In its judgement of 19 March 2026, the European Court of Justice (ECJ) clarified that the application of German insolvency law cannot be circumvented by a choice-of-law clause with respect to shareholder loans. The provisions governing the subordination and the challenge of such loans remain mandatorily applicable in German insolvency proceedings.
Under German insolvency law, shareholder loan claims and economically equivalent claims (e.g., trade receivables left outstanding by shareholders) are subject to statutory subordination (Sec. 39(1)(5) of the German Insolvency Code). If insolvency proceedings are opened over the assets of a corporation in Germany, such claims are satisfied only after all other creditors have been satisfied in full.
To reinforce this subordination, German insolvency law provides for extensive grounds for challenge (so-called “claw-back”): Repayments on shareholder loans made within one year prior to the filing for insolvency are subject to challenge without any further requirements. The granting of security for shareholder loans can be challenged for up to ten years prior to the insolvency filing.
In German insolvency proceedings, German insolvency law generally applies, regardless of the law to which the company is otherwise subject. This includes the provisions on subordination and the challenge of transactions.
Until now, it had remained unclear whether the subordination and challenge provisions also apply if the loan agreement, by virtue of a choice-of-law clause, is governed by the law of another state that does not provide for either statutory subordination or the challenge of shareholder loans.
The ECJ's judgement of 19 March 2026 (Case C-43/25 SML Maschinengesellschaft mbH) addresses the question of whether the assertion of challenge claims is precluded by the exception in Article 13 of the former European Insolvency Regulation (now Article 16 of the European Insolvency Regulation) and thereby opening up a possibility of circumvention through a different choice of law. Under this exception, a legal act is protected from challenge if it is governed by the law of another Member State and is not subject to challenge under that law.
In the case at hand, SML Maschinengesellschaft mbH, an Austrian sister company of the insolvent German company, had received repayments on a shareholder loan which was subordinated under German insolvency law. The loan agreement was governed by Austrian law. Following the opening of insolvency proceedings in Germany, the insolvency administrator sought repayment of these amounts from the Austrian sister company. The latter company objected, arguing that Austrian law provides for neither subordination nor challenge.
The ECJ rejected the arguments put forward by SML Maschinengesellschaft mbH and decided that Article 13 of the former version of the European Insolvency Regulation (now Article 16) must be interpreted narrowly as an exception to Article 4(2)(m) (now Art. 7(2)(m)) and does not apply to provisions regarding subordination. Since, under German law, the challenge of shareholder loans serves to enforce the statutory ranking of claims, it cannot be prevented by invoking a more favourable foreign legal system.
This decision is particularly relevant for international group financing structures and international investors. In international group structures, foreign law is often chosen for cash pool financing if the parent company is based abroad.
However, the subordination and challenge provisions governing shareholder loans are mandatorily applicable in German insolvency proceedings, irrespective of any choice-of-law clause.
From a practical perspective, the decisive factor will ultimately be whether insolvency proceedings are opened in Germany and German insolvency law applies. International jurisdiction and the applicable law are determined by the debtor’s centre of main interests (COMI). In group structures in particular, determining the COMI is often complex: It is not necessarily located at the statutory seat of the company, but may also, in individual cases, be located at the parent company’s place of business, for example, where effective management (i.e., the same persons are acting as managing directors) and administrative functions are carried out.