Risks for shareholders:

 Loan collateral in the event of insolvency.

Risks for shareholders: Loan collateral in the event of insolvency.

When a company takes out a loan, the shareholder often provides the collateral. In the event of insolvency, the shareholder may also end up being liable for repayments on the bank loan.

Frequently, cases like these are based on “double collateralization”. Double collateralization occurs when a third party, such as a bank, grants a loan to the company and the repayment of the loan is secured by the company and the shareholders. This is a common occurrence. If the company subsequently becomes insolvent, the law gives equal treatment to shareholders who have granted a loan directly to the company and shareholders who have only secured a third-party loan. In both cases, the shareholder should only be entitled to a subordinate claim. As a consequence, the shareholder’s claim is only repaid when all other corporate creditors have been satisfied.

The same applies in the year before the insolvency. If the company pays back a shareholder loan, partially or in full, in the year before insolvency, the insolvency administrator can contest these payments to the shareholder. The shareholder has to repay the amount as a consequence. This also applies if the loan has been issued by a bank and the shareholder has only provided security for the loan. In this case, the shareholder must also repay the insolvency administrator the amount received by the bank as repayment on the loan. This repayment this justified by the fact that the shareholder has benefited from the repayment of the loan. Ultimately, the shareholder was released from their security to this amount.

The insolvency administrator may still demand the payment even if the loan was repaid because the company had provided other collateral itself. According to the law, first of all the shareholder contributes the full amount which they were prepared to grant either as a loan or as security.

Many shareholders are not aware of this risk. This often comes as an unpleasant surprise in the event of insolvency and more so when the insolvency administrator demands payments be returned.

Practical tip:

Shareholders need to consciously take into consideration this risk of default. If the company becomes insolvent, securities provided by the company itself are only utilized on a subordinate basis. The shareholder’s securities are drawn on first of all and to their full extent.

If the bank requires the provision of collateral by the shareholder in addition to the collateral provided by the company, the shareholder must ensure that at least the amount itself is limited. Moreover, all of the relevant contracts must be thoroughly examined.

Further advice on this and other corporate law issues are available on my YouTube channel “Recht hat er!”.