Theory on loans replacing equity not applicable to non

Theory on loans replacing equity not applicable to non-shareholders
Facts:
The plaintiff is an Austrian bank, which granted loans to a limited partnership. Only
part of the loans was secured by sureties and mortgages on the real property of the
company's shareholders. After the limited partnership had fallen into bankruptcy, the
receiver contested the bank's claim, because it was made unconditionally and not
limited to the amount not satisfied by the securities provided by the shareholders.
The bank then sought a declaratory judgment acknowledging the unconditional
nature of its claim, i.e. that it ranked pari passu with the claims of other creditors in
bankruptcy. This judgment was granted by the court of first instance and on appeal.
Held:
The Supreme Court noted that the principles developed in Germany in relation to
shareholder's loans replacing equity capital were also valid in Austria. Under this
theory a shareholder who does not inject equity capital into his company in case of
financial problems, but grants a new loan, security for the loan of a third person or
does not accelerate the maturity of an existing loan, should be prevented from
placing the financing risk on other creditors.
By the 1980-amendment to the German Act on Limited Liability Companies the
theory was extended to third party creditors under certain conditions, if they had
received security by a shareholder. The third party creditor only had a claim for pro
rata satisfaction in bankruptcy proceedings to the extent that he was unable to
recover his claims from the provided security. A similar proposal was discussed for
the 1993-amendment to the Austrian bankruptcy laws, but this proposal did not find
its way into the government bill which eventually became the new law.
In the absence of an express provision to this effect, which would be similar to the
German provision outlined above, the application of the theory on loans replacing
equity capital to third parties could only be derived from the general principles of
Austrian company law. However, while it was in conformity with these principles to
apply the theory to shareholders, the same was not true for third parties. In general, a
creditor is not prevented from claiming pro rata satisfaction in bankruptcy
proceedings, even if he has obtained security from third parties. Such a limitation
would require an express legal basis, which does not exist.
Thus, the decision of the Appellate Court had to be affirmed.
Comment:
In this decision the Austrian Supreme Court for the first time deals with the
applicability of the theory on loans replacing equity capital to third party creditors. On
previous occasions, the Supreme Court has only dealt with loans or guarantees for
loans by shareholders of the bankrupt company. The Supreme Court found that, in
the absence of a legal provision to the contrary, which presently does not exist in
Austria, the theory on loans replacing equity capital may not be extended to third
party creditors.
The decision will give comfort to banks and other creditors in case of bankruptcy that
they do not have to bear the same consequences as a shareholder with regard to
their loans secured by shareholders, as a mortgage or otherwise.
Source: Supreme Court 12 March 1998, 8 Ob 336/97p
DR. PETER PÖCH / DR. HEINZ RINDLER