Liability of a managing director of an insolvent GmbH where payments are made out of the insolvency assets

The claimant, an insolvency administrator, took action against the former managing director of a German limited liability company (GmbH) for reimbursement of payments made although the company was technically insolvent under section 64 subsection 2 of the old version of the German Limited Liability Companies Act. The insolvent company held a current account. The company assigned all existing and future receivables from third parties arising from deliveries of goods and services under the company’s relationship to the bank as security under a global assignment agreement, with a few exceptions. In the legal action, the claimant demanded compensation from the defendant to the value of the amounts credited to the account after the company had technically become insolvent minus the return debits.

The Federal Court of Justice refused the claim. It first made clear that collecting the receivables of a technically insolvent GmbH paid into an account that is in the red may be a payment which reduces the company’s insolvency assets under the terms of section 64 subsection 2 German Limited Liability Companies Act (old version) because the company’s assets are diminished to the benefit of the bank and at the expense of the other creditors. However, it maintained that collecting receivables that were assigned to a bank as security from an account of the GmbH that is in the red and subsequently offsetting it against the debit balance was not a payment initiated by the managing directors of the GmbH which led to the assets being diminished if the assignment of security had been agreed before the company become insolvent and the company’s receivable had arisen and was collectable.

The court contended that in section 64 subsection 2 of the old version of the German Limited Liability Companies Act the word “payment” meant a payment by the insolvent debtor which leads to the assets available to the creditors being reduced. In the case in question, however, it continued, the assets were not reduced: receivables of a debtor assigned as security would count as part of the insolvency assets under the terms of section 35 German Insolvency Code which were subject to the administrative powers of the insolvency administrator. But they were not available to equally settle the debts due to creditors as part of the free assets, and were only available to the assignee (being the bank). The court pointed out that the assignee was entitled to separate satisfaction (section 51 no. 1 German Insolvency Code). Moreover, the insolvency administrator had to satisfy the creditors entitled to separate satisfaction following realisation (section 170 subsection 1 sentence 2 German Insolvency Code).

Finally, the Federal Court of Justice made clear that the managing director of a GmbH does not have to prevent the receivable assigned as security being collected and offset against the account that is in debt by moving it to a new account at another bank that in the black.