GERMANY Law and Practice Contributed by: Wolfram H. Krüger, Barbara Rybka, Markus Wollenhaupt and Alexander Zitzl, Linklaters
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 secu - rities are underway in some cases, a significant number of actual enforcements has not been initiated. Lenders largely still tend to agree on a standstill and issue waivers or reservation 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 exist - ing debt to that of another creditor by means of a subordination agreement or an intercredi - tor agreement. If the existing debt is secured by a land charge/mortgage and such land charge/ mortgage will be subordinated to a newly cre - ated 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 direc - tor of the company and does not hold more than 10% of the registered share capital in the company (minority shareholding privilege – Kleinbeteiligungsprivileg ); or • when the shareholder has acquired shares with the intention of rescuing the company from insolvency (restructuring privilege – Sanierungsprivileg ).
In addition, newly created debt is subordinated by law to outstanding debt to public authorities. 3.8 Lenders’ Liability Under Environmental Laws A lender holding or enforcing security over real estate cannot be held liable under environmental laws due to its position as lender/security ben - eficiary. Under the Federal Soil Protection Act, the pol - luter, all current and former users, and all current and former owners of a property can be held liable for contamination. The lender can, there - fore, be held liable in the unlikely circumstances that they were in possession of the property or that they are themselves the polluter. 3.9 Effects of a Borrower Becoming Insolvent In certain circumstances, a borrower’s insol - vency administrator may challenge agreements entered into by the borrower between one month and ten years prior to the filing for the opening of insolvency proceedings. The following are valid reasons for challenging security interests granted by the borrower: • the creditor had knowledge of the borrower’s illiquidity, or the borrower had already applied for the opening of insolvency proceedings, or the creditor was aware of circumstances leading directly to the conclusion that the borrower was illiquid or had applied for insol - vency proceedings; • the creditor is a shareholder of the borrower; • the borrower provided the security intend - ing to discriminate against the rights of other creditors and the creditor was aware of this intention; • the creditor did not have a valid right to obtain the security that he or she was not
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