GERMANY Law and Practice Contributed by: Wolfram H. Krüger, Barbara Rybka, Markus Wollenhaupt and Alexander Zitzl, Linklaters
Enforcement of security is done via court pro - ceedings for which court fees are payable. The court will only initiate the proceedings once the secured creditor applying for the proceedings has paid a cost advance. No taxes apply to the granting and enforcing of security. However, if a land charge/mortgage is enforced by way of public auction, RETT of between 3.5% and 6.5% (depending on the Ger - man federal state in which the property is locat - ed) is payable, for which the successful bidder and the property owner are jointly liable. Additionally, interest on loans granted by a for - eign lender and secured by German real estate would trigger German domestic income for the lender; ie, interest would in principle be subject to German income tax if no double tax treaty excludes the German right to tax this income. 3.5 Legal Requirements Before an Entity Can Give Valid Security Depending on the security-granting entity, finan - cial assistance and corporate benefit rules must be complied with. The prohibition on financial assistance only applies to German stock companies ( Aktienge- sellschaften ). If there is a control agreement or a profit transfer agreement ( Beherrschungs- oder Gewinnabführungsvertrag ) in place between the stock company and the financially assisted company, the prohibition on financial 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 Cor - porate Governance applies to members of the managing board and the supervisory board of German listed stock companies. An infringement 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 capital maintenance, restrictions on transac - tions between a company and its affiliates other than its own subsidiaries, and provisions relating to transactions that disadvantage creditors and have been entered into within a certain period before the commencement of insolvency pro - ceedings. 3.6 Formalities When a Borrower Is in Default In addition to contractually agreed prerequisites for the enforcement of security, such as serving an enforcement notice to the security grantor and the borrower, and giving the chance of heal - ing the default, additional statutory requirements apply to the enforcement of a land charge/mort - gage. It must be terminated with a mandatory six months’ notice period and the enforceable copy of the land charge/mortgage deed must be officially served to the property owner. Only once this has been done can enforcement pro - ceedings via forced administration and/or forced auction commence. 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.
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