PLC Global Finance update for September 2010: Germany

The Germany update for September 2010 for the PLC Global Finance multi-jurisdictional monthly e-mail.


Financial institutions

Draft CRD II Implementation Regulation: update

Due to the implementation of CRD II, the German Financial Services Supervisory Authority (or BaFin) is currently working on changes to, among others, the Regulation on Large Exposures and Exposures exceeding EUR1.5 million (or GroMiKV). Compared to the previous draft, the treatment of intra-group exposures according to draft section 9 para. 2 GroMiKV, which is of particular importance for foreign banks, has only been marginally amended in the latest draft CRD II Implementation Regulation (the Draft Regulation). However, the current Draft Regulation contains a new provision for a look-through approach with regard to investment fund units (cf. section 6 para. 2 draft GroMiKV). Moreover, the current Draft Regulation no longer qualifies buying guarantees for leasing objects as credits (cf. section 1 para. 1 No 1a draft GroMiKV).

UCITS IV implementation: Ministry of Finance starts consultation of new draft Investment Act

The Federal Ministry of Finance started a consultation of the "discussion draft" of the amended Investment Act (the Draft InvG). The Draft InvG contains the implementation of the new European Investment Funds Directive 2009/65/EC, as well as a partial implementation of the four implementation measures enacted in the course of the UCITS IV implementation. The following measures shall be implemented by the Draft InvG:

  • Introduction of the possibility of cross-border collective portfolio management by extending the European Passport for management companies.

  • Facilitation of cross-border fund mergers.

  • Introduction of Master-Feeder-Structures.

  • Introduction of "key investor information".

  • Facilitation of the notification procedure mandatory for UCITS compliant investment funds prior to cross-border distribution.

  • Improvement of co-operation of the authorities which are in charge of supervision and approval.

Moreover, the Draft InvG shall improve the framework conditions for so-called micro-finance funds and eliminate existing inhibition thresholds.


Restructuring and insolvency

German Federal Court of Justice finds that comfort letters may allow for their termination

Reinhard Bunjes (

Comfort letters (Patronatserklärungen) are a tool to secure claims of a creditor against a subsidiary typically by way of a promise by a parent company to manage the subsidiary in such a fashion and to equip it with financial means that will allow the subsidiary to fulfil all of its present and future obligations (harte Patronatserklärung – binding comfort letter. This text does not deal with non-binding comfort letters). While comfort letters have grown popular in Germany since their beginning in the 1960s, they have not been subject to a distinct set of legislation, and they have rarely been the subject of jurisdiction either.

In the case at hand, the defendant had issued a comfort letter to a subsidiary that was in financial difficulty. In the comfort letter, the defendant promised, should the subsidiary become over-indebted or unable to pay its debts, to settle due claims against the subsidiary to such extent that the subsidiary would not have to file for insolvency. Several months later, the defendant terminated the comfort letter and the subsidiary filed for insolvency.

The insolvency administrator sued the defendant, claiming that termination of the comfort letter had been inadmissible and that the defendant therefore was liable to settle all claims against the subsidiary. The defendant argued that it had been agreed that the comfort letter would only be valid for as long as it would take the defendant to figure out if the subsidiary could be restructured, but that the letter had not been intended to guarantee the subsidiary's survival even if it proved unsuitable for restructuring.

Since there are no legal provisions and little jurisdiction on comfort letters under German law, the court discussed other structures for financing of distressed subsidiaries that might have denied a right to termination. However, it found that the principles of equitable subordination (Grundsätze des Eigenkapitalersatzes) which were still applicable at the time did not oppose a termination of the comfort letter because they prohibit to withdraw funds from a subsidiary, but do not oblige a parent company to invest new funds. Also, the model of regular credits to a subsidiary instead of providing additional equity (Finanzplankredit) that might have bound the defendant as parent company to stick to its promise did not apply because the defendant's promise could not be considered as equal to equity.

Therefore, the court found that the termination of the comfort letter was not forbidden. Since the lower courts had omitted to determine whether or not the defendant and its subsidiary actually had agreed that the comfort letter would be time limited or subject to termination, the BGH remitted the case to the appellate court.

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