End of hope: Federal Court of Justice leaves Wirecard-shareholders out in the cold

Wirecard AG is a listed stock corporation. Insolvency proceedings were opened against its assets in August 2020. In addition to (normal) secured and unsecured creditors, approximately 50,000 of the insolvent company’s shareholders filed proofs of debt, too, so as to recover their damage under capital market law. They argued that Wirecard AG had fraudulently misled its shareholders about the company’s actual financial position and earnings by deliberately promoting a business model that did not actually exist. This deception had caused thousands of bona fide investors to invest in Wirecard shares.

The shareholders' claims totalled around EUR 8.5 billion, while the other creditor claims amounted to approximately EUR 7 billion. The currently available assets amount to approximately EUR 650 million (before taking into account various lawsuits filed by the insolvency administrator against third parties, such as Wirecard’s former auditors, in the billions).

The Federal Court of Justice ruled today that shareholders' claims for damages under capital market law do not qualify as claims in the insolvency of Wirecard AG within the meaning of Section 38 InsO (Insolvency Act) and, therefore, that (like other claims by shareholders) those claims are subordinated to the claims of creditors – which means that shareholders will come away empty-handed.

In the court's opinion, the decisive factor is that the damage claimed is inextricably linked to the claimants’ position as a shareholders. Even if the damage incurred stems from incorrect or misleading capital market information, inaccurate financial reporting or even tortious conduct, under German insolvency law these are subordinated claims that are only recoverable after all other insolvency creditors were satisfied in full. In the opinion of the Federal Court of Justice, Wirecard’s deception of its shareholders alone is not sufficient to justify an equal ranking of their claims with those of (ordinary) insolvency creditors. Instead, the deciding factor is that the acquisition of the shares was at the core of the legal transaction and, consequently, shareholders have to bear the risks associated with their legal position and an investment in equity capital gone wrong.

Practical note

The decision structurally strengthens the position of lenders in German insolvency proceedings and clearly assigns the allocation of loss in the capital market to the equity sector. Shareholders' losses in terms of share price and confidence are largely excluded under insolvency law, as the BGH believes that insolvency proceedings should not be used as a tool for the protection of shareholders from loss. Today's decision thus has fundamental significance for the future beyond the Wirecard case, as it will serve as a guideline for the treatment under insolvency law of claims for damages arising from incorrect ad hoc announcements, prospectus liability or market manipulation. At the same time, in future criminal insolvency proceedings, shareholders will no doubt increasingly focus on other market participants and executive bodies where creditors believe they are able to identify failures or shortcomings.