No Loophole Through Choice of Law

The idea is tempting: if a foreign parent finances its German subsidiary with a shareholder loan, why not simply subject the loan agreement to a shareholder-friendly foreign law? If the subsidiary later becomes insolvent, that law is then supposed to prevent the insolvency administrator from clawing back, under § 135 InsO, the interest and principal payments made beforehand. Whether this calculation works had been referred by the German Federal Court of Justice (BGH) to the European Court of Justice (ECJ). The answer has been available since 19 March 2026 — and it is unambiguous.

The case and the BGH’s referral

Two companies of an Austrian group were linked through a common Austrian parent. One granted the other two loans totalling five million euros; both loan agreements expressly subjected themselves to Austrian law. The borrower paid principal and interest — and became insolvent in Germany a few months later, in October 2016. The insolvency administrator sought the return of these payments by way of avoidance.

Under German law the position was clear: because of the shareholding structure the lender was treated as equivalent to a shareholder, its repayment claims were subordinated under § 39 (1) no. 5 InsO, and the payments received were subject to avoidance under § 135 InsO. The lender countered with the choice of law: Austrian law applied, and under it the payments could not be challenged.

The lever for this is Art. 13 of the EU Insolvency Regulation (old version; Regulation (EC) No 1346/2000; today identical in substance: Art. 16 of the EU Insolvency Regulation 2015/848). As a rule, the law of the state of opening governs avoidance (Art. 4 (2)(m)). Art. 13 creates an exception: the beneficiary can fend off avoidance if it proves that the act is governed by the law of another Member State and that under that law the act is “in no way challengeable”. The BGH, hearing the appeal, was uncertain whether this exception helps here and referred four questions to the ECJ by order of 16 January 2025 (Case C-43/25).

What Art. 13 EU Insolvency Regulation does — and does not — do

The ECJ first recalls a principle of its settled case law: Art. 13 is an exception and must therefore be interpreted narrowly (as already held in Lutz, Nike European Operations Netherlands and Oeltrans Befrachtungsgesellschaft). The provision displaces the law of the state of opening only within the area precisely defined by Art. 4 (2)(m) — that is, for rules on the voidness, voidability or unenforceability of acts detrimental to the general body of creditors.

The decisive distinction the Court draws from this: the exception in Art. 13 does not extend to the law governing the lodging of claims or their ranking (Art. 4 (2)(g) and (i)). Where the matter concerns the ranking and distribution order among creditors, the law of the state of opening continues to apply.

The ECJ’s decision (C-43/25)

This is exactly where the Court places the German case. On the BGH’s findings, which are binding on it, § 39 and § 135 InsO are closely connected: § 39 (1) no. 5 InsO orders the subordination of the shareholder loan, and § 135 InsO is the instrument by which that subordination is enforced against third-party creditors. The avoidance here therefore does not serve to balance equally ranked creditors, but to enforce the ranking.

As a result, the clawback claim concerns the ranking and distribution order of claims (Art. 4 (2)(i)) — and not the avoidance of detrimental acts covered by Art. 13. The consequence: the beneficiary cannot rely on Art. 13 EU Insolvency Regulation. The choice of Austrian law changes nothing about the subordination or the duty to repay.

“… a person who has received repayments on a shareholder loan … cannot rely on that provision to resist a clawback claim by the insolvency administrator … where that claim is intended to secure the ranking of claims provided for under the law of the state of opening.”

Notably, the Court left open a great deal: because the first question already ruled out reliance on Art. 13, it did not answer the remaining three — in particular not by which law a shareholder loan is to be determined within Art. 13, nor whether the rules on subordination are to be treated as overriding mandatory provisions within the meaning of Art. 9 (1) Rome I Regulation.

Implications for practice

For cross-border shareholder financing the message is clear: a choice in favour of a foreign law does not protect a shareholder loan from subordination and avoidance under § 135 InsO where the insolvency proceedings are opened in Germany. What governs is not the law of the contract, but the insolvency law of the state of opening.

Anyone financing German structures through foreign shareholders should therefore:

• plan for the German subordination of shareholder loans from the outset and not rely on a foreign choice of law as a shield;
• keep the avoidance periods of § 135 InsO in view (one year for repayments, ten years for security — in each case before the application to open proceedings);
• carefully examine the financing structure, subordination, collateral and the timing of payments, rather than betting on a more favourable foreign law;
• bear in mind that the ECJ left central follow-up questions open — the structuring remains, in part, subject to uncertainty and should be secured case by case.

Conclusion

The ECJ draws a clear line: where avoidance serves to enforce subordination — that is, the ranking of claims — there is no room for the exception in Art. 13 EU Insolvency Regulation. The supposed loophole of escaping avoidance under § 135 InsO by choosing a more favourable foreign law is thus closed. As Art. 16 of the current Regulation is identical in substance, this also applies to current proceedings.

We are happy to advise you on structuring cross-border shareholder loans and assessing avoidance risks — with foresight and with an eye to the questions that remain open.

This article reflects the state of the sources reviewed and serves general information purposes; it does not constitute legal advice in an individual case. German and European law are decisive; for foreign law an external adviser may be consulted. Any tax aspects must be verified separately by a tax adviser/auditor.