German Constitutional Court: It is constitutional that legal entities are excluded from being insolvency administrators

On 12 January 2016, the German Constitutional Court ruled that the exclusion of legal entities from the office of insolvency administrator is constitutional (1 BvR 3102/13). Pursuant to § 56 (1) German Insolvency Act, only natural persons can be insolvency administrators. A limited lawyers’ partnership argued in an individual constitutional complaint that this exclusion violated their fundamental rights to choose an occupation (Art. 12 (1) German Constitution) and to receive equal treatment (Art. 3 (1) German Constitution). The Constitutional Court thus approves the current legal situation. Unless the legislator extends the scope of application to legal entities, they cannot be insolvency administrators under German law.

According to the Constitutional Court, this is an intervention for the right to choose an occupation. However, this intervention is justified in view of the legitimate legislative goal of effective supervision by the insolvency court.

In balancing the conflicting interests, the Constitutional Court emphasizes the importance of the insolvency administrator’s office for the guarantee of legal protection. The supervision of the insolvency administrator is particularly important given that he manages assets which are not his own. Whilst supervising a natural person can be done effectively, supervising a legal entity is difficult because the person in charge can easily change. There are no equally effective, but less intrusive means to achieve a high standard of supervision. Especially the proposal of appointing a natural person charged with administering within the legal entity leads only to a limitation of responsibility. This limitation of responsibility shall expressly be avoided. The Constitutional Court considers the intervention to be adequate since a similarly close connection between insolvency administrator and company can be reached by contract and governance mechanisms.

The Constitutional Court left the issue to the legislator’s discretion. This means that it would not necessarily deem an amendment of the Insolvency Act enabling legal entities to be appointed as administrators unconstitutional. However, according to government sources, there are currently no plans to extend the scope to legal entities.