Subordination of Shareholder Loans from a Legal and Economic Perspective

Journal for Institutional Comparisons, Vol. 5, No. 2, pp. 40-47, 2007

Harvard Law and Economics Discussion Paper No. 13

9 Pages Posted: 9 Jul 2007 Last revised: 5 Aug 2008

See all articles by Martin Gelter

Martin Gelter

Fordham University School of Law; European Corporate Governance Institute (ECGI)

Juerg Roth

Bill Isenegger Ackermann AG, Attorneys at Law

Date Written: 2007

Abstract

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.

Keywords: Close corporations, bankruptcy, insolvency, equitable subordination, recharacterization, equity substitution, capital structure, MoMiG, Eigenkapitalersatz

JEL Classification: G32, G33, K22

Suggested Citation

Gelter, Martin and Roth, Juerg, Subordination of Shareholder Loans from a Legal and Economic Perspective (2007). Journal for Institutional Comparisons, Vol. 5, No. 2, pp. 40-47, 2007, Harvard Law and Economics Discussion Paper No. 13, Available at SSRN: https://ssrn.com/abstract=998457

Martin Gelter (Contact Author)

Fordham University School of Law ( email )

150 West 62nd Street
New York, NY 10023
United States
646-312-8752 (Phone)

HOME PAGE: http://www.fordham.edu/info/23135/martin_gelter

European Corporate Governance Institute (ECGI)

HOME PAGE: http://ecgi.global/users/martin-gelter

Juerg Roth

Bill Isenegger Ackermann AG, Attorneys at Law ( email )

Witikonerstrasse 1
P.O. Box
Zurich, 8032
Switzerland
+41 44 386 88 57 (Phone)
+41 44 386 88 99 (Fax)

HOME PAGE: http://www.bialaw.ch

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