When the company is in crisis, the confidence of the financing banks in the management and shareholders is frequently shaken. Still, insolvency is seen as a potential value destroyer and is not necessarily the first choice in restructuring (if a compulsory filing can be avoided). In addition, sustainable restructuring often requires “fresh money”, which cannot be obtained through restructuring per se. Moreover, the financing banks are often not willing to re-finance if previous shareholders (without giving new money on their part) would participate in a cash injection. A potential investor sees things similarly and usually does not want to deal with the existing shareholders either. In such situations of conflicting interests, the so-called “dual-purpose trust ” can provide a solution. However, some special features have to be taken into account when using such a trust, which are discussed in the following article, as well as the latest BGH case law in this area.
Basics
An insolvency-proof protection of assets may be achieved by the construction of a so-called “dual-purpose trust ” (also called ” bilateral (security) trust”, German: “Doppelnützige Treuhand“). In this case, the trustee administers the trust property on the basis of a contract with the settlor (administration trust) and uses it on behalf of the settlor creditor on the basis of or for the benefit of the latter (security trust). Such (dual-purpose) trust constructions are used in various constellations, e.g. to form a collateral pool (by banks) or also to provide security in occupational pension schemes (often in the form of so-called “Contractual Trust Agreements“, CTA), in the context of payments conditional upon the counter-performance (“escrow accounts”) or in the situation described at the beginning of this article, i.e. the contribution of company shares to a trust construction to balance conflicting interests.
Compared to the pure pledging of collateral, the dual-purpose trust has – depending on the design of the the trust agreements – the advantage of possible influence on the part of the trustor-creditor. Thus, the dual-purpose trust is frequently used as a so-called “sales trust”, i.e., the trustee is simultaneously commissioned to initiate a sales process. The proceeds of the sale are usually used to satisfy the creditors (banks), any surplus being usually paid out to the shareholders.
The insolvency of the trustor
As explained at the beginning, the dual-purpose trust is used in turnaround siuations in order to separate the shareholder from the shares – and thus prevent him from intervening in the restructuring. The aim is to avoid the insolvency of the trust property (=company). If the company whose shares are held in trust becomes insolvent, these shares are usually worthless (or are “devalued” as part of a debt-equity swap). However, problems arise if the trustor (=shareholder) itself falls into insolvency. In a ruling from 2015, the Federal Court of Justice (BGH) dealt in depth with such a constellation in a decision on Schmid/Mobilcom whereby the special feature was that the shares were both pledged and constituted the trust property within the framework of a dual-purpose trust.
With regard to the trust construction, the BGH ruled that “a trust agreement with protective third-party effect [is to be assumed] if lenders or other third parties make their contribution to reorganization or restructuring measures dependent on the transfer of the trustor’s shares in the company to a trustee in order to ensure that the measure is implemented independently of the influence of the trustor.” According to the decision of the BGH, the commencement of insolvency proceedings regarding the assets of the trustor remains without influence on the effectiveness of a dual-purpose trust agreement “if this is necessary to safeguard the rights of a third party beneficiary.” Accordingly, such a trust agreement remains effective notwithstanding §§ 115, 116 InsO if this is necessary to safeguard the rights of third-party beneficiaries, for example to secure their contribution to restructuring measures (see BGH reasoning, paras. 43, 44).
Furthermore, the BGH ruled that so-called “bearer shares” can be pledged in accordance with the provisions on the lien on movable property, even if they are securitized in a global certificate held in custody at a securities clearing and deposit bank. If the settlor becomes insolvent, however, the trustee of the dual-purpose trust – because he is treated in the same way as a security trustee – is generally only entitled to a right to separate satisfaction analogous to § 51 InsO and not to a right to separate satisfaction under § 47 InsO. According to the BGH, the insolvency administrator is nevertheless not entitled to dispose of the pledged shares pursuant to § 166 para 1 InsO at least if the debtor initially remained the holder of the securitized membership rights but later disposed of these rights himself by transferring them to a trustee. With this decision, the BGH affirmed the “insolvency proofnees” of dual-purpose trust constructions if the settlor irrevocably transfers his (corporate) membership rights to the trustee and the latter is no longer subject to his instructions in this respect. In this respect, the trustee himself is entitled to the right of realization pursuant to § 173 InsO.
Initially, however, it remained disputed whether the trustee nevertheless had to pay the administrator the so-called “determination and liquidation lump sum” (“Feststellungs- und Verwertungspauschale“) of regularly 9% of the proceeds from the liquidation, cf. § 171 InsO. According to a decision of the BGH from 2019, however, it is to be assumed that the administrator may claim neither the determination nor the liquidation lump sum.
Equality of trustor-creditor and shareholder(s)?
In the past, the attempt to establish a trust structure was often countered by the shareholders with the “killer argument” that the bank, as a trustor creditor, was equivalent to a shareholder and that the loans issued by the bank should therefore be classified as subordinated within the meaning of § 39 (5) InsO. In the event of the company’s insolvency, the respective insolvency administrators naturally attempted a very similar discussion in the course of various lawsuits. The BGH put an end to this discussion with a decision from 2020 and ruled that “a double-sided trust relationship in which the shareholder as trustor transfers his share in the company to a trustee who at the same time holds it in trust for the benefit of the lender [does] not lead to the lender being treated the same as a shareholder solely on the basis of the fiduciary entitlement existing in his favor. In this respect, too, it depends on how the legal position of the lender is structured in comparison to that of a shareholder.” In this context, a mere factual possibility of the lender to influence the decisions of the company shall not be sufficient for the equalization with a shareholder.
Tax issues
Pursuant to § 39 (2) No. 1 Sentence 2 of the German Fiscal Code (AO), the principle applies that in the case of trust relationships the respective assets continue to be attributable solely to the trustor, so that – insofar as the requirements of the standard are met – there is no taxable (harmful) transfer of shares, e.g. within the meaning of § 8c of the German Corporation Tax Act (KStG). However, the criteria established by the Federal Fiscal Court (Bundesfinanzhof, BFH) to specify the standard include that the trust relationship must be “controlled” by the settlor, i.e. in particular that there must be authority to issue instructions and that the settlor must be able to demand the return of the trust property at any time. These criteria are obviously at odds with the objectives sought by the banks regularly acting as trustor-creditors when establishing the trust. Accordingly, tax recognition will depend on the contractual arrangement and the assessment of the respective tax authorities in each individual case.
Conclusion: It is true that the use of a “dual-purpose trust” as such – just a the so-called “transferring restructuring” (“übertragende Sanierung“) – does not lead to the restructuring of a company in crisis. However, a trust structure can succeed in balancing the sometimes conflicting interests of the parties involved in a restructuring – which forms an essential basis for a sustainable restructuring.
As the above explanations show, however, setting up a trust structure is complex, if only because of the divergences between higher court rulings in civil and tax matters. In addition, the Schmid/Mobilcom case described above was based on the rare constellation of bearer shares, i.e. securitized rights. Accordingly, it is still disputed how to deal with “uncertificated” rights, which are therefore not subject to the provisions of property law. Up to now, the prevailing opinion has considered an analogous application of § 166 I InsO. Accordingly, the liquidation right would lie with the administrator and he would also have the right to retain the lump sum for determination and liquidation. Of course, this would impair the rights and proceeds of the trustor creditors.
Due to its complexity, the dual-purpose trust cannot be an “all-purpose weapon” in the turnaround manager’s toolbox, but in appropriate cases its reorganization effectiveness should not be underestimated.
BGH, Urt. v. 24.09.2015 – IX ZR 272/1
BGH, Urt. v. 14.11.2019 – IX ZR 50/17
BGH, Urt. v. 25.06.2020 – IX ZR 243/18
BFH, Urt. v. 04.05.2022 – I R 19/18
(all decisions in German)