The consequence of a subordination agreement is essentially that debts covered by subordination should not be recognized as liabilities in insolvency (a specific balance sheet for insolvency law purposes) and, therefore, if the subordination is broad enough, over-indebtedness for bankruptcy purposes is excluded. The tax treatment of subordinated debts is also an important issue, which means that such a right is not depreciated, resulting in taxable income. It is therefore desirable for the Bundessteuergericht to follow the decision of the Federal Court of Justice and accept the legal requirements for qualified subordination agreements, in order to obtain the respective tax effects. Subordination agreements can be used in a variety of circumstances, including complex corporate debt structures. In 2006 and 2007, the debtor entered into an incentive agreement and a loan agreement with the defendant`s creditors. Neither the defendant nor his predecessors are or have been shareholders of the debtor. The agreements were awarded to the defendant who received interest payments between January and March 2008. In its judgment, the Federal Court of Justice specifies that the provisions of the German Insolvency Code (InsO) dealing with subordination agreements are applicable even if subordination is not granted by a debtor, but, as in this case, by a third party such as Mezzanine`s creditors. The Federal Court of Justice answers the question of the legal nature of subordination in the sense that it is a debt modification contract that does not alter the existence of the debt itself, but its rank. The agreement between the parties is amended so that the creditor can only demand payment of his debt if there are sufficient assets free of the debtor. However, if the debtor is required to request insolvency proceedings, the creditor is not entitled to request payment. The Federal Court of Justice defines the following legal requirements that must be met by a qualified subordination agreement in order to avoid over-indebtedness of a corporation.
The Tribunal confirms that the legal requirements in force until 1 November 2008, when the modernised Law of Obligations (MoMiG) came into force, also apply to subordination agreements concluded under the new legal provisions.