017. Equity Substitute Loans

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A recent decision by Germany's highest court of general jurisdiction, the Federal Court of Justice, has added to the long line of cases defining when loans made by shareholders in a limited liability company (GmbH) will be regarded as so-called "equity substitute loans" and what consequences this has. In the recent decision, the Court held that the failure of a shareholder to insist on prompt payment by his GmbH for goods sold by him to it could cause the unpaid amount to be treated as an equity substitute loan.

The decision is best understood after a brief review of the general rules. In a bankruptcy context, detailed statutory provisions exist. In addition, inside and outside of bankruptcy, a court-created doctrine applies.