Liability for subordinated loans - BGH update with relevance for crowdfunding structures

In its judgement of 20 March 2025 - III ZR 261/23 ("Judgement"), the Third Civil Senate of the Federal Court of Justice ("BGH") clarified the conditions under which managing directors of borrowers are not liable if the subordination clause of a subordinated loan is invalid, but can invoke a so-called unavoidable prohibition error (unvermeidbarer Verbotsirrtum). The decision is of considerable importance for crowdfunding structures in particular, as subordinated loans are often used for the realisation of financing. The legally compliant structuring of these loans is essential for all parties involved for various reasons, including from a civil liability and financial supervisory law perspective.

Background to the Decision

The Judgement is based on a case that can also occur in a similar way in crowdfunding practice. The defendant - first as a sole trader and later for a limited liability company (Gesellschaft mit beschränkter Haftung – “GmbH”) - raised loans from investors as part of an investment model in order to acquire property with the funds. 

After the public prosecutor's office investigated the defendant on suspicion of violating the German Banking Act (Kreditwesengesetz – "KWG") by conducting unauthorised deposit transactions, he commissioned a specialist lawyer for banking and capital market law. The lawyer was asked to develop a new concept for the implementation of the investment model and drafted a new loan agreement with a qualified subordination clause (qualifizierter Rangrücktritt). For the borrower, the legally secure agreement of a qualified subordination excludes the possibility of an unauthorised deposit business. In addition, the GmbH was founded, of which the defendant was the managing director.

The public prosecutor's office became aware of the new subordinated loan agreement and discontinued its investigation. 

Based on the new concept, the loan agreement originally concluded with the plaintiff – one of the investors – was converted into a new loan agreement containing the qualifying subordination clause.

In view of the subsequent insolvency of the GmbH, the plaintiff claimed damages from the managing director of the GmbH personally, as he considered the subordination clause to be invalid. 

The central legal question of the proceedings was whether the defendant can invoke an unavoidable error of prohibition – which excludes liability. The BGH answered in the affirmative. In doing so, it deviated from the decision of the lower court, the Higher Regional Court of Cologne (OLG Köln, decision dated 19 July 2023 - 13 U 131/22). The Higher Regional Court of Cologne had considered the conclusion of the loan agreements offered by the defendant to be an unauthorised deposit transaction and therefore held the defendant liable for damages.

Legal Context

Qualified subordinated loans, which are also regularly used in crowdfunding structures, may generally be taken out without the borrower requiring a licence for deposit-taking business. Qualified subordination means that the funds provided are no longer "unconditionally repayable", as required by the definition of deposit-taking business in Section 1 para. 1 sentence 1 alt. 2 KWG. However, the prerequisite for this is that the subordination clause is legally effectively. This is subject to strict requirements, which are constantly being further developed in the case law of the Federal Court of Justice under civil law. If the clause is ineffective, the loan is generally a deposit transaction for the borrower that requires authorisation within the meaning of Section 1 (1) sentence 1 no. 1 Alt. 2 KWG.

If no licence has been issued by the Federal Financial Supervisory Authority ("BaFin"), the deposit business has been conducted without authorisation. Operating the deposit business without a licence is a criminal offence. Among other things, this can result in a claim for damages under civil law by investors. Such a claim does not apply if the borrower was in an unavoidable error of prohibition.

What is an unavoidable prohibition error?

An error of prohibition occurs when someone mistakenly assumes that they are acting lawfully, even though a law has actually been violated. 

This can also regularly be the case when using subordinated loans. In the context of crowdfunding structures, this specifically means that the issuer – typically the borrower – assumes that the subordination clause it uses is effective and that the business model is therefore not subject to authorisation. If the validity of the clause is later assessed differently – in particular by a court – the loan must subsequently be qualified as a deposit-taking transaction requiring a licence. The unavoidable prohibition error can then exclude the resulting liability under criminal and civil law, provided that the conditions for this are met.

However, the misconception that the clause was effective is not sufficient. The prohibition error must have been unavoidable for the borrower. A prohibition error is unavoidable if the person acting could not recognise that their behaviour was unlawful despite careful examination and taking into account their individual knowledge, experience and professional environment. In case of doubt, the person has a duty of enquiry, whereby the person providing the information and the information provided must be reliable.

The BGH has now further specified these requirements in its Judgement.

Key Statements of the BGH

The Judgement is based on the criterion of unavoidability. The focus is on the question of the extent to which the defendant was allowed to rely on expert legal advice and the importance of investigations by authorities such as the public prosecutor's office or BaFin.

Anyone who turns to a lawyer who is experienced in this area of law to obtain information or advice has often done what was initially required. However, it is also necessary for the borrower to be able to rely on the accuracy of the information according to the recognisable circumstances. This is the case if the advice was given objectively, carefully and responsibly and the facts of the case were comprehensively examined. 

A written expert opinion is required for difficult legal questions or complex issues. In other cases, however, it is sufficient if the advice is recognisably based on a well-founded, conscientious examination of the facts of the case and the relevant legal situation. In the case of the Judgement, the BGH considered it sufficient that the lawyer had been given the mandate to draft a clause whose use excluded the obligation to obtain permission. In the opinion of the BGH, this also included the review of its effectiveness. The defendant was entitled to assume that this had also been carried out with the necessary thoroughness and taking into account the applicable legal situation against the background of the invoiced time expenditure, according to which the assessment of the previous agreements in accordance with the KWG and the possibility of a qualified subordination plus literature research alone took almost 22 hours.

The BGH also explains when borrowers cannot rely on legal advice. According to the case law of the Second Civil Senate, this is the case if a so-called "courtesy report"(Gefälligkeitsgutachten) is only obtained as a precaution, but not to clarify the results. The same applies to information that is clearly superficial and inadequate or merely intended to fulfil a "fig leaf function". However, this was not the case here. The BGH saw no indication that a further plausibility check of the legal correctness of the contract drafting or even a written expert opinion was necessary against the background of the legal advice given to in order to draw up the clause. Such a general requirement rather exceeded the requirements. 

In conclusion, the BGH states that it is not possible to determine in general terms which requirements are to be placed on the clarification of the authorisation obligation in detail and how legal information or advice must be structured. Rather, this always depends on the specific case to be assessed.

The Judgement also deals with the effects of the public prosecutor's investigation and the discontinuation of the proceedings on the unavoidability of the prohibition error. 

As a result, the course of the investigation confirmed the defendant's view that the new system model did not require a licence. The public prosecutor's office had taken note of the revised contract documents and discontinued the proceedings with regard to the new concept without drawing any consequences under criminal law. The BGH recognised this as a circumstance that additionally supported the defendant's confidence in the legality of his actions.

In the opinion of the BGH, additional involvement of BaFin as the responsible supervisory authority was not necessary under the given circumstances. Although the involvement of the supervisory authority could provide more legal certainty in individual cases, this was not necessary if the public prosecutor's office was already involved in the audit and had not raised any objections.

It is also noteworthy that the BGH also allows for a hypothetical consideration in its decision, which works in favour of the defendant subordinated borrower. Thus, the BGH states that even in the event that the defendant subordinated borrower completely fails to make enquiries, the prohibition error may be unavoidable if a hypothetically sufficient enquiry would have led to a misconception on the part of the defendant subordinated borrower.

Conclusion

With its decision, the BGH clarifies that anyone who turns to expert legal advice on complex regulatory issues and receives sound, careful advice can invoke an unavoidable error of omission in individual cases, even without a written expert opinion. The decisive factor is not the form, but the quality of the advice. The ruling expressly states that the commissioning of a specialised lawyer to draft a new (licence-free) contract generally means that the borrower may rely on the licence-free nature of his transaction. 

In addition, the assessment of an authority such as the public prosecutor's office or BaFin can strengthen confidence in the legality of one's own actions. It is particularly noteworthy that the BGH assumes an unavoidable error even if a hypothetical enquiry would have led to the same misconception.

In practice, this means that you should seek legal advice from an expert lawyer when designing financial products. The person seeking legal advice can rely on expert and well-founded advice – especially when drafting contracts. This will protect them from subsequent liability, even if case law changes.

With the kind support of Anna Maria Volz, Research Assistant.