Subordinated Loans (Nachrangdarlehen): Ranking, Balance Sheet and Insolvency

A Nachrangdarlehen (a subordinated loan) is debt in legal terms: the agreed subordination ranks the claim behind all other creditors in insolvency proceedings (§ 39 Abs 2 InsO), and only a qualifizierter Rangrücktritt (a qualified subordination undertaking) keeps the liability out of the over-indebtedness test under § 19 Abs 2 Satz 2 InsO. In the commercial balance sheet the liability stays on the books, and Austria attaches entirely different conditions — the EKEG (the Austrian act on equity-substituting shareholder loans) requires a crisis and a holding of at least 25 per cent (§ 5 EKEG).

How a structured, discreet search works in practice is described under finding an investor.

The subordinated loan is also the mezzanine instrument most often described incorrectly. The reason is a single confusion: the commercial balance sheet and the insolvency over-indebtedness test are two separate statements.

How widespread the instrument is can be seen in the BaFin annual report 2025. Of 257 approved investment information sheets for Vermögensanlagen (2024: 297), 81 per cent related to subordinated loans, 12 per cent to participating loans and 7 per cent to profit participation rights. Subordinated loans are therefore the dominant instrument in the German retail segment for such investments; the investment focus was solar and wind.

What subordination actually does in law

A subordinated loan starts out as an ordinary loan. The lender has an unconditional repayment claim and the company has a liability. What is added on top is the ranking agreement.

In Germany, § 39 Abs 2 InsO governs contractually agreed subordination. In economic terms it usually means a total loss. This must be kept apart from the statutory subordination of shareholder loans under § 39 Abs 1 Nr 5 InsO, which applies without any agreement. The small-shareholder exemption in § 39 Abs 5 InsO only covers a non-managing shareholder holding 10 per cent or less.

Simple subordination takes effect exclusively within insolvency proceedings. It changes nothing in the balance sheet, nothing in the over-indebtedness test and nothing about enforceability while the business is running. Anyone who wants more needs a qualified subordination undertaking.

How that value can be established credibly is set out under company valuation.

The qualified subordination undertaking and the correct leading case

The leading decision is BGH 05.03.2015 – IX ZR 133/14 (BGHZ 204, 231). The predecessor decision is BGH 08.01.2001 – II ZR 88/99 (BGHZ 146, 264).

A note on sources: freely available guidance literature circulates a case number "BGH IX ZR 238/12 vom 05.03.2015". That decision does not exist. Anyone who finds it cited in a draft agreement knows the template was adopted without being checked.

The qualified subordination undertaking has to meet three requirements.

Requirement	Meaning	Typical drafting error
No time limit	The undertaking must not be limited to a date or an event	Subordination "for a period of three years" or with an end date
Coverage of any security	Any security provided must also be caught by the undertaking	Subordination while a Grundschuld (a German land charge) or a guarantee remains in place
Pre-insolvency enforcement bar	The claim must already be unenforceable outside insolvency proceedings	Subordination "only in the event of insolvency"

The third point is where most templates fail. Subordination that only bites once proceedings are opened does not satisfy § 19 Abs 2 Satz 2 InsO.

The revised version of IDW S 11 was approved on 20.05.2024 and published on 09.07.2024. Its content on subordination cannot be verified in the original from public sources; what is reliable is § 19 Abs 2 Satz 2 InsO and BGH IX ZR 133/14.

Commercial balance sheet and over-indebtedness test are two separate statements

This is the single most important point of the topic and the biggest mistake in freely available guidance literature.

A liability covered by a subordination undertaking that complies with the BGH requirements still has to be carried in the commercial balance sheet. The basis is the prudence principle; the corresponding IDW HFA position is available to us only through secondary sources. Subordination does not remove the debt, it merely moves it down the ranking.

The effect arises exclusively in the over-indebtedness test. § 19 Abs 2 Satz 2 InsO excludes claims from shareholder loans carrying subordination under § 39 Abs 2 InsO from the liabilities to be taken into account. That is a special calculation, not an accounting rule.

Statement	Effect of the qualified subordination undertaking	Provision
Commercial balance sheet (DE/AT)	none — the liability stays on the books	prudence principle, § 266 Abs 3 C.8 HGB, § 224 Abs 3 C.8 UGB
Over-indebtedness test Germany	liability is left out of account	§ 19 Abs 2 Satz 2 InsO
Over-indebtedness test Austria	comparable mechanism	§ 67 Abs 3 IO
Bank rating	a matter of interpretation for the individual institution, not prescribed by law	none

Anyone reading that subordination "turns debt into equity" is reading a shortcut. Equity in the commercial balance sheet does not rise by a single cent.

In Austria, § 67 Abs 3 IO refers to "§ 225 Abs 1 HGB" — a historic reference to the Austrian HGB of the time, today the UGB. The mechanism is confirmed by the Leitfaden Fortbestehensprognose (the Austrian guidance on going-concern forecasts, Vienna, March 2016).

Austria and Germany: EKEG versus § 39 Abs 1 Nr 5 InsO

This is where the most important practical dividing line runs. Both countries subordinate shareholder loans in insolvency, but on completely different conditions.

Germany subordinates shareholder loans unconditionally and irrespective of any crisis. The BGH described this with the formula "ohne Rücksicht auf einen Eigenkapitalcharakter", that is, regardless of any equity character (BGH 13.10.2016 – IX ZR 184/14, BGHZ 212, 272; available to us only through secondary sources).

Austria, by contrast, ties the question to whether the company was in crisis when the credit was granted.

Criterion	Germany	Austria
Legal basis	§ 39 Abs 1 Nr 5 InsO	EKEG
Trigger	none — independent of any crisis	crisis when credit is granted (§ 2 EKEG)
Concept of crisis	not required	illiquidity, over-indebtedness or need for reorganisation within the meaning of the URG
Need for reorganisation	—	equity ratio below 8 per cent AND notional debt repayment period above 15 years
Shareholding threshold	subordination applies in principle in all cases	at least 25 per cent or controlling influence (§ 5 EKEG)
Exemption for small holders	§ 39 Abs 5 InsO: 10 per cent or less and not managing	via the 25 per cent threshold in § 5 EKEG
Over-indebtedness test	§ 19 Abs 2 Satz 2 InsO	§ 67 Abs 3 IO

The consequence for cross-border structures is clear. A German shareholder who lends to their GmbH in good times is automatically subordinated. An Austrian shareholder with a 20 per cent holding already falls outside the threshold of § 5 EKEG. The instrument as a whole is placed in context under mezzanine capital.

Balance sheet presentation and what AFRAC 40 says

In the German commercial balance sheet the subordinated loan belongs under § 266 Abs 3 C.8 HGB, that is, under other liabilities. In Austria it is § 224 Abs 3 C.8 UGB, cross-checked against § 225 Abs 6 UGB ("Posten C 1 bis 8").

The negative finding matters: neither the HGB nor the UGB requires separate presentation or a note disclosure because of the subordination.

For the Austrian treatment of mezzanine capital as equity, AFRAC 40 is the relevant guidance. Paragraph (8) sets out four criteria, in the original wording: "Diese Kriterien sind nachfolgend definiert und kumulativ zu erfüllen." — the criteria are defined below and must be met cumulatively. Paragraph (9) defines subordination.

Decisive in practice is paragraph (10), in the original wording: "Nicht ausreichend ist eine vertraglich vereinbarte Nachrangigkeit gegenüber nur einzelnen Gläubigern oder einer Gruppe von Gläubigern." — contractual subordination towards only individual creditors or a group of creditors is not sufficient.

That is where the market-standard relative subordination fails. Anyone subordinating a loan only towards the acquisition bank — the standard case in a management buy-out — will not achieve equity treatment. What is needed is subordination towards all creditors.

Three common claims that cannot be substantiated

At this point this article deliberately departs from the majority of online treatments.

First: "banks count subordinated loans towards economic equity." That cannot be substantiated. The Gabler Banklexikon defines economic equity without subordinated capital. Whether an institution gives the loan credit in its internal rating is a matter for negotiation, not a matter of law.

Second: the "50 per cent recognition" figure that circulates. It traces back through Wikipedia to a single source, Thießen/Hockmann 2020, p. 275. No supervisory or industry association document setting that ratio exists.

Third: the IFRS claim. A subordinated loan with a repayment claim is a financial liability under IAS 32, regardless of ranking. IAS 32.16A is tailored to puttable instruments. The claim that subordination is a "material classification feature" is misleading in that generality.

Practical consequence: ask the financing bank in writing, before signing, how it treats the instrument in its rating.

Telling it apart from silent partnership, participating loan and profit participation right

The subordinated loan remains a loan with a fixed repayment claim. The return is in principle independent of results, and there is no common purpose.

Instrument	Return depends on results	Participation in losses	Common purpose	Balance sheet at the company
Subordinated loan	no	no (ranking only)	no	debt
Participating loan (partiarisches Darlehen)	yes (profit share)	no	no	debt
Typical silent partnership	yes (mandatory)	optional	yes	debt
Atypical silent partnership	yes	as a rule yes	yes	close to equity
Profit participation right (Genussrecht)	freely structurable	freely structurable	no	depends on structure

The dividing line between a participating loan and a silent partnership was set out by the BFH in its judgment of 28.11.2019 – IV R 54/16. Official headnote 1 reads: "Einem partiarischen Darlehen sind – in Abgrenzung von einer stillen Beteiligung – eine Verlustbeteiligung des Darlehensgebers und eine gemeinsame Zweckverfolgung (§ 705 BGB) fremd." — a participating loan, as distinct from a silent partnership, does not involve the lender sharing in losses or pursuing a common purpose.

The label chosen by the parties is expressly "nicht maßgebend", not decisive. Anyone heading a document "subordinated loan" while granting the lender loss participation and a say may in fact have created a silent partnership. Its mechanics are covered in the primer on the silent partnership, and the co-entrepreneur variant under atypical silent partnership.

§ 705 Abs 1 BGB has applied in its MoPeG version since 01.01.2024; that does not devalue the case law on the distinction. A further authority is BGH 10.10.1994 – II ZR 32/94 (BGHZ 127, 176).

For Austria the finding is clearly negative: no OGH decision on this distinction could be verified, because the RIS legal database blocks automated queries.

On profit participation rights: § 221 Abs 3 AktG (Germany) and § 174 Abs 3 AktG (Austria) only govern the issuing procedure. They contain no statutory definition of the instrument — details under profit participation rights.

The vendor loan: same mechanism, different occasion

A vendor loan is usually a subordinated loan: the seller defers part of the purchase price and ranks behind the acquisition bank. The deal mechanics are covered under vendor loan; what follows here are only the data points that hold up.

Metric	Value	Source and caveat
Size	roughly 10 to 20 per cent of the purchase price	Rädecke, PU 03/2022 (IWW)
Term	five to ten years	Rädecke, PU 03/2022
Security	subordinated vendor loans usually unsecured	Rädecke, PU 03/2022
Interest	no range stated	negative finding
Prevalence in Europe	34 per cent of transactions with vendor financing	European Deal Terms Report, November 2025, secondary source
Deferred share	10 to 20 per cent	European Deal Terms Report, November 2025
Direction of travel DACH	48 per cent of advisers report an increase	Dealsuite DACH M&A Monitor, issue 14, August 2025

The most important finding is a negative one. There is no reliable official or academic statistic on how widely vendor loans are used in German SME succession deals. KfW Fokus 526 (09.01.2026) and KfW Fokus 450 (12.02.2024) do not mention vendor loans at all.

Dealsuite measures the direction of change, not the level of use. Issue 14 (159 of 498 responses, 32 per cent) records 41 per cent reporting an increase in vendor loans and 7 per cent a marked increase.

For Austria, KMU Forschung Austria (final report August 2021, commissioned by BMDW and WKO) provides reference points. In 2018 there were just under 6,500 business transfers, 55 per cent of them for consideration. On financing, respondents named own funds at 70 per cent, bank credit at 55 per cent, subsidies at 14 per cent and loans at 11 per cent.

Those 11 per cent mix family loans and vendor loans; the sample comprises 119 successors and 82 transferors. As a payment form, a single lump sum dominates at 68 per cent, with instalments or annuity payments at 25 per cent.

Financing pressure is rising measurably. KfW Fokus 526 puts the share seeing a financing hurdle at 18 per cent, against 16 per cent in KfW Fokus 450. The DIHK succession report 2025 counts 9,636 companies looking for a successor (up 16 per cent), but comments on vendor loans only qualitatively. The wider frame is set out under business succession.

One insolvency law point comes on top. In a share deal the vendor loan typically flows to the acquirer or a NewCo — in which case § 39 Abs 1 Nr 5 InsO does not apply. If the seller retains a rollover stake, the provision does apply, unless the holding is 10 per cent or less and non-managing (§ 39 Abs 5 InsO).

That classification is a reading of the statutory wording, not case law. Authorities in this area are BGH 13.10.2016 – IX ZR 184/14 (BGHZ 212, 272) and BGH 25.06.2020 – IX ZR 243/18 (ZIP 2020, 1468), both available to us only through secondary sources.

Common mistakes

The subordination is agreed only for the insolvency case. The pre-insolvency enforcement bar is then missing. The lender gives up ranking without any effect in the over-indebtedness test.

The undertaking is given a time limit, for example "until positive equity has been restored". Or security remains in place. Either failure misses the requirements of BGH IX ZR 133/14.

The subordinated liability is written off. Anyone releasing the liability through profit and loss in the commercial balance sheet produces incorrect annual accounts and, in case of doubt, a tax problem.

German templates are used for Austrian companies. The automatic subordination of § 39 Abs 1 Nr 5 InsO does not exist there.

Subordination is declared only relative to the bank and the loan is nonetheless presented as equity. AFRAC 40 paragraph (10) rules that out expressly.

This article is not a substitute for legal or tax advice.

How IGCP helps

International German Capital Partners (IGCP), Postgasse 14, 1010 Vienna, has been advising on capital raisings and transactions for more than 20 years, with over 100 transactions completed and complete independence from banks, funds and buyers.

With a subordinated loan that means structure before contract. The first question is whether subordination actually achieves the intended objective — or whether a minority shareholding or growth capital in another form fits better. An instrument aimed at the wrong objective can only be corrected later, and expensively.

After that the commercial terms are negotiated: the scope of subordination, term, interest and repayment schedule, alignment with the acquisition financing and the treatment in the bank rating. The legal and tax drafting is done with your own advisers.

The typical range is companies with revenue between 300,000 and 15 million euros in the DACH region. Process duration at IGCP: three to six months instead of the market-standard six to twelve.

If you are planning to grant or take up a subordinated loan, send the key facts — amount, term, purpose and existing bank financing — to office@igcp.at, and we will review the structure confidentially before the first draft agreement.

FAQ

What is a Nachrangdarlehen?

A loan with a full repayment claim whose entitlement ranks behind all other creditors in insolvency proceedings. In Germany, § 39 Abs 2 InsO governs contractually agreed subordination. For accounting purposes it remains debt.

What is the difference between simple subordination and a qualified subordination undertaking?

Simple subordination takes effect only in insolvency proceedings and changes nothing in the over-indebtedness test. A qualifizierter Rangrücktritt additionally requires that there is no time limit, that any security is caught, and that the claim cannot be enforced even before insolvency. Only then does § 19 Abs 2 Satz 2 InsO apply.

Is a subordinated loan written off the balance sheet once subordination is agreed?

No. A liability covered by a subordination undertaking that complies with the BGH requirements stays on the commercial balance sheet; the basis is the prudence principle. The effect arises exclusively in the insolvency over-indebtedness test under § 19 Abs 2 Satz 2 InsO.

Which BGH judgment governs the qualified subordination undertaking?

BGH 05.03.2015 – IX ZR 133/14 (BGHZ 204, 231), with the predecessor decision BGH 08.01.2001 – II ZR 88/99 (BGHZ 146, 264). The case number "IX ZR 238/12 vom 05.03.2015" that circulates in guidance literature does not exist and should not be cited.

Do the same rules apply in Austria as in Germany?

No. Germany subordinates shareholder loans under § 39 Abs 1 Nr 5 InsO unconditionally and irrespective of any crisis. Austria requires under the EKEG that the company was in crisis when the credit was granted (§ 2 EKEG) and that the lender holds at least 25 per cent or has controlling influence (§ 5 EKEG).

Do banks count a subordinated loan as equity?

That cannot be established as a general rule. The Gabler Banklexikon defines economic equity without subordinated capital, and no supervisory or industry document supports the 50 per cent recognition figure that circulates. Treatment in the rating is a matter for the individual institution and should be clarified in writing.

How does a subordinated loan differ from a silent partnership?

The subordinated loan carries a fixed repayment claim, no participation in losses and no common purpose. Under BFH 28.11.2019 – IV R 54/16 the label chosen by the parties is not decisive. How the payout at the end is calculated for a silent partner is covered under settlement credit.