The market for bond issues is booming (see also here on legal issues). It is not uncommon for such bonds to be issued as subordinated bonds (see e.g. here, in German), which of course can have harsh consequences for bondholders in the event of a crisis of the issuing company: In the worst case, up to the default of his bond (see only here for the “Windreich” case, in German). Often, however, (non-professional) investors are not aware of this risk at all when subscribing. After the Lower Regional Court (LG) Düsseldorf had already dealt with the requirements for subordination declarations in general terms & conditions in 2017 (here), the BGH now followed with another decision, though on a different case, in 2019.
Having previously clarified – as did the LG Düsseldorf – that a qualified subordination naturally only becomes an integral part (and thus unquestionably subject to the provisions for of general terms & conditions) of a contract (i.e. also of a bond issue) if it has been validly agreed upon, the BGH subsequently deals with the requirements for its effective inclusion. If the stipulation contained in the general terms & conditions turns out to be a so-called “surprising clause” within the meaning of § 305c (1) of the German Civil Code (Bürgerliches Gesetzbuch – BGB) or if it does not stand up to a review of its content under § 307 BGB, such clauseis not validly agreed (see para. 20 of the judgement). In the specific case, the BGH classified the disputed wording of the subordination as contrary to the transparency requirement of § 307 BGB. With regard to the concrete requirements for the transparency of subordination clauses in consumer contracts, the court then makes the following gratifyingly clear statement in para 25:
“In general terms and conditions vis-à-vis consumers, a qualified subordination agreement is only sufficiently transparent if it clearly and unambiguously states the depth of ranking, the pre-insolvency enforcement bar, its duration and the extension to the interest […]. This also requires that the conditions for the pre-insolvency enforcement bar are explained sufficiently clearly, in particular that the clause clarifies to what extent the claims arising from the loan are already no longer enforceable if the company is already insolvent or over-indebted at the time of the demand for performance or threatens to become so […]“.
If the subordination does not meet these requirements, it is invalid as a violation of the provisions pertaining to general terms & conditions. This invalidity does not affect the validity of the rest of the contract pursuant to § 306 BGB. This legal effect (described by the BGH in para 31) may also lead to grave consequences: While the respective (consumer) bond creditor may in this case justifiably hope for at least a small repayment, there is the risk for the manager(s) subscribing to the contract (i.e. a bond) to (unwittingly) file to late for insolvency: If the subordination is not validly agreed, the corresponding claims must of course be included in any over-indebtedness status and also taken into account in the integrated liquidity planning as claims that may be (already) due.
Against this background, this ruling is highly recommended reading for potential bond issuers already when preparing the issue.
BGH, Urt. v. 12.12.2019 – IX ZR 77/19 (in German)