1. The facts of the case

The defendant and appellor was a partner of a private limited company, Gesellschaft mit beschränkter Haftung, GmbH. Due to the contract establishing the GmbH he was obliged to a contribution in kind. He had to contribute the right to use a certain premise.

Instead of providing the GmbH with the ownership of the premise, he provided it with a corresponding lease contract. Under the not cancellable contract, the GmbH was entitled to use the premise for 10 years against a monthly payment of 7,500 Euros. For the time after the fixed period of 10 years it got an option to renew the lease for another 10 years.

In fact, the lease contract between the partner and the GmbH was a sublease contract. The original lease contract was between the proprietor as lessor and the partner as leaseholder. The conditions were the same, so that the 7,500 Euros paid by the GmbH went to the proprietor.

After bankruptcy proceedings for the GmbH started, the administrator in bankruptcy sued the partner for the payment of 300,000 Euros. The administrator claimed that the partner had not made his contribution because the GmbH - not the obliged partner - had paid the rent.

The partner, however, proved in court that the right of the company to use the premise (as subleaseholder) was worth 300,000 Euros more than the GmbH actually had to pay, and claimed he had contributed exactly these 300,000 Euros in kind.

2. The legal arguments [top]

a) The general principle

A contribution in kind has to be made by the partner and does not have to be financed by the company itself. The partner has to effectively contribute to the share capital.

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Table of content:

1. The facts of the case

2. The legal arguments

a) The general principle

b) The peculiar facts of the case

c) Commentary

3. The core ideas of the decision

iQ: insofar, there are no differences between the ordinary contribution, i.e. the transfer of money, and the contribution in kind. In both cases the partner has to increase the capital of the company.

In our case, however, the company paid 7,500 Euros per month. Thus, as to the administrator, it had paid for the right to use the premise and had not received this right as a contribution in kind.

b) The peculiar facts of the case [top]

Nevertheless, things were different in this case because the general presumtion that a contract establishes a balanced relationship did not apply to the lease and sublease contracts. In fact, the company paid 300,000 Euros less than it had had to pay, if the contract had been on an arms length basis. The market value of the right to use the premise was higher than the lease agreed upon.

When the court had ascertained the 300,000 Euros "surplus", it had to determine whether this added value could be seen as contribution in kind.

In fact, the partner had bargained for the conditions of the contract, and had forwarded them to the company. So there was no problem.

Nevertheless, one question remained. The contribution in kind has to be safe, at least to a certain degree. Since it can not be as easily valued as cash, it has to be somewhat lasting and stabile at least. And there is a problem. Under normal circumstances, a (lease) contract can be cancelled, causing the 300,000 Euros contribution to vanish and leaving the company stripped of one of its important and legally defined assets.

The court, however, found a way to steer clear of that rock, too. It looked upon (both) the lease contract(s) and saw two clauses securing the company's and its creditor's interests. First, the long term. Under normal conditions the contract for 10 years was not cancellable, so that it was safe to assume the "surplus" as contribution in kind. Second, the company was entitled to renew the contract on equal, i.e. equally easy, terms after the fixed period, so that its situation was even more comfortable.

c) Commentary [top]

The decision is correct. Bearing in mind the outright obsession the German courts have with the contribution in kind, tightening up the preconditions to an unduly harmful level, leaving sleepless even partners who made their contribution in kind in good faith, not knowing of the snares the courts could develop with the help of fanciful administrators in bankruptcy, the decision is to be more than appreciated.

iQ: with respect to the 300,000 Euros "surplus" the principle applied by the court was very simple and common, in the end. Imagine, the partner had to contribute a certain car, say an Audi A8. Imagine furthermore, the car is (meant to be) worth 75,000 Euros. When the partner hands over the car to the company it is of absolutely no concern whether he has paid (a) 10,000 or (b) exactly 75,000 or (c) 100,000 Euros. In case (a) the car is still worth 75,000 Euros, no matter the partner only paid 10,000. And in case (c) the car is not worth 100,000 Euros, but still only 75,000 Euros. In case (a) he does not contribute less, and in case (c) he does not contribute more than stipulated.

3. The core ideas of the decision: [top]

A contractual entitlement can be forwarded to a limited company as a contribution in kind, if the right is (contractually) safe and therefore of a certain calculable value.

The value ascribed to such a contribution in kind is tantamount to the caculable and safe value of the contractual right.

iQ: one risk remaining is that the partner to the contract can go bankrupt himself Since most contractual rights are bankruptable, and since the administrator in our case would certainly cancel the unprofitable lease contract (as he is entitled to under section 109 paragraph 1 clause 1 of the German Bankruptcy Act), that can not be helped. The law governing contributions in kind, however, can and does not require absolute certitude. Life is risk, and so is running - and or beeing creditor of - a company.

CLM