Since the codification of the German principles of equitable subordination of shareholder loans (eigenkapitalersetzende Darlehen) has been reformed in 2008, numerous questions of detail have been open (again) for the courts to decide. In its judgment dated 17 February 2011, the BGH had to decide on the classification of two loans which had been granted to a limited partnership. One creditor was the mother of the person who was at the same time sole shareholder of the general partner and sole limited partner of the limited partnership (Partner), the other creditor was another limited partnership who was controlled by the brother of the Partner.

After insolvency proceedings had been opened over the assets of the limited partnership that had borrowed these two loans, the insolvency administrator (Insolvenzverwalter) refused to recognise both loans as equivalent to other unsecured loans. He argued that the loans should be subordinated because both creditors had granted the loans based on their relationship with the Partner and that the loans should therefore be treated like they had been granted by the Partner themselves.

However, based on the reformed codification, the courts of all three instances found against the insolvency administrator and refused to declare the loans subordinated. In the final decision, the BGH accepted the argument that, under the reformed codification as well as before, under certain circumstances loans can be subordinated like shareholder loans even if the creditor is not the partner himself. However, to subordinate third-party loans there must be substantial evidence that allows the attribution of the loans to the partners. The position of the creditor as relative of the partners alone is not sufficient to allow for subordination of the relative’s loan.