Subordination of Shareholder Loans from a Legal and Economic Perspective
Fordham University School of Law; European Corporate Governance Institute (ECGI)
Bill Isenegger Ackermann AG, Attorneys at Law
Journal for Institutional Comparisons, Vol. 5, No. 2, pp. 40-47, 2007
Harvard Law and Economics Discussion Paper No. 13
In closely-held corporations, the owners of a significant amount of shares sometimes try to avert an impending bankruptcy by informally extending a loan, in the hope of financing a successful rescue attempt. For creditors, the continued operations of the company may result in a dissipation of even more liquidation value due to perpetuated and increased risk. For various reasons, courts and legislators are sometimes inclined to subordinate such loans in bankruptcy, or to require their treatment as equity. This article gives a brief overview of the legal basis of subordination in Germany, Austria, Italy, Spain, and the United States, and provides references to the laws of a number of other countries. It also explores the incentive effects of subordination, which are partly beneficial and partly detrimental, and discusses possible implications for legal reform, including the recent German legislative proposal.
Number of Pages in PDF File: 9
Keywords: Close corporations, bankruptcy, insolvency, equitable subordination, recharacterization, equity substitution, capital structure, MoMiG, Eigenkapitalersatz
JEL Classification: G32, G33, K22Accepted Paper Series
Date posted: July 9, 2007 ; Last revised: August 5, 2008
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