Germany: Legal Problems Arising in the Course of the Transfer of Credit Portfolios Can be Solved

Last Updated: 22 June 2005
Article by Jörg Wulfken

German Financial Institutions manage non-performing loans more and more by sales – bank secrecy and data protection are no barrier with regard to the sale

Although many legal aspects have to be observed within the course of the sale of distressed loans, there are no legal obstacles in Germany which would bar such sales. Since banks in the United States, in Asia and also in Italy have caused a sensation in the market by accomplishing sales of large portfolios of problem loans, this option has become increasingly attractive for German banks. German banks have accumulated a huge number of problem loans in their balance sheets in recent years. Numerous advantages are associated with the sale of such loans. Above all, the equity capital is credited and the balance sheet parameters are enhanced. Moreover, costs can be reduced to a great extent, particularly with regard to the collection of debts and by reorganisation of the audit proceedings which has to be conducted by banks with the aid of external auditors. In addition, space is created for relief or for reorientation of special "realisation departments". With increasing risk precaution the sale of loans may allow for extraordinary proceeds that have a positive influence on the overall annual result. This applies even if one takes great reductions from the face value into account.

Diverse Interests

Purchasers of portfolios of distressed loans are, for the most part, investment banks and private equity funds (associated with investment banks or independent). Most of these investors have gained experience in the High-Yield-Market and in the Asia crisis in recent years, where high margins have been achieved and are now looking for new markets. Funds and some banks refinance purchases of distressed loans or credit portfolios in general with their own assets. Investment banks are interested in integrating third parties by continuous placement or reorganisation of such credit portfolios, for example by means of Asset Backed Securities. The aim of the investors is diverse to all intents and purposes. Some are interested in the purchase of a high volume individual loan resulting from crisis cases as for example Holzmann or Flowtex, in order to make a trading profit. Others, so-called "Vulture Funds", use the purchase of liabilities of distressed companies to obtain control rights in order to liquidate the company or assume control at a later stage.

Value lies in the security

However, the purchase of a variety of problem loans from already existing portfolios gains more and more commercial importance. Many of these loans are secured by real estate or other rights. The security often constitutes the essential value of these portfolios. With the purchase of credit portfolios the collection, the collection of debts and the realisation of security by the purchaser or a third party, is generally transferred as well. Both the evaluation and determination of the purchase price, and the transfer of the collection of debts require the transmission of data protected by banking secrecy and data protection law. Since tendering procedures, at which many investors try to purchase the portfolio, precede most portfolio sales, this data is not only transferred to the purchaser but to several bidders. Banking secrecy and data protection law are often considered as obstacles to such transactions. Though both legal areas pursue different protection purposes – data protection law protects the private individual whereas banking secrecy protects the banking business – the legal criteria for an analysis are the same. Within the scope of an appreciation of interests of banking secrecy and the protection of certain personal information between the selling bank and the debtor, the commercial interests of the selling bank concerning the refinancing of the loans and the portfolio adjustment should take priority where distressed loans are concerned.

Data transfer is possible

Also, during the execution of the due diligence which precedes the sale, a transfer of protected data can take place. Though no case law does exists regarding the above described situation, one can anyhow assume that the legal situation is clear. In connection with the sale of companies it has been already acknowledged that information which is relevant for the purchaser can be disclosed if a purchase without this data is not feasible. This should also apply to the purchase of credit portfolios.

However, organisational arrangements should be made to ensure that – as far as possible – only data is used which has been made anonymous and the transfer of data is limited to the information which is necessary for the bidder. Additionally it is advisable to agree on special non-disclosure and confidentiality obligations.

However, bidders have to deal – within the scope of a due diligence – not only with portfolio data but also with legal aspects. With regard to loans secured by real estate, these include building and planning laws, lease problems if leases constitute the valuable characteristic of certain loans, and details of enforcement and collection law.

Unlike in Italy, where some high volume sales of distressed loans took place, the realisation periods in Germany are relatively short. However, the duration of procedures may vary significantly within different local court circuits. This is especially true if charges on real estate have to be realised. Investors who are interested in distressed loans generally aim at a liquidation of the portfolio within three to five years.

Complex agreements

If the decision has been made to sell the problem loans, both the loans and the related security must be sold. In the purchase and transfer agreement concluded between the selling financial institution and the purchaser, the seller is generally liable for the existence of the receivables and the purchaser bears the complete loan risk. However, such agreements are often only concluded after long-lasting negotiations. In general, arrangements have to be made to prevent the sale of the credit portfolio from being evaluated as a transfer of business according to Section 613 a German Civil Code. This would lead to a transfer of employment relationships and thus to legal problems in the field of employment law.

Other problems which should be regulated in such an agreement concern the treatment of incoming payments or realisation proceeds between the close of the portfolio evaluation and the final transfer of the portfolio. In general the parties choose retroactively an effective date ("cut-off-date") as of which all proceeds and all costs are apportioned to the purchaser. Additionally, the transfer of the collection of debt or, alternatively, the management of the credit portfolio by the seller has to be contractually regulated. It is possible that the seller and the purchaser may plan to manage the loans together by a joint venture in order to optimise the management by using the complementary experience of both parties. Furthermore it should be ensured that the transfer of the related security is effected in a legally binding way. In particular, the transfer of charges on real estate causes enormous transaction costs. In general these costs are borne by the purchaser, who includes these costs within the scope of the price calculation.

No banking license is required

In cases where the collection of debts is transferred to the purchaser, aspects of banking supervision have to be observed. Often it is doubtful if the purchaser needs a banking license. Generally one can assume with regard to the management of distressed loans that the purchase, the collection of debts and the realisation of distressed loans do not constitute a banking transaction for which a license is needed. In individual cases, however, the demarcation indicating the existence of a banking transaction can be difficult and an accurate analysis of the future activity of the purchaser is advisable. In any case the transfer of the collection of debts to the purchaser requires a permit according to the law regulating legal advice (servicer or collection licence). When issuing the license the competent local court examines the professional qualifications of the collection company and of the person who will manage the collection.

In addition, the selling financial institution and the purchaser must inform themselves of the legal implications of a portfolio sale on the balance sheet and in relation to tax. A discharge of the loans from the balance sheet of the financial institution is effectuated if the risks connected with the portfolio, especially the credit risk, have been transferred to the purchaser. If the purchase price is lower than the book value of the receivable, the selling financial institution has to record an extraordinary deficit in the year in which the sale becomes effective.

An extension of such deficits over several accounting periods can be effected for instance in Italy and has motivated numerous financial institutions there to sell distressed loans. Such an extension is arguably not possible according to German law. On the other hand, financial institutions have as a matter of course the opportunity to record extraordinary proceeds if a portfolio is already largely amortised. A recent judgement of the European Court of Justice must be observed according to which the implications of credit sales with regard to sales tax and the transfer of the collection of debts within the scope of a factoring have to be analysed accurately. Although it is doubtful if the adjudication (judgement of the EuGH dated 26 June 2003, file number C 305/01) can be applied to this type of transaction, existing risks in this regard should be eliminated as far as possible by a corresponding transaction plan.

Copyright © 2007, Mayer, Brown, Rowe & Maw LLP. and/or Mayer Brown International LLP. This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Mayer Brown is a combination of two limited liability partnerships: one named Mayer Brown LLP, established in Illinois, USA; and one named Mayer Brown International LLP, incorporated in England.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions