Concept and Significance of Subordination in Law
The Term Subordination refers, in a legal context, to a relationship of superiority and subordination, in which one party is subject to the instructions of another or occupies a subordinate role. Subordination plays a significant role in various areas of law, especially in public law but also in private law and labor law. Subordination creates the foundation for hierarchical structures, regulatory authority, and obligations.
Subordination in Public Law
Administration and Authority Structure
In public law, subordination describes the relationship between superior and subordinate authorities as well as the relationship between the state and the citizen. A central feature of administrative law is the unilateral sovereign order of state bodies toward private citizens, known as the subordination relationship.
Administrative Act and Sovereign Action
The administrative act, as the classic instrument of the state’s exercise of power, is an expression of subordination. The state can issue a binding order through an administrative act, while the citizen generally only has recourse to the courts. This one-sidedness emphasizes the hierarchical superiority of the administration over the citizen.
Subordination Principle and Self-Administration
The principle of subordination also manifests within the structure of authorities. Superior and subordinate authorities exist in relationships bound by instructions, which establishes a clear hierarchy within administrative organization. By contrast, entities with self-administrative powers may replace subordination with a relationship based on coordination.
Public Service Law
In civil service law, subordination manifests primarily in the so-called relationship of instruction. Civil servants are generally obliged to follow lawful instructions of superiors within the scope of official and technical supervision. This relationship serves to ensure an orderly and efficient administration.
Subordination in Private Law
Contract Law
In private law, subordination is discussed especially in connection with obligations. While civil law is fundamentally based on the equality of parties, a relationship of superiority and subordination may be established by contract, for example in service contracts, employment contracts, or certain company forms.
Subordination in Employment Law
In employment law, the principle of subordination is a fundamental structural feature. The employment relationship is characterized by the employee’s personal dependence, who, within the framework of an employment contract, is subject to the employer’s right to issue instructions. The dimensions of subordination include:
- Obligation to follow instructions regarding the content, execution, time, and place of work performance
- Integration into the employer’s business organization
The embodiment of this subordination relationship distinguishes the employment relationship on the one hand from freelance service contracts and on the other from contracts for work.
Subordination in Corporate and Law of Obligations
Company relationships
Subordination can also play a role in corporate law, for example, in management and representation in certain company forms. For example, in limited partnerships, there are clear subordination relationships between the general partner and the limited partner with regard to management and representation authority.
Subordination in the Law of Obligations
The law of obligations recognizes the contractual agreement of the subordination of claims. This is referred to as subordination under the law of obligations , for example in the case of subordinated loans. Such a loan is satisfied only after all other claims have been satisfied in the event of insolvency.
Subordination and Legal Protection
Safeguards Against Abuse
The law provides the subordinate party in a subordination relationship with various forms of legal protection. These include access to administrative courts in public law, civil and employment law court actions, as well as specific protective provisions such as the prohibition of retaliatory action or arbitrary instructions in employment law.
Abuse of Instruction Authority
The improper exercise of the right to issue instructions can lead to violations of rights, against which affected persons can defend themselves by legal means. In public law, challenging administrative acts is provided; in employment law, protection through judicial review of instructions exists.
Subordination and Distinction from Other Legal Relationships
Distinction from Relationship of Coordination
The counterpart to the subordination relationship is the relationship of coordination. Here, the parties are on equal footing and have equivalent rights and obligations. In private law, the coordination principle generally dominates, whereas public law prefers the subordination principle.
Significance in Procedural Law
In procedural law, subordination relationships exist, for example, between the court and the parties. Here, the court exercises procedural authority, while the parties must comply with procedural rules.
Significance and Practical Relevance
The principle of subordination has considerable practical significance for the functioning of the community, the world of work, and the relationship between state, business, and citizens. Clearly defined subordination relationships provide legal certainty, enable efficient processes, and offer effective legal protection in cases of abuse or breach of superior obligations.
References
- Maurer, Hartmut: Allgemeines Verwaltungsrecht, 20th edition, Munich 2023.
- Schmitt, Gerd: Grundzüge des Arbeitsrechts, 8th edition, Berlin 2022.
- Brox, Hans/Walker, Wolf-Dietrich: Allgemeiner Teil des BGB, 43rd edition, Munich 2024.
See also:
- relationship of coordination
- Administrative act
- Right to issue instructions
- Subordinated loan
- Employment contract
- Company law
- Civil service law
This article provides a comprehensive overview of the term subordination in law and explains its structure, functioning, and protection mechanisms in various areas of law.
Frequently Asked Questions
What are the legal consequences of subordination in the event of insolvency?
Subordination in a legal context, especially in insolvency proceedings, usually means that a claim or right is ranked behind other claims. The consequence is that creditors with a subordinated claim are only satisfied from the insolvency estate once all senior creditors have been fully satisfied. Legal consequences arise in particular for subordinated loans (e.g., shareholder loans pursuant to § 39 InsO), which, in the event of insolvency, fundamentally cannot compete with the claims of regular creditors. A subordinated claim may therefore be entirely lost in case of insufficient insolvency estate, as is often the case in corporate insolvency. In addition, payments to subordinated creditors must not be made before full satisfaction of the senior creditors; any such payment made nonetheless may, under certain circumstances, be reclaimed under insolvency avoidance law.
Must subordination be explicitly agreed in a contract?
Yes, in a legal context, subordination must be explicitly and clearly agreed upon. Without an explicit contractual arrangement, the statutory order of priority of claims applies, so that no subordination is established. The agreement is regularly made in loan agreements, debt acknowledgments, or other contracts under the law of obligations and does not require any specific form, but should, for evidentiary purposes, be recorded in writing. The specific form may vary and should clearly regulate in relation to which claims and to what extent the subordination applies. It is advisable to ensure transparency in the subordination declaration to avoid disputes and to guarantee effectiveness in insolvency proceedings.
In which legal situations is subordination permitted or required?
Subordination is legally permissible if it does not violate mandatory legal provisions or immoral agreements. It is often used to strengthen equity in companies, for example through shareholder loans, to improve the conditions for a going concern forecast under insolvency law. Subordination is legally required, particularly in banking regulation (Basel III), when assets are to be counted as liable equity, or in certain financing forms of institutional investors. It may also be indicated in company law if shareholders agree to subordinate their claims in order to protect the company’s assets from claims by shareholders and give priority to the claims of external creditors.
What formal requirements apply to the agreement of a subordination?
There are generally no statutory formal requirements for the agreement of a subordination, unless it concerns a land charge, mortgage, or other rights in rem that require notarial recording or registration. In the case of shareholder loans, written form is sufficient, but it is strongly recommended for reasons of legal certainty. If the subordination includes significant obligations or waivers, legal advice and a clear written record are advisable in order to avoid interpretative disputes. Substantively, the parties should specify whether it is a simple, qualified, or comprehensive subordination and to which claims the subordination applies.
Can claims be enforced despite subordination?
Claims may generally be asserted even if subordination has been agreed. However, enforceability by way of compulsory enforcement or in insolvency proceedings is limited. In the case of qualified subordination, for example, the creditor can only demand performance once the debtor is solvent and not over-indebted or insolvent. In the event of insolvency, subordinated claims are only considered after all higher-ranking claims have been settled. In practice, this often means that there is little prospect of satisfaction for creditors of subordinated claims, especially in the debtor’s economic crises.
What is the difference between simple and qualified subordination?
With simple subordination, the claim is only subordinated to the other claims of all other creditors in the event of insolvency (§ 39 InsO). Outside insolvency proceedings, the creditor retains their rights without restriction. Qualified subordination, on the other hand, goes further: the creditor waives the assertion of their claim even outside insolvency proceedings as long as the debtor is over-indebted or insolvent. Only when these circumstances no longer exist can the claim be enforced. Qualified subordination clauses thus represent the highest level of protection for senior claims and are of central importance for strengthening equity on the balance sheet.
What effect does subordination have on the accounting of claims?
For accounting purposes, a subordinated claim can be treated as equity – at least when qualified subordination is present. Case law and tax authorities require that the creditor is prepared to restrict their claims in priority and enforcement to such an extent that no repayment can be demanded in the event of the debtor’s insolvency or over-indebtedness. This accounting practice is particularly important in restructuring cases; the subordination may help improve the balance sheet and avoid grounds for insolvency. Care must be taken that the subordination declaration meets bank and tax authority requirements to ensure recognition in financial statements and audits.
