Postponement of priority declaration and ban on recognising provisions for anticipated losses for German corporations
The financial debt overload of a corporation can constitute a reason for filing a bankruptcy petition (art. 19 Insolvency Act). There is a financial debt overload when the liabilities exceed the assets, as for example in the case of a loss not covered by equity. In order to avoid having to file for bankruptcy, the shareholders often issue a postponement of priority declaration for their own claims against the company.
If, however, the postponement of priority declaration is not formulated correctly, it may lead to a ban on recognising provisions for anticipated losses in accordance with art. 5 sec. 2a EStG (Income Tax Act), in the sense that only seriously meant debt must be reported in the balance sheet. In such a case, the company's liabilities towards the shareholder would be wholly or substantially to be dissolved to the increase of the profit, which may eventually lead to unwanted tax payments.
The shareholder's claim related to the postponement of priority declaration should, at least next to future annual surpluses or a liquidation surplus, also be served from the free assets of the company, i.e. from the positive difference between assets and liabilities. A sufficiently formulated postponement of priority declaration should include this condition.