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First decision of Austrian Supreme Court on permissibility of qualified subordinated loans granted by consumers

Under a qualified subordinated loan, the lender (in summary) accepts that his claims shall be subordinated to all other claims against the borrower (subordination) and declares that in respect of these liabilities no insolvency proceedings need to be opened and that he will claim satisfaction only after removal of a negative equity (qualification). The rising popularity of qualified subordinated loans is based not least on the fact that the raising of capital by means of qualified subordinated loans does not fall under licensed banking deposit business. Qualified subordinated loans are used regularly as financing instruments in the course of crowdfunding campaigns. Increasingly, also private individuals act as capital providers in such campaigns. When assessing their legal relationship with the capital raising entity, such private capital providers in most cases will have to be qualified as consumers pursuant to the Austrian Consumer Protection Act.

In its decision from 24 August 2017, 4 Ob 110/17 f, the Austrian Supreme Court for the first time had the opportunity to assess the permissibility of qualified subordinated loans which are granted by consumers. The Supreme Court clarified in this decision that the agreement on a qualified subordination of a repayment claim constitutes an integral part of the principal contractual obligations under a loan agreement; the ranking of the lender’s repayment claim is directly affected by such agreement. Contrary to the arguments of the lower instance courts, the agreement of a qualified subordination in a loan agreement therefore is not subject to the content control of general terms and conditions pursuant to sec 879 para 3 Austrian Civil Code (this provision on content control of contracts only applies to ancillary clauses which are not governing the principal obligations under a contract).

The Supreme Court’s decision should be welcomed, since it provides lenders as well as borrowers with much needed legal certainty while also taking into account the recent developments in the field of alternative corporate financing. It is only consequent that the Supreme Court accepts qualified subordinated loans as an own type of contract. The argumentation of the lower instance courts – which would have led to invalidity of the agreement on subordination – would have triggered severe consequences for all entrepreneurs who have raised capital via subordinated loans from consumers.