Repayment block on loans for future shareholders under the Austrian Equity Substitution Act

With its first civil law decision on the inclusion of future shareholders under the provisions of the EKEG (Eigenkapitalersatz-Gesetz, Austrian Equity Substitution Act), the Supreme Court (OGH 28 May 2020, 17 Ob 1/20a) upheld a literal interpretation of the law. Nevertheless, the applicability of the EKEG may be extended in future exceptional cases.

The issue

A loan granted by a shareholder to a company in crisis is, according to Section 1, EKEG, a replacement for equity. The shareholder is not entitled to reclaim the loan including the interest thereon (except for the quota of the insolvency proceedings, of course) until the company is restructured. Payments made anyway must be reimbursed by the shareholder of the company according to Section 14, EKEG.

Until now, there has been uncertainty as to whether the lender must already be a shareholder of the company at the time the loan is granted or whether future shareholders may also be subject to the provisions of the EKEG. This is the first time the Supreme Court has taken a position on this legal question in a civil law decision.

The case

In the case in question, a company was granted a loan from a non-shareholder. Simultaneously, the lender negotiated the intended acquisition of 25% of the shares in the borrowing company, which actually took place to the aforementioned extent in the following year. The crux of the matter: the borrowing company was already in crisis within the meaning of Section 2, EKEG at the time the loan was granted.

After the acquisition of a 25% share in the company by the lender, the borrowing company became insolvent. Subsequently, the insolvency administrator demanded the loan repayments made in the meantime to be reimbursed by the (current) shareholder in accordance with Section 14, EKEG.

In its decision, the Supreme Court ruled that the repayment block (Rückzahlungssperre) under Section 14, EKEG generally requires the lender to be a shareholder within the meaning of Sections 5 et seqq., EKEG at the time the loan is granted, but that an already agreed acquisition of shares may also be sufficient in exceptional circumstances.

The decision cites as justification a criminal decision the Supreme Court issued the previous year (OGH 7 November 2019, 12 Os 42/19x), which affirmed the applicability of the EKEG to future shareholders. As opposed to the case under discussion, the share acquisition was recorded in writing at the time the loan was granted, although the formal requirement to supply a notarial deed (Notariatsakt) within the meaning of Section 76, paragraph 2, GmbH-Gesetz (Austrian Act on Companies with Limited Liability) had not (yet) been fulfilled. Accordingly, future shareholders would be covered by the provisions of Sections 5 et seqq., EKEG if the share acquisition was already specifically planned at the time the loan was granted (RIS Justiz RS0132906); a legally secured position would not necessary.

The Supreme Court remains true to this legal interpretation in its current decision: in exceptional cases, future shareholders are also covered by the provisions of the EKEG, namely in the case of a legally secured position or at least a factual agreement on the envisaged share transfer. However, in the absence of a factual agreement between prior and new shareholders on the future shareholder position, the Supreme Court rejected the insolvency administrator’s claim in the case in question.

Opinion and outlook

The Supreme Court’s stance that the factual agreement on the shareholder’s future position is sufficient for the applicability of the EKEG – even if there is no legally secured position – is questionable. In our view, the focus on an economic link between the granting of a loan and the acquisition of shares (hence a close temporal and factual connection) would convincingly meet the EKEG’s valuation criteria.

In practice, it should be borne in mind that a non-shareholder granting a loan can be equity-replacing even before the conclusion of a formally valid share purchase agreement and can therefore (if the borrowing company is in crisis) be subject to the EKEG repayment block.