GERMANY Law and Practice Contributed by: Michael Josenhans, Lucas Lengersdorf and Karl Kuhn, Freshfields
5.3 Downstream, Upstream and Cross- Stream Guarantees It is generally possible for any entity to provide downstream, upstream and cross-stream guar - antees or security. However, if the guarantee/ security provider is a German limited liability company or a limited partnership with a lim - ited liability company as its general partner, upstream and cross-stream guarantees/security may result in personal and criminal liability for the management directors, to the extent that the granting or enforcement of such a guarantee/ security would lead to a breach of capital main - tenance rules ( Kapitalerhaltungsregeln ). The capital maintenance rules prohibit the direct and indirect repayment (where this term includes payments pursuant to guarantees or security in favour of obligations of a direct or indirect shareholder) of the registered share cap - ital of a German limited liability company to its shareholders. Accordingly, by way of so-called limitation language in the respective guarantee/ security document, enforcement of an upstream and/or cross-stream guarantee/security will be limited (subject to certain exceptions) if and to the extent that payments under the guarantee or enforcement of the security would directly or indirectly cause the net assets ( Reinvermögen ) of the guarantee/security provider (or, in the case of a partnership, the net assets of the respective general partner) to fall below the amount of its respective registered share capital and, hence, to create personal or criminal liabilities for the management directors. If there is a stock corporation ( Aktiengesells- chaft or Societas Europaea ) involved, the general prohibition of repayment of contributions ( Ver- bot der Einlagenrückgewähr ) under the German Stock Corporation Act ( Aktiengesetz – AktG) also warrants designated language, aimed at
the debtor can effectively settle the receivable by way of payment to the assignor. Notifications are therefore common in respect of intra-group receivables and receivables towards profes - sional parties (eg, insurances or report provid - ers) but, for confidentiality reasons, typically not in respect of customers. Real Estate Security over immovable assets is provided by way of land charges or mortgages. The land charge or mortgage itself is a standard docu - ment containing only a formal description of the security right to be established. Therefore, a related security purpose agreement needs to be concluded which includes all other provisions, such as the security purpose and enforcement triggers. The land charge or mortgage itself needs to be notarised and registered in the land register, incurring additional costs. Land charges and mortgages can be certified or uncertified. In the case of an uncertified land charge or mort - gage, the security only becomes valid upon its entry into the land registry. 5.2 Floating Charges and/or Similar Security Interests A floating charge typically describes an instru - ment which creates security over non-constant assets changing in quantity and quality. How - ever, German law requires that a security inter - est relate to determinable assets such that these assets are identifiable by a third person. A float - ing charge would not be compatible with these requirements. Nonetheless, in a manner similar to a floating charge, German security usually covers all exist - ing and future assets of a certain type (which is possible for all of the security types mentioned in 5.1 Assets and Forms of Security , except for land charges/mortgages).
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