Definition and Legal Classification of Debt Capital
Debt capital is a central element in German and international business and accounting law. It refers to those financial resources provided to a company from external sources—that is, by third parties—for a fixed period and which must be repaid. Debt capital must therefore be distinguished from equity capital, as it does not represent assets that are available to the company permanently and without a repayment obligation. The legal structure and significance of debt capital touch on various areas of law, including civil law, corporate law, tax law, and insolvency law.
Accounting and Commercial Law Classification of Debt Capital
Definition according to the German Commercial Code (HGB)
In commercial law, the distinction of debt capital is particularly found in the provisions of the German Commercial Code (HGB). In accordance with Section 266 (3) C HGB, the balance sheet distinguishes between equity and debt capital. Debt capital includes all provisions and liabilities. Accurate assignment is significant for accounting purposes, for example, in terms of balance sheet truth and clarity (Section 238 HGB).
Subclassification of Debt Capital
Legally, debt capital is subdivided into different categories:
- Short-term debt capital: Repayable within one year, e.g. trade payables.
- Long-term debt capital: With maturities of more than one year, e.g. bonds or long-term bank loans.
- Provisions: For uncertain liabilities or impending obligations pursuant to Section 249 HGB.
Civil Law Aspects of Debt Capital
Origination of Debt Capital
Debt capital is generally created through obligations, such as loan agreements (Sections 488 et seq. BGB), bonds, or by purchasing goods and services on credit. The legal framework derives from the relevant contract types.
Rights and Obligations of Lenders
Creditors of debt capital acquire claims against the company for repayment and, if applicable, payment of interest. Unlike with equity capital, they are generally not entitled to share in profits or losses, but rather stand outside the company.
Ranking and Collateral
In the repayment of debt capital, the rights of creditors are typically defined by contract, law, or articles of association. Certain lenders may require collateral, such as land charges or guarantees. In the event of insolvency, creditors of debt capital are generally satisfied before shareholders (priority according to the Insolvency Code – InsO).
Company Law Significance of Debt Capital
Financing and Regulation
In company law, debt capital plays a particular role in the structuring of a company’s capital (leverage). The regulations for raising and maintaining capital, especially in corporations such as GmbH or AG (Sections 30 et seq. GmbHG, Sections 57 et seq. AktG), protect lenders from being disadvantaged by distributions to shareholders.
Equity-Substituting Loans
In the past, the concept of the equity-substituting loan was particularly significant due to the so-called equity substitution law (Sections 32a, 32b GmbHG old version). The reform of MoMiG (Act to Modernize the Law on Limited Liability Companies and to Combat Abuses) repealed these regulations; however, they still have relevance for old cases.
Tax Law Aspects of Debt Capital
Debt capital is also of major importance in tax law. This includes, in particular, the deductibility of interest as operating expenses. However, the so-called interest barrier (Section 4h EStG, Section 8a KStG) limits the deductibility of debt interest for certain companies to prevent tax structuring through excessive debt financing.
Another issue is the distinction between debt and equity in the context of hidden profit distributions, which is especially relevant in group structures.
Insolvency Law Treatment of Debt Capital
In insolvency law, the claims of debt capital providers are significant, as in the insolvency proceedings pursuant to Sections 38 et seq. InsO they are treated as insolvency creditors. They participate in the insolvency proceedings in rank after the mass liabilities (Section 53 InsO), but before the claims of shareholders. Certain scenarios, such as shareholders leaving loans in the company after the fact, can affect their rank (Section 39 InsO).
Summary and Distinction
Debt capital refers to all lawfully granted funds that grant third parties a right to repayment from the company. The legal framework of debt capital is thus fundamental in many ways to commercial activity and legally compliant corporate management. In addition to commercial law provisions, civil, corporate, tax, and insolvency regulations in particular must be observed. Accurate knowledge and classification are crucial for assessing business risks, accounting, and protecting creditors’ interests.
See also:
- Equity capital
- Liability
- Provision
- Insolvency Code
- Commercial Code
Frequently Asked Questions
Which legal regulations govern the raising of debt capital by companies?
The raising of debt capital by companies in Germany is primarily regulated by the German Civil Code (BGB), the German Commercial Code (HGB), and the GmbH Act (GmbHG) as well as the Stock Corporation Act (AktG). The selection of relevant regulations depends on the company form. Corporations such as GmbH or AG are subject to special rules regarding loan procurement, disclosure requirements, and notification obligations to shareholders or stockholders. Public funds and bank loans are additionally subject to special banking supervision regulations, such as the Banking Act (KWG), especially in the context of large loans. The resolution to take on debt capital may require the approval of the shareholders’ meeting or the supervisory board, depending on the company structure. Moreover, insolvency law provisions, such as Section 19 InsO, also regulate to what extent debt capital can lead to over-indebtedness and what liability consequences result.
What rights and obligations arise from a legal perspective when taking on debt capital?
From a legal perspective, taking on debt capital imposes significant obligations on the company, particularly the obligation to pay interest and principal on time in accordance with contractual agreements. Additionally, this often entails extensive information and cooperation duties towards the lender, such as submitting annual financial statements or interim reports. The rights of the creditor may also be secured by collateral, such as guarantees, land charges, or pledges. In return, the lender acquires the right to repayment of their capital and the agreed interest, but usually no say in operational management. In case of breaches of duty, such as failure to meet repayment or interest agreements, creditors may initiate various legal steps, ranging from contractual sanctions to enforcement measures and the initiation of insolvency proceedings.
What liability risks exist for management in the event of misuse of debt capital?
Management is liable for the proper use of debt capital, both under civil and criminal law. Duties and responsibilities derive from company law regulations, such as Sections 43 GmbHG or Section 93 AktG, which impose duties of care. In the case of abusive use of debt capital, such as for private purposes or unauthorized investments, the company or creditors may assert claims for damages. If misuse leads to insolvency, management faces liability for delaying insolvency (Section 15a InsO) and criminal prosecution, for example, for embezzlement (Section 266 StGB). Furthermore, executives may be personally liable to creditors, especially if over-indebtedness or insolvency is not reported in good time.
Under what legal conditions can creditors demand collateral for debt capital?
Creditors generally have the right to demand collateral when granting debt capital to protect against default risk. The structuring and provision of collateral is governed by private law in the BGB, such as in the case of mortgages (Section 1113 BGB), land charges (Section 1191 BGB), guarantees (Section 765 BGB), or pledges (Section 1204 BGB). The effectiveness of collateral requires compliance with certain form requirements, for example, notarization and entry in the land register in the case of a land charge. The appropriateness and admissibility of collateral may also be subject to competition and antitrust restrictions. In insolvency, collateral is preferentially treated under the Insolvency Code (InsO), i.e. debt capital lenders with security interests have priority access to secured assets.
What disclosure obligations exist for companies when taking on debt capital?
Disclosure obligations in connection with debt capital depend on the company form and the amount of capital raised. Corporations, such as GmbHs or AGs, are subject to extensive disclosure obligations under Sections 325 et seq. HGB, in particular the disclosure of liabilities and loans in the balance sheet and in the notes to the annual financial statements. Contractually relevant side agreements, collateral, or off-balance sheet obligations often also have to be disclosed. In the case of bond issues, additional capital market disclosure regulations and the publication of a securities prospectus in accordance with the German Securities Prospectus Act (WpPG) must be observed. Breaches of these disclosure obligations can result in fines and liability claims against management.
What special legal aspects apply to the acquisition of debt capital in insolvency?
Special rules apply to existing and newly acquired debt capital in insolvency. After the opening of insolvency proceedings, administration of the assets rests with the insolvency administrator, and new loans can only be taken out with the administrator’s consent and often only as so-called mass liabilities (Sections 53, 55 InsO). Mass liabilities are given preferential treatment and are satisfied in priority to insolvency claims. Existing debt capital becomes an insolvency claim and is usually satisfied only proportionally in the final distribution. Creditors’ collateral generally remains effective; however, the insolvency administrator can assert and realize rights arising from segregated collateral (Sections 49, 50 InsO). The subsequent provision of collateral after the onset of insolvency may also be contestable under Section 131 InsO.
Are company resolutions required for acquiring debt capital?
Whether company resolutions are required for acquiring debt capital depends on the company form and the amount of the desired loan. In corporations, especially in a GmbH, a shareholder resolution pursuant to Section 49 GmbHG is often required for extraordinary and significant measures, such as taking out large loans or securing significant assets. In an AG, the approval of the supervisory board may be required under Section 111 (4) AktG for the conclusion of particularly significant credit agreements or the issuance of bonds. If the necessary approvals are missing, the loan agreement may be invalid or the management may be liable to the company.
