Volume 5
<NOBR>A Guide to the Labyrinth of Equity Substitution Law</NOBR>

Feitsch

As shareholders in corporate crises generally lack the strength and realism to to make unpleasant decisions such as, for example, the liquidation of the company, the courts and the legislature have been compelled to exert legal pressure and to expand the existing institutional protection of creditors at the expense of the shareholders’ interests. U. a. the courts and legislators had to respond to the observable reality that, during a corporate crisis, shareholders attempt to evade financial responsibility for the risky continuation of the crisis-stricken company by dealing with their company not under company law but under the law of obligations. The law must therefore influence the financing behaviour of shareholders in order to restore the balance between shareholders, who possess insider knowledge, and external creditors. From a legal technical perspective, this objective is achieved through the Institute of equity substitution. In this way, financial assistance which a shareholder provides to their company under the law of obligations is reclassified as equity capital for the duration of the corporate crisis. The aim of this paper is to outline the financial consequences of such a reclassification from the perspectives of business administration and company law. The discussion of the tax law consequences, however, must be reserved for a separate paper.

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