Clifford Chance
Equitable subordination of leased assets – the end of the story – ILO
5 October 2015
The concept of 'equitable subordination' – essentially, the rules regarding the treatment of shareholder loans – is deeply rooted in German law and foresees that shareholder loans rank below (unsecured) third-party creditor claims. This concept also extends to transactions which were initially considered as commercially comparable to granting a loan – for example, the lease of an asset from a shareholder to its subsidiary. For that reason, the leasing of assets by shareholders to subsidiaries used to be a sub-category of the principle of equitable subordination of shareholder loans. Properties let by shareholders to subsidiaries in a financial crisis had to be rented free of charge during insolvency proceedings (subject to contractual termination rights). In cases where shareholders deprived the insolvent company of such use, they were held liable for payment of an appropriate consideration. The insolvency administrator had the right to claw back any rental payments made to the shareholders in the year preceding the opening of insolvency proceedings, as well as any payment causing a short balance of the subsidiary.
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Equitable subordination of leased assets – the end of the story – ILO
