Skip to content
PKF News

You are here:

An insolvency administrator may challenge profit distributions

In the event of a looming crisis at a GmbH [German limited liability company], a question that frequently arises for shareholders is whether or not they may still distribute between themselves the profits that were generated in the past (retained income brought forward, revenue reserves) without the risk of this being challenged subsequently by an insolvency administrator. The Federal Court of Justice (Bundesgerichtshof, BGH) has now, in principle, replied in the negative – there is therefore a risk of this being challenged.

Background

Certain legal acts that are performed prior to the opening of insolvency proceedings may be challenged by the insolvency administrator. This also includes the satisfaction of a loan granted by a shareholder to the company if the repayment is made in the last year prior to the opening of insolvency proceedings. This however likewise applies to payments that are the economic equivalent of loans. Whether or not the latter also applies to profits ‘that have been left in the company’ has been disputed for a long time now.

Retained income brought forward is the economic equivalent of a loan

In the opinion of the BGH (ruling of 22.7.2021, case reference: IX ZR 195/20) the crucial point is that a capital asset is made available for a period for use by the company and a financing function is thus attributed to the legal act. This can then also be deemed to be so if the sole shareholder decides not to distribute profits that have been generated but, instead, to carry them forward to new account. 

A subsequent distribution would then be the economic equivalent of a loan repayment even though this concerns equity capital and not debt capital. Consequently, the creation of revenue reserves or voluntary payments into the capital reserves should be rated as being ‘similar to a loan’.

Applicable also in the case of majority decisions?

The BGH ruling related to the case of a sole shareholder who had made a financing decision by carrying the income forward to new account. According to the court’s explanations, the same could also readily be assumed for the majority shareholders of a multiple ownership company if they were to vote in favour of retaining profits. 

Please note: By contrast, in the case of out-voted minority shareholders it would likely not be possible to assume that there had been a distinct financing decision because there would have been no voluntary decision to leave profits in the company.

Recommendation: In view of the one-year time limit prior to the opening of insolvency proceedings, during which profit distributions are at risk of being challenged, in principle, the recommendation can only be to actually distribute earnings so long as it is possible do so without causing an adverse balance in the accounts but with the clear understanding that for shareholders who are basically willing to provide finance this would represent a dilemma. For minority shareholders it would be advisable, as a precautionary measure, to vote against the respective resolutions to carry forward retained income.

Back
Back to top of page