This is to inform you that since 1 September 2007 our London office has been moved to the following address:
Please also note our new phone and fax numbers:
Tel.: +44 (0) 207 156 5029
Fax.: +44 (0) 207 156 5223
Federal Court of Justice of Germany: European law prevails over national (insolvency) law for claims to repayment of subsidies having consequences with regard to the claim registration (ruling of July 5, 2007)
Where a shareholder files an equity-equivalent loan in the insolvency table but the contract is void due to a breach of the antitrust ban on government subsidies in accordance with the EC treaty, the action to have the claim, being contested by the insolvency administrator, recognized as a loan repayment claim is inadmissible according to a ruling by the Federal Court of Justice. There must be a new filing of the claim to repayment. The claim to repayment of a subsidy constitutes a simple insolvency claim with the rank as set out in § 38 German Insolvency Code (InsO). § 39 I No. 5 InsO (subordinated ranking of shareholders’ loan) does not apply.
Facts of the Case
The Plaintiff granted the Debtor several loans to the total amount of 28 million Euros, which were to be converted to subsidies subject to the provision of approval by the EU Commission, and conceded the Debtor a deferral of the purchase price liability. The sole shareholder of the Debtor was another GmbH (limited liability company), whose sole shareholder was the Plaintiff. The Commission instated proceedings against the Federal Republic of Germany in accordance with Art. 88 II EGV [Treaty of the European Union] on account of the loans. In September 2000, insolvency proceedings were instated against the Debtor’s assets. The Plaintiff filed the loan repayment claims plus interest in the insolvency table, in part as subordinated liabilities. The insolvency administrator contested them in first instance. On 9 April 2002, the Commission ruled that subsidies to the amount of 34 million Euros granted by the Federal Republic of Germany to the Debtor, including the loans and subordinated liability, were incompatible with the common market and ordered the Federal Republic of Germany to take all necessary measures to demand repayment of the subsidies plus interest.
Legal Assessment
The Ninth Division of the Federal Court of Justice of Germany states that a new registration is necessary where the ground for a claim being filed with the table changes after the inspection according to insolvency law is carried out. Otherwise, an action for declaratory judgment based on the other ground for the claim is inadmissible. The provisions in European law and the Commission’s order for repayment of the subsidy do not make it necessary to deviate from the provisions set out in §181 InsO. In part, the Plaintiff filed his loan-based claims with the table with a different rank from what he had specified (viz., they were filed as subordinated claims because the shareholders’ loans would be subject to the restrictions of equitable subordination law), filing the claims as loan repayment claims, hence, stating a different ground. Actually, the Plaintiff is entitled to unjust enrichment claims against the Debtor, because due to lack of notification, the loans agreed on between the parties breached the directly applicable antitrust ban stipulated in Art. 88 III 3 EGV. As a consequence of this breach, the contract is void. In contrast to loan repayment claims filed by a shareholder, which in most cases are filed as subordinated liabilities, it was ruled that unjust enrichment claims are non-subordinated insolvency claims (§ 38 InsO) and are thus to be treated essentially different in law.
The subordinated ranking rule set in § 39 I No. 5 InsO does not apply to the filed purchase price liability. The court ruled that accumulating claims entails the application of the provisions of equitable subordination (§§ 32a, 32b GmbHG [German Limited Liability Company Act]), but nevertheless the purchase price claim is not to be accounted for as a subordinated liability, as it is to be asserted on the basis of provisions in European law regarding claims to repayment in order to remedy the obstruction of fair competition caused by illegal subsidy. The relevant national provisions may not exclude repayment or make repayment difficult or infeasible. Where the directly applicable law of the EC clashes with national German law, EC law is to prevail in accordance with Art. 24 I GG. Where the application of German law would hinder the immediate and actual implementation of the Commission’s ruling and it would thus make restoration of effective competition more difficult, the respective German provisions are not to be applied. Where the company is going bankrupt, it is sufficient for the party granting the subsidy to file his repayment claim with the table. However, the duty to repayment is only implemented effectively and immediately upon filing in the insolvency proceedings if the repayment claims are not treated as subordinated liabilities. It is only subject to this condition that the impairment of fair competition caused by the illegal subsidy can be effectively rectified. The prevalence of the provisions of European law (Art. 88 II EGV) entails non-applicability of § 39 I No. 5 InsO. Non-applicability of § 39 I No. 5 InsO does not introduce a creditor’s privilege, nor is it an inadmissible judicial interpretation of the law. It is the consequence of the prevalence of European law. The mere theoretical possibility that a subordinated liability could be satisfied is not sufficient for the effective assertion of the repayment claim ordered in Art. 88 II EGV. Moreover, application of § 39 I No. 5 InsO would eliminate the influence of the creditor of the repayment claim on the subsidy recipient’s insolvency proceedings.
Legal Practice
The ruling by the Federal Court of Justice of Germany must be regarded as a watershed in previous adjudication by German courts with regard to applicability of equitable subordination provisions when claiming repayment of subsidy. In its ruling of November 30, 2005 (described in International Corporate Rescue Volume 4, Issue 3, 2007 page 132) the Higher Court of Jena still decided that the provisions of German capital preservation and insolvency law must be observed within the framework of claims to repayment of subsidy which was granted in violation of EC law and construed the rulings by the European Court of Justice regarding filing of the repayment claim with the table differently. This stance has also been taken in legal literature: § 39 I No. 5 InsO does apply, European law does not prescribe anything else, the provisions of reequitable subordination law are neutral to competition. Through its current ruling, the Federal Court of Justice of Germany is limiting the scope of application of the national, equitable subordination regulations, in particular § 39 I No. 5 InsO, by giving precedence to provisions of European law by referring to the Basic Law and the rulings by the EuGH. Insolvency creditors in similar constellations must therefore anticipate that § 39 I No. 5 InsO will no longer apply to repayment claims to subsidies granted in violation of European law, that they are no longer treated as subordinated liabilities and will reduce the dividend accordingly as simple insolvency claims.
Question of COMI – a constantly disputed issue between the courts of Continental Europe and the UK obtains new clarification
With its order of 20 December 2006 the High Court of Justice, London (No 9849/02) clarified the centre of main interests (COMI) for individuals:
In general, the COMI of an individual is at his place of residence. This is to be strictly distinguished from the business activities of any company he is responsible for.
In this particular case the debtor was an individual, Mr Zvonko Stojevic, who managed an English private limited company but whose personal residence was in Vienna.
The High Court of Justice ruled that it is incorrect to draw conclusions on his personal COMI from his management of an English private limited company. Rather, a strict distinction must be maintained between the person as an individual / consumer and the company as a separate legal entity.
As result, the court revoked the opening order of the main insolvency proceedings over the assets of Mr Stojevic in London.
With this decision the Court clarified two issues:
Dr. Annerose Tashiro
Rechtsanwältin / German Attorney-at-Law
33 Throgmorton Street
London EC2N 2BR
London EC2N 2BR
Please also note our new phone and fax numbers:
Tel.: +44 (0) 207 156 5029
Fax.: +44 (0) 207 156 5223
Federal Court of Justice of Germany: European law prevails over national (insolvency) law for claims to repayment of subsidies having consequences with regard to the claim registration (ruling of July 5, 2007)
Where a shareholder files an equity-equivalent loan in the insolvency table but the contract is void due to a breach of the antitrust ban on government subsidies in accordance with the EC treaty, the action to have the claim, being contested by the insolvency administrator, recognized as a loan repayment claim is inadmissible according to a ruling by the Federal Court of Justice. There must be a new filing of the claim to repayment. The claim to repayment of a subsidy constitutes a simple insolvency claim with the rank as set out in § 38 German Insolvency Code (InsO). § 39 I No. 5 InsO (subordinated ranking of shareholders’ loan) does not apply.
Facts of the Case
The Plaintiff granted the Debtor several loans to the total amount of 28 million Euros, which were to be converted to subsidies subject to the provision of approval by the EU Commission, and conceded the Debtor a deferral of the purchase price liability. The sole shareholder of the Debtor was another GmbH (limited liability company), whose sole shareholder was the Plaintiff. The Commission instated proceedings against the Federal Republic of Germany in accordance with Art. 88 II EGV [Treaty of the European Union] on account of the loans. In September 2000, insolvency proceedings were instated against the Debtor’s assets. The Plaintiff filed the loan repayment claims plus interest in the insolvency table, in part as subordinated liabilities. The insolvency administrator contested them in first instance. On 9 April 2002, the Commission ruled that subsidies to the amount of 34 million Euros granted by the Federal Republic of Germany to the Debtor, including the loans and subordinated liability, were incompatible with the common market and ordered the Federal Republic of Germany to take all necessary measures to demand repayment of the subsidies plus interest.
Legal Assessment
The Ninth Division of the Federal Court of Justice of Germany states that a new registration is necessary where the ground for a claim being filed with the table changes after the inspection according to insolvency law is carried out. Otherwise, an action for declaratory judgment based on the other ground for the claim is inadmissible. The provisions in European law and the Commission’s order for repayment of the subsidy do not make it necessary to deviate from the provisions set out in §181 InsO. In part, the Plaintiff filed his loan-based claims with the table with a different rank from what he had specified (viz., they were filed as subordinated claims because the shareholders’ loans would be subject to the restrictions of equitable subordination law), filing the claims as loan repayment claims, hence, stating a different ground. Actually, the Plaintiff is entitled to unjust enrichment claims against the Debtor, because due to lack of notification, the loans agreed on between the parties breached the directly applicable antitrust ban stipulated in Art. 88 III 3 EGV. As a consequence of this breach, the contract is void. In contrast to loan repayment claims filed by a shareholder, which in most cases are filed as subordinated liabilities, it was ruled that unjust enrichment claims are non-subordinated insolvency claims (§ 38 InsO) and are thus to be treated essentially different in law.
The subordinated ranking rule set in § 39 I No. 5 InsO does not apply to the filed purchase price liability. The court ruled that accumulating claims entails the application of the provisions of equitable subordination (§§ 32a, 32b GmbHG [German Limited Liability Company Act]), but nevertheless the purchase price claim is not to be accounted for as a subordinated liability, as it is to be asserted on the basis of provisions in European law regarding claims to repayment in order to remedy the obstruction of fair competition caused by illegal subsidy. The relevant national provisions may not exclude repayment or make repayment difficult or infeasible. Where the directly applicable law of the EC clashes with national German law, EC law is to prevail in accordance with Art. 24 I GG. Where the application of German law would hinder the immediate and actual implementation of the Commission’s ruling and it would thus make restoration of effective competition more difficult, the respective German provisions are not to be applied. Where the company is going bankrupt, it is sufficient for the party granting the subsidy to file his repayment claim with the table. However, the duty to repayment is only implemented effectively and immediately upon filing in the insolvency proceedings if the repayment claims are not treated as subordinated liabilities. It is only subject to this condition that the impairment of fair competition caused by the illegal subsidy can be effectively rectified. The prevalence of the provisions of European law (Art. 88 II EGV) entails non-applicability of § 39 I No. 5 InsO. Non-applicability of § 39 I No. 5 InsO does not introduce a creditor’s privilege, nor is it an inadmissible judicial interpretation of the law. It is the consequence of the prevalence of European law. The mere theoretical possibility that a subordinated liability could be satisfied is not sufficient for the effective assertion of the repayment claim ordered in Art. 88 II EGV. Moreover, application of § 39 I No. 5 InsO would eliminate the influence of the creditor of the repayment claim on the subsidy recipient’s insolvency proceedings.
Legal Practice
The ruling by the Federal Court of Justice of Germany must be regarded as a watershed in previous adjudication by German courts with regard to applicability of equitable subordination provisions when claiming repayment of subsidy. In its ruling of November 30, 2005 (described in International Corporate Rescue Volume 4, Issue 3, 2007 page 132) the Higher Court of Jena still decided that the provisions of German capital preservation and insolvency law must be observed within the framework of claims to repayment of subsidy which was granted in violation of EC law and construed the rulings by the European Court of Justice regarding filing of the repayment claim with the table differently. This stance has also been taken in legal literature: § 39 I No. 5 InsO does apply, European law does not prescribe anything else, the provisions of reequitable subordination law are neutral to competition. Through its current ruling, the Federal Court of Justice of Germany is limiting the scope of application of the national, equitable subordination regulations, in particular § 39 I No. 5 InsO, by giving precedence to provisions of European law by referring to the Basic Law and the rulings by the EuGH. Insolvency creditors in similar constellations must therefore anticipate that § 39 I No. 5 InsO will no longer apply to repayment claims to subsidies granted in violation of European law, that they are no longer treated as subordinated liabilities and will reduce the dividend accordingly as simple insolvency claims.
Question of COMI – a constantly disputed issue between the courts of Continental Europe and the UK obtains new clarification
With its order of 20 December 2006 the High Court of Justice, London (No 9849/02) clarified the centre of main interests (COMI) for individuals:
In general, the COMI of an individual is at his place of residence. This is to be strictly distinguished from the business activities of any company he is responsible for.
In this particular case the debtor was an individual, Mr Zvonko Stojevic, who managed an English private limited company but whose personal residence was in Vienna.
The High Court of Justice ruled that it is incorrect to draw conclusions on his personal COMI from his management of an English private limited company. Rather, a strict distinction must be maintained between the person as an individual / consumer and the company as a separate legal entity.
As result, the court revoked the opening order of the main insolvency proceedings over the assets of Mr Stojevic in London.
With this decision the Court clarified two issues:
- To establish the COMI of an individual in the UK, it is not sufficient to support the application with the argument that the individual manages business affairs of an English private limited company. The main factor should remain the place of residence. Hence, it will not be possible for German residents who are involved in the management of an English private limited company to escape to the UK simply to claim insolvency – an actual change of residence may be necessary.
- The courts in the UK are willing to examine the COMI within the ongoing insolvency proceedings and to revoke their earlier opening decisions if necessary. Therefore, in practice, it is possible to change an earlier decision. However, this examination will only be made once insolvency proceedings have been initiated over the assets of a debtor in the UK. Therefore, it must be kept in mind that, to initiate the examination process, it is necessary to file an objection against the earlier decision to open the main insolvency proceedings in the UK.
Dr. Annerose Tashiro
Rechtsanwältin / German Attorney-at-Law