Disputed loan claims threaten the opening of German insolvency proceedings

Background

When the validity of an agreed interest rate is the subject of a dispute between the parties to a loan agreement in Germany, the insolvency courts do not have jurisdiction to deal with the dispute. This is something only the civil courts can do.

Impact 

If lenders provide sufficient evidence of the loan interest amount, ie usually the loan agreement, the debtor is required to prove that the interest rate contradicts public policy or is unreasonably high.

As the insolvency court does not have jurisdiction to review the reasonableness of interest rates or consider public policy issues, it cannot include the disputed part of the claim to determine insolvency pursuant to Section 17 of the Insolvency Statute (Insolvenzordnung – InsO). Lenders risk the insolvency court refusing to open insolvency proceedings until they have successfully pursued their interest claim through the civil courts.

Key takeaways

While in corporate transactions it is very difficult to prove that the lender intended to exploit the borrower by charging an extortionate interest rate (a high interest rate alone does not prove this intent), it is a long process to obtain a final decision through the civil courts, by which time, the debtor's assets may have disappeared.

This scenario is of particular significance for aggregated loan claims. Lenders should consider all the possible risks and whether it is advisable first to take legal action under civil law before filing for insolvency.

Find out more

To discuss the issues raised in this article in more detail, please reach out to a member of our Restructuring & Insolvency team.