In the wake of various judgments from the European Court of Justice which have held that the previous rules in various Member States (including Germany) which refused to recognise the legal existence of a company which had been incorporated in another EU member state, but had its actual headquarters in another Member State violated Community Law, German entrepreneurs were in a rush to form limited companies in particular in the U.K. This promted the Government to react with the new bill in order to stem to tide of companies being “flagged out”.

Under the proposed legislation, intended to come into effect on October 1, 2007, the minimum capital for the formation of a GmbH would be reduced from € 25,000 to € 10,000. Furthermore, and much more importantly, the proposal intends to do away more or less completely with a very crucial limb of the doctrine of corporate law, that is, the treatment of shareholder loans as quasi-equity. The rules applicable in this regard have over the years evolved into one of the most murky and controversial parts of corporate law in Germany, not only making it very difficult for legal scholars and practicioners to find their way through the jungle, but also for investors to apply internationally recognized financing techniques such as debt push-downs, upstream loans and intra-group cash-pooling arrangements. If adopted, the new rules would simply provide that shareholder loans which were given within the last year prior to the insolvency of a GmbH will not be permissible as debts in the insolvency (i.e., are subordinated) and that any repayments (including interest) made during such period can be challenged by the trustee in bankruptcy.

Even though it is not clear at this point to what extent the proposed rules will ultimately be adopted, it should be noted that the bill sends a very important message in particular to investors from abroad as it aims to bring German corporate law more into line with internationally recognized standards and thus helps to increase the attractiveness of Germany for foreign investors.