Characterising The Liability of Directors of an Insolvent English Limited having its Real Seat in Germany: German Federal Court of Justice Requests a Preliminary Ruling from the CJEU
by Dr. Vanessa Seibel
Dr. Vanessa Seibel is an Associate at White & Case LLP, Frankfurt/Main (Germany).
1. Introduction
In a recent request for a preliminary ruling by the CJEU, the German Federal Court of Justice (Bundesgerichtshof, BGH) proposes to apply a German provision of the code on limited liability companies (GmbHG) to an English Limited having its real seat in Germany, against whose assets insolvency proceedings have been instituted in Germany (BGH, decision of 2 December 2014 – II ZR 119/14, available – in German – here).
The relevant provision, § 64 sent. 1 GmbHG, holds directors of a GmbH liable for any payments effected after the company has become overindebted or unable to pay upcoming obligations, unless such payments are compatible with the due diligence of an orderly director. Even though this kind of liability does not formally require that insolvency proceedings have been initiated, the BGH tends to classifiy it as a “law applicable to insolvency proceedings” within the meaning of Art. 4(1) of the Council Regulation (EC) No. 1346/2000 of 29 May 2000 on insolvency proceedings (Insolvency Regulation). Thus, the company’s Centre of Main Interest (COMI) – and therefore generally the real seat of the company – would determine the applicable law.
Hence, the CJEU is confronted with the questions, (1) whether § 64 sent. 1 GmbHG falls under the scope of Art. 4(1) Insolvency Regulation and (2) whether this characterisation violates the company’s freedom of establishment pursuant to Articles 49, 54 TFEU
2. Facts of the Case
The K. Montage- und Dienstleistungen Ltd was founded under the laws of England and Wales in 2004, but mainly operated in Germany. While the company became unable to pay upcoming obligations in 2006 (at least from a legal perspective), it continued its business activities until November 2007, effecting payments during that period of around 110,000.00 EUR to creditors.
Once the company entered into insolvency proceedings in November 2007, the insolvency administrator requested the director of the K. Montage- und Dienstleistungen Ltd to recompense 110,000.00 EUR on the grounds that § 64 sent. 1 GmbHG in conjunction with Art. 4(1) Insolvency Regulation had been violated. The regional court (Landgericht) and the higher regional court (Oberlandesgericht) have both awarded this claim. In its request for a preliminary ruling, the BGH now suspends court proceedings and refers the case to the CJEU, indicating that it shares the view of the lower courts.
3. The Reasoning of the BGH: § 64 sent. 1 GmbHG as Insolvency Law
The BGH favours the classification of § 64 sent. 1 GmbHG as an insolvency provision – regardless of its formal embedding in German corporate law and despite the fact that an insolvency proceeding is not a technical requirement for triggering this liability –, arguing inter alia that
- the provision aims at protecting the insolvency estate in anticipation of upcoming insolvency proceedings;
- all effected payments have to be refunded by the director of the company – even though the payments served to fulfill legally valid claims – with the damage of “prospective insolvency creditors” in view;
- in practice (with rare exemptions) it is the insolvency administrator who asserts the claims arising from § 64 sent. 1 GmbHG;
- from a German point of view, the provision would be regarded as insolvency law.
The BGH further points out that, in its opinion, this interpretation is compliant with Articles 49, 54 TFEU because it does not prevent companies from establishing a real seat in Germany, but merely checks the “misbehavior” of their directors in cases of insolvency.
4. Open Questions
In its request for a preliminary ruling, the BGH shortly summarizes years of a controversial discussion in German legal literature, somewhat abbreviating the current state of the debate. Just to mention a few additional aspects: Even though it is true that in practice any liabilities of directors under the GmbHG are asserted by the insolvency administrator, it remains possible for creditors to directly sue directors, (1) when insolvency proceedings are not initiated or terminated (massive bankruptcy or formal closure of insolvency proceedings after an insolvency plan has been implemented), or (2) before proceedings have been instituted. If § 64 sent. 1 GmbHG is characterised as insolvency law, how should one classify this provision outside the scope of the Insolvency Regulation? Does the Insolvency Regulation leave room for a “German insolvency law” in terms of private international law? In this context, conflicts rules have to be aligned with the international civil procedural law. In general, once the Insolvency Regulation is applicable, Art. 1(2)(b) of the Brussels Ia-Regulation (No. 1215/2012) precludes the jurisdiction in civil matters. Therefore, the characterisation of the German rule on directors’ liability as insolvency law would – at least in theory – interfere with the synchronization of procedural and substantive law. With these difficulties in mind, one could consider alternative routes, e.g. characterising § 64 sent. 1 GmbHG as tort law or using the concept of lack of rules (Normenmangel) as the English law provides for a functionally similar liability of directors during insolvency of the company in Sec. 214 Insolvency Act 1986 (wrongful trading rule) a rule which is supposedly, however, regarded as insolvency law and not applicable in German insolvency proceedings.
Still, these and other questions have been discussed in German legal literature extensively for years without any definite results. Therefore, any lid on this discussion – at least before the courts – is highly welcomed as well as any specification of CJEU rulings.
In this respect, the CJEU can build on a number of rulings, for example in the cases Gourdain./.Nadler (22 February 1979, C 133/78) – in which an early form of the French action en comblement du passif was regarded as a provision relating to bankruptcy proceedings – and Seagon./.Deko Marty (12. February 2009, C 339/07) – in which an action by the insolvency administrator to set a transaction aside was treated accordingly. According to settled CJEU case law, the insolvency regulation applies to “actions which derive directly from insolvency proceedings and are closely connected with them” (see recently ÖFAB, 18 July 2013, C?147/12, para. 24). However, all legal rules mentioned so far make it a mandatory requirement that insolvency proceedings have already been initiated. On the contrary, in a quite recent case the CJEU did not apply the Insolvency Regulation on the grounds that the action in question – a Swedish liability for piercing the corporate veil during undercapitalization – did “not concern the exclusive prerogative of the liquidator to be exercised in the interests of the general body of creditors” (ÖFAB, 18 July 2013, C?147/12, para. 25). Taking this into account, it remains doubtful whether the CJEU is willing to accept common practice and the purpose of the law as a sufficient link to the “law applicable to insolvency proceedings and their effects” within the meaning of Art. 4(1) Insolvency Regulation.
Has this question not already been answered?
See CJEU, 4 December 2014, C?295/13, H v H.K.
20 […] so far as concerns the fact that the wording of Paragraph 64 of the GmbHG theoretically allows an action to be brought even where no insolvency proceedings concerning the assets of the debtor company have been opened, it must be stated that this fact per se does not preclude such an action being characterised as an action which derives directly from insolvency proceedings and is closely connected with them, providing that that action was actually brought in the context of insolvency proceedings, as is the case in the main proceedings.
21 Admittedly, the Court has already held that, in order to identify the area within which an action falls, it is necessary to determine whether the right or the obligation which forms the basis of the action finds its source in the common rules of civil and commercial law or in the derogating rules specific to insolvency proceedings (judgment in Nickel & Goeldner Spedition, EU:C:2014:2145, paragraph 27).
22 However, those considerations cannot be interpreted to the effect that an action based on a provision whose application does not require insolvency proceedings to have formally been opened but does require the actual insolvency of the debtor, and thus on a provision which, in contrast to the provisions at issue in the case which gave rise to the judgment in Nickel & Goeldner Spedition (EU:C:2014:2145), derogates from the common rules of civil and commercial law, does not derive directly from insolvency proceedings or is not closely connected with them.
23 Under Paragraph 64 of the GmbHG, the managing director of a debtor company must reimburse the payments which he made on behalf of that company after it became insolvent or after it was established that the company’s liabilities exceeded its assets. That provision therefore clearly derogates from the common rules of civil and commercial law, specifically because of the insolvency of the debtor company.
24 An interpretation of Article 3(1) of Regulation No 1346/2000 to the effect that an action based on Paragraph 64 of the GmbHG, brought in insolvency proceedings, is not an action deriving directly from insolvency proceedings and closely connected with them, would therefore create an artificial distinction between that action and comparable actions, such as the actions to set transactions aside at issue in the cases which gave rise to the judgments in Seagon (EU:C:2009:83) and F-Tex (EU:C:2012:215), on the sole ground that the action based on Paragraph 64 of the GmbHG could theoretically be brought even if there were no insolvency proceedings. Such an interpretation, which has no basis in the relevant provisions of Regulation No 1346/2000, cannot be accepted.
25 It must be stated, on the other hand, that an action based on Paragraph 64 of the GmbHG and brought outside the context of insolvency proceedings may fall within the scope of the Lugano II Convention or, as the case may be, that of Regulation No 44/2001. However, that is not the situation in the case in the main proceedings.
A good queston, indeed. However, the Federal Court of Justice (in para. 25 of the decision on which Dr. Seibel comments here) explicitly states that its request of 2 December 2014 would not become moot because of a decision of the CJEU in Case C-295/13, arguing that the latter case only concerns jurisdiction, whereas the present case deals with determining the applicable law. It remains to be seen, of course, whether the CJEU will accept this distinction.