German Federal Court director of Limited is liable under German law

23.05.2016

On 15 March 2016, the German Federal Court (BGH) ruled that the director of an English Limited is liable under German law if he or she authorises a payment after the Limited is insolvent (§ 64 s. 1 German Limited Liability Company Act, GmbHG). According to the court, this German provision is applicable to directors of an English Limited filing for insolvency in Germany. The judgment affects English Limiteds having their centre of main interest in Germany. Therefore, it is of particular interest to the large amount of German companies operating in the legal form of a Limited.

The case

In the very case, an insolvency administrator sued the director of a Limited for damages under German law. The director had authorised payments at a time when the company was already cash-flow insolvent, but had not filed for insolvency yet. Pursuant to § 64 s. 1 GmbHG this violates the director’s duty towards the company of maintaining the company’s assets before insolvency proceedings. The German Federal Court faced the question whether this provision is applicable to an English Limited filing for insolvency in Germany. In particular, doubts arose if such an application is in conformity with Article 4 of the EU Regulation on insolvency proceedings and the freedom of establishment (Articles 49 and 54 TFEU). It therefore referred to the European Court of Justice (ECJ) for a preliminary ruling.

ECJ

The ECJ ruled on 10 December 2015 that applying German director liability standards to a Limited filing for insolvency in Germany was in conformity with EU law. Firstly, the ECJ considers provisions on the director’s liability from the moment of insolvency onwards to be insolvency law provisions. Thus, they fall within the scope of application of the EU Regulation on insolvency proceedings. Therefore, a provision like § 64 s. 1 GmbHG can be applied to a company under a foreign legal form according to Article 4 EU Regulation on insolvency proceedings. Secondly, applying this regime to a foreign company does not violate the freedom of establishment granted in Articles 49 and 54 TFEU. The ECJ distinguishes the case from the cases Überseering and Inspire Art. § 64 s. 1 GmbHG does not concern the recognition of the legal capacity of the Limited (Überseering). Nor does it create the director’s personal liability if the minimum capital requirements are not met (Inspire Art). Furthermore, § 64 s. 1 GmbHG has no actual impact on the company’s establishment as such. For these reasons, there is no violation of the freedom of establishment.

German Federal Court

The German Federal Court followed the ECJ’s interpretation. It treated the English Limited as equivalent to the German limited liability company (GmbH). In both legal forms the shareholders are protected from direct claims and the directors entrusted with the company’s administration. Therefore, in both cases there is a risk that directors harm the insolvency creditors by paying some of them before insolvency proceedings guarantee an equal distribution of the company’s assets. Those circumstances justify the equal treatment of both legal forms GmbH and Limited.

Practical consequences

The judgments of the ECJ and the German Federal Court clarified the applicable regime for Limiteds mainly operating in Germany. If they file for insolvency in Germany, the German liability regime for directors will be applicable. This includes the strict provision of § 64 s. 1 GmbHG constituting the director’s personal liability. In practice, insolvency administrators commonly do assert repayment of funds against directors under this provision.

Any questions? Please contact: Isabel Giancristofano
Practice Group: Restructuring & Insolvency