GERMANY Law and Practice Contributed by: Wolfram H. Krüger, Barbara Rybka, Markus Wollenhaupt and Alexander Zitzl, Linklaters
3.5 Legal Requirements Before an Entity Can Give Valid Security Depending on the security-granting entity, financial assistance and corporate benefit rules must be com - plied with. The prohibition on financial assistance only applies to German stock companies ( Aktiengesellschaften ). If there is a control agreement or a profit transfer agree - ment ( Beherrschungs- oder Gewinnabführungsver- trag ) in place between the stock company and the financially assisted company, the prohibition on finan - cial assistance does not apply. On the other hand, a transaction carried out in violation of the financial assistance rules is void. As a corporate benefit rule, managing directors are legally obliged to act as prudent business people vis-à-vis their company. In upstream or cross-stream loans within a group, there is an obligation on the lending entity to take security if there is a credit risk in relation to the borrowing entity. Furthermore, the German Code of Corporate Governance applies to members of the managing board and the supervisory board of German listed stock companies. An infringe - ment of corporate benefit rules does not lead to the invalidity of a transaction, but to the possible liability of the directors, managing board, and/or supervisory board. In addition, other rules deriving from corporate and insolvency law apply, including rules relating to capi - tal maintenance, restrictions on transactions between a company and its affiliates other than its own sub - sidiaries, and provisions relating to transactions that disadvantage creditors and have been entered into within a certain period before the commencement of insolvency proceedings. 3.6 Formalities When a Borrower Is in Default In addition to contractually agreed prerequisites for the enforcement of security, such as serving an enforce - ment notice to the security grantor and the borrower, and giving the chance of healing the default, addition - al statutory requirements apply to the enforcement of a land charge/mortgage. It must be terminated with a mandatory six months’ notice period and the enforce - able copy of the land charge/mortgage deed must
be officially served to the property owner. Only once this has been done can enforcement proceedings via forced administration and/or forced auction com - mence. A forced auction procedure takes a minimum of several months; in some cases it can take more than one year. Additional steps to give priority to a lender’s security interest are not required. There are no pandemic restrictions on a lender’s ability to enforce security. Although the percentage of non-performing loans has multiplied within the last year, and preparations for enforcement of real estate securities are underway in some cases, a significant number of actual enforce - ments has not been initiated. Lenders largely still tend to agree on a standstill and issue waivers or reserva - tion of rights letters. 3.7 Subordinating Existing Debt to Newly Created Debt Existing secured debt can be subordinated both by agreement and by law. A creditor can agree to subordinate its existing debt to that of another creditor by means of a subordination agreement or an intercreditor agreement. If the exist - ing debt is secured by a land charge/mortgage and such land charge/mortgage will be subordinated to a newly created land charge/mortgage, registration of such subordination is required in the land registry in order for it to become effective. Shareholder loans and other arrangements equivalent to shareholder loans are subordinated to the claims of all other creditors by law, except: • when the relevant shareholder is not a director of the company and does not hold more than 10% of the registered share capital in the company (minor - ity shareholding privilege – Kleinbeteiligungsprivi- leg ); or • when the shareholder has acquired shares with the intention of rescuing the company from insolvency (restructuring privilege – Sanierungsprivileg ).
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