Landmark Decision by German Federal Court of Justice Affecting License Purchases in the Insolvency Context

License purchases can be excluded from the insolvency administrator’s right to reject or assume contracts

By Peter Jark, Stefan Dittmer and Tom Braegelmann and Fabian Hollwitz

The Federal Court of Justice (Bundesgerichtshof – “BGH”) on 21 October 2015 issued a landmark decision that is of utmost importance to restructuring and the intellectual property law (case no. I ZR 173/14, available here). According to the BGH, in principle, insolvency administrators are no longer capable of electing to reject or assume contracts referring to license buy-outs once the mutual obligations of the parties to the license agreement have been fulfilled.

Underlying facts

The plaintiff — ECO-SOIL Süd GmbH (a German law limited liability company) — demanded that the defendant — ECOSOIL Holding GmbH — refrain from infringing on its community trade mark and company symbol. The defendant claimed that a license had been granted by the former parent company free of charge, entitling the defendant and the remaining subsidiaries of the parent company to the right to use the designations. After the license had been granted and the insolvency proceedings had opened over the assets of the parent company, the plaintiff acquired the immaterial assets of the parent company, including the rights to the trade mark “ECOSOIL”. Based on this acquisition, the plaintiff started to enforce its claims against the defendant.

Question raised

From a shared restructuring and IPT perspective, the case is of particular interest. This is due to the fact that it has given rise to the question as to whether the licensee loses the right to use the license once the insolvency proceeding is opened over the assets of the licensor. In that regard, the BGH issued this landmark decision because it held for the first time that under certain circumstances the insolvency administrator of a licensor cannot issue a decision by which the licensee effectively loses the license. This holds true in spite of the fact that the licensor has filed for insolvency proceedings, and regardless of the fact that the trademark has been transferred to another enterprise. License agreements are treated in accordance to the provisions governing a permanent lease of rights, Sections 108 and 112 of the German Insolvency Code. In fact, Section 103 of the German Insolvency Code is thus of no relevance to this particular case, the BGH held.

Quotes taken from the decision, recitals 44, 45:

“The appellate court was correct in holding that Section 103 of the German Insolvency Code was inapplicable in this case. This is due to the fact that before the insolvency proceedings were opened, the mutual obligations under the license agreement had been completely fulfilled by both the obligor/licensor and the licensee. Thus, the opening of the insolvency proceedings did not entitle the insolvency administrator to reject the fulfillment of the license agreement.

 

In cases of license purchases, in general, a license agreement is completely performed by both parties (Section 103 para 1 of the German Insolvency Code) when the mutual main obligations have been fulfilled, i.e. once the licensor has granted the license and the licensee has paid the purchase price. In the pending case, due to the lack of a payment agreement, the license was not granted on the basis of a typical purchase contract. In fact, it was an exchange contract of genuine nature, stipulating that on the one hand, in the interest of a common market appearance, the defendant and the other companies belonging to the parent organization were obliged to use the trade mark Ecosoil, while on the other hand, the obligor was demanded to grant the corresponding usage rights free of charge for the duration of the existence of the Ecosoil company group. This reciprocal contract, however — and this is the deciding matter —  was completely fulfilled by both parties prior to the opening of the insolvency proceeding. The obligor had granted the corresponding license prior to the opening of the insolvency proceedings, and the defendant then used that license as agreed upon. There is no sign that there were any auxiliary obligations not fulfilled yet by either parties to the license agreement that would have rendered Section 103 of the German Insolvency Code applicable. Furthermore, contrary to the plaintiff’s opinion, the license granted to the defendant did not end merely because the Ecosoil concern group seized to exist.”

Conclusion

This landmark decision needs to be taken into account when negotiating trademark license agreements in relation to Germany and to companies (licensors and/or licensees) who would have their centre of main interests (“COMI”) in Germany. In the event a licensor or licensee has its COMI in Germany, German insolvency courts would have jurisdiction and German insolvency law would in principle apply to the insolvency debtor.

Permanent link to this article: http://blogs.dlapiper.com/derestructuring/2016/06/29/landmark-decision-by-german-federal-court-of-justice-affecting-license-purchases-in-the-insolvency-context/

Federal Court of Justice attenuates management liability risks for payments made after the company’s insolvency

By Dr. Philipp Clemens

The liability regime under Section 64 sentence 1 GmbHG and Sections 92 para. 2, 93 para. 3 Nr. 6 AktG for payments made after the company’s insolvency imposes severe personal liability risk on the management of limited liability companies and stock corporations. This does not only apply to the management of German limited liability companies (“GmbH”) and stock corporations (“AG”) but also to companies incorporated under foreign law that have their centre of main interest in Germany, as the European Court of Justice has decided just recently. Following the continuous criticism of these liability provisions in German insolvency law literature, the Federal Court of Justice (Bundesgerichtshof – “BGH”) has now slightly attenuated this liability concept in a series of recent decisions.

Management liability for payments under Section 64 GmbHG and Sections 92, 93 AktG

According to Section 64 sentence 1 GmbHG and Sections 92 para. 2, 93 para. 3 Nr. 6 AktG, the management of a GmbH or AG can be held liable, in general, for any payment made by the company after it has become insolvent. These liability provisions have been used extensively by insolvency administrators and thus subjected the members of the company’s management to high risk of personal liability due to the facts that (a) the liability starts as soon as the company has become over-indebted or illiquid (a point of time which – as practice shows – is discovered by the management often much later and which can be argued in a law suit rather easy by the insolvency administrator) and (b) that theses liability provisions, in general, applied to every payment made on behalf of the company with only a very few exceptions. Furthermore, the wide scope of the liability regime for payments made after the company’s insolvency is determined by the broad definition of the term “payment” which covers any reduction of the company’s assets. As a consequence of this broad definition, the collection of receivables onto a debit account of the company also qualifies as payment under the liability regime since collecting the company’s receivable and offsetting it against the debt on the bank account leads to a reduction of the company’s assets in favour of a creditor (the account-holding bank).

Restricted definition of “payments” in recent BGH-decisions

With its decisions dated 18 November 2014 (II ZR 231/13), 23 June 2015 (II ZR 366/13) and more recently 8 December 2015 (II ZR 68/14) regarding the liability for payments after the company’s insolvency, the BGH has now narrowed the definition of “payments” under Section 64 sentence 1 GmbHG and Sections 92 para. 2, 93 para. 3 Nr. 6 AktG adopting a more commercial view. According to the aforementioned decisions of the BGH, payments are excluded from the aforesaid liability if they are compensated in direct correlation with the respective payment (asset swap) at the moment of the relevant transaction. Furthermore, no liability is triggered by payments that relate to a claim of the company which has been created and assigned as security before the insolvency of the company and therefore – being subject to the right of separate satisfaction under German insolvency law – would not have been available for the satisfaction of the company’s creditors anyway. According to the most recent decision of the BGH, the management eventually cannot be held liable for payments which constitute a mere swap of securities from a commercial point of view. In all of the aforementioned cases, the respective payments from a commercial point of view do not lead to a reduction of the company’s assets and therefore do not trigger the liability of the management in accordance with Section 64 sentence 1 GmbHG and Sections 92 para. 2, 93 para. 3 Nr. 6 AktG.

Collection of receivables onto a debit account in light of the recent BGH-case law

In view of the aforementioned collection of receivables onto a debit account of the company, the new decisions of the BGH regarding exemptions to the management’s liability for payments after the insolvency of the company can be illustrated in more detail as follows:

  1. No liability under Section 64 sentence 1 GmbHG and Sections 92 para. 2, 93 para. 3 Nr. 6 AktG will attach, if a receivable of the company is collected on its debit account, decreasing the debt on the account and the new credit funds made available hereby are directly used in return to acquire valuable goods for the company. Deviating from its previous decisions, the BGH now no longer requires that the compensation for the payment still exists in the companies’ assets at the moment of the opening of insolvency proceedings. Instead, it is sufficient that the value of the acquired goods compensates the previous decrease of assets by the payment at the moment of the acquisition (BGH II ZR 366/13; BGH II ZR 231/13). From a commercial point of view, this case constitutes a mere swap of assets and therefore does not lead to a liability under Section 64 sentence 1 GmbHG and Sections 92 para. 2, 93 para. 3 Nr. 6 AktG.
  2. Likewise, no liability will attach, if a receivable of the company is collected on its debit account and the new credit funds made available hereby are then withdrawn from the debit account and paid into a credit account of the company, thus securing the funds for the insolvency estate (BGH II ZR 366/13). In this way, the previous reduction of the company’s assets (by means of collecting and offsetting the receivable against the debt on the account) is compensated by the subsequent transfer of the newly available credit funds to a credit account of the company.
  3. The same applies, if as a result of the collection of the receivable onto the debit account and the reduction of the debt on the account hereby, granted securities of the account-holding bank are released and transferred back to the assets of the company (BGH II ZR 366/13). Here, the decrease of assets by means of collecting and offsetting the receivable against the debt on the debit-account is compensated by the receipt of the assets formerly granted as securities to the bank.
  4. Furthermore, a liability for payments made after the company’s insolvency is excluded if the collected receivable had been assigned to the account-holding bank as security for the debit account and the receivable has been created before the insolvency of the company (BGH II ZR 366/13). In this case, the collected receivable would have been subject to the bank’s right of separate satisfaction under German insolvency law anyway, so that the later insolvency estate could not be affected by the collection and offsetting of the receivable against the debit account.
  5. According to the most recent decision of the BGH, the aforesaid finally also applies, if the collected receivable that has been assigned to the account-holding bank as security for the debit account was created after the insolvency of the company but by way of supplying goods to the debtor of the receivable, which on their part had been transferred to the bank as security before (BGH II ZR 68/14). In this case, only a swap of securities takes place and the later insolvency estate ultimately is not affected by the collection and offsetting of the receivable against the debit account.

Continuous liability risks for payments made after insolvency despite recent decisions of BGH

Although the recent decisions of the BGH with regard to management liability under Section 64 sentence 1 GmbHG and Sections 92 para. 2, 93 para. 3 Nr. 6 AktG attenuate management liability risks for payments made after the company’s insolvency and therefore point in the right direction, the liability regime under the aforesaid provisions remains a significant risk for the management of a company in economic crisis. Given the fact, that the aforementioned situations are exceptions to the management’s general liability for payments made after the company has become overindebted or illiquid, the burden of proof for such exceptional circumstances lies with the management. Therefore the members of the management will have to monitor the financial situation of the company closely and continuously. Furthermore, they will have to ensure that they can prove any such specific circumstances as laid out above, which exclude a liability under Section 64 sentence 1 GmbHG and Sections 92 para. 2, 93 para. 3 Nr. 6 AktG (e.g. the receipt of valuable goods in direct connection with and as compensation for the payment made).

Permanent link to this article: http://blogs.dlapiper.com/derestructuring/2016/03/15/federal-court-of-justice-attenuates-management-liability-risks-for-payments-made-after-the-companys-insolvency/

Major Clawback Reform in Germany Getting Closer

Major Clawback reform in Germany Getting Closer

By Tom Braegelmann

On February 24, 2016, the legal committee (Rechtsausschuss) of the German parliament (Bundestag) held a hearing on the proposed reform to considerably limit the clawback regime (Insolvenzanfechtung) in the German insolvency code (InsolvenzordnungInsO). The general gist of hearing was that the current German governing party coalition is still determined to enact the reform, with some modifications as to the scope and protected parties still up for discussion.

Background: The German government wants to limit clawback actions by German insolvency administrators (see our previous blog posts in this regard) by excluding, among others, employees of the insolvent debtor, as well as tax authorities, social security providers and other creditors who are holding enforcement titles. Furthermore, the general scope of the contestation for willful intent (Vorsatzanfechtung) shall be limited and the looking-back-period shortened from ten to four years prior to the insolvency filing. Other incentives of insolvency administrators to late-file clawback actions shall also be removed.

The hearing was held in order to fine-tune the proposal, by collecting the views of representative experts of German unions, German industry, legal scholars and several insolvency administrators, who all also answered further questions from the members of parliament. While there is still some considerable criticism from legal scholars leveled against the overall scope and necessity of the reform, which was reiterated during the hearing, it appears that most of the experts agreed that some real reform to considerably limit German clawback law is in order. The debate mostly circled not on the need for a reform but rather around the question how far the reform should go and which additional third-parties should be protected against clawback liability.

There was general agreement that employees of debtors should have more protection against being subject to clawback actions for wages paid by the debtor or by third parties closely related to the debtor. Even the insolvency administrators admitted that there had been excesses in prosecuting claw back claims against employees. The experts also agreed that the planned exception should not apply to managers.

Crucially, the parliamentary representatives of the governing coalition asked the experts specifically whether, in addition to employees, other stakeholders should also be protected against clawback. This would include innocent small craftspeople and manufacturers, vendors and suppliers, which usually have no way of knowing whether the company that they are serving is already insolvent or not. Currently the reform does not envisage to specifically protect these groups in addition to employees.  The issue was brought up because it would in a way be unfair to protect only employees against clawback but not others that may often be like employees essentially needed for the continuation of the debtor’s business.

During the hearing it became clear that the representatives of the governing coalition agreed that their reform draft was already, in their view, in good shape, and only needed some further tweaking but in all likelihood not a major change. All in all, it seems to be likely after this hearing that the envisaged reform of German clawback law will soon be enacted. While the final scope of the limitation to claw back law has not yet been decided, it can be expected that not only employees but other specific groups may also soon be subject only to a more restrained German clawback regime. Whether this reform will result in eviscerating German claw back to a degree that would makes it mostly ineffective, as some legal scholars fear, remains to be seen.

*****

Permanent link to this article: http://blogs.dlapiper.com/derestructuring/2016/02/26/major-clawback-reform-in-germany-getting-closer/

Director Liability in an International Context

ECJ: Director Liability Under German Law Applies to Directors of insolvent English Limited Company with its COMI in Germany

By Peter Jark and Tom Braegelmann

The European Court of Justice (“ECJ“) on 10 December 2015 issued a decision (case no. C-594/14, Simona Kornhaas v. Thomas Dithmar, available here) that is of immense relevance for all directors, creditors, debtors and insolvency administrators that are active in companies that operate cross-border, especially where the registered seat of the company is not in Germany but rather in another member state of the European Union, but where the centre of the main interest (“COMI”) of the company is in Germany.

The ECJ had to deal with two questions that were brought forward by the German Federal Court of Justice (“Bundesgerichtshof” – “BGH”). The first question was whether an action to seek reimbursement of payments was governed by German insolvency law, the second was whether or not such an action would infringe freedom of establishment under European law.

Under German law a director of a German limited liability company (“GmbH”) can be held liable for payments it made before the opening of an insolvency proceeding but after the company had become either illiquid or overindebted according to the respecitve definitions under German insolvency law, which means that the companies is legally insolvent. Even if the insolvent company is not registered in Germany but only has its COMI in Germany and is thus subject to a German insolvency proceeding, this liability applies and a director, in this case of a private company limited by shares, registered in the United Kingdom, faces such an action.

Underlying facts

In the case at hand a private company limited by shares, registered in the United Kingdom with a branch in Germany, registered with the commercial register at the local court in the city of Jena in Germany and was insolvent according to German statutory law. The director of this company had made payments to creditors of the company after the company was insolvent but before the insolvency proceeding in Germany was opened. the iInsolvency administrator of this company filed an action against the director for reimbursement of the money paid to creditors during this time. Subsequently, all German courts involved, including the BGH, were in favour of the insolvency administrator, but the BGH referred the decision to the EHC in order to confirm that (i) the relevant sec. 64 of the German limited liability company act (“Gesetz betreffend die Gesellschaften mit beschränkter Haftung” – “GmbHG”), though part of a statute for corporations, is legally deemded to be German insolvency law within the meaning of Article 4 (1) of Regulation No 1340/2000 (the “European Insolvency Regulation” – “EIR”) and (ii) that this action does not infringe freedom of establishment under Articles 49 and 54 of the  Treaty on the Functioning of the European Union (‘TFEU”).

 

Answers by the ECJ in summary

The ECJ ruled with respect to the first question raised that an action against a director in the case at hand falls within the scope of Article 4 (1) EIR . With respect to the second question the ECJ ruled that in circumstances like this there is no breach of Articles 49 and 54 TFEU.

This ruling clarifies that sec. 64 GmbhG must be regarded as being covered by the law applicable to insolvency proceedings and their effects within the meaning of Article 4 (1) of Regulation No 1340/2000. This is especially due to the fact, that the wording of sec. 64 GmbHG specifically refers to a liability in case of making payments in a situation in which the company itself is insolvent, referred to as being illiquid or overindebted.

With respect to the second question the ECJ states that sec. 64 GmbH in Germany does not concerns the legal formation of the company in a given member state or it subsequent establishment in another member state and does not, therefore, restrict freedom of establishment. The German legal provisions do not concern the refusal by a host member state to recognise the legal capacity of the company formed in accordance with the law of another member state and they further do not infringe provisions concerning minimum capital and the personal liability of administrators where the capital of that company has not reached the minimum amount laid down. This is why article 49 and 54 of TFEU are not violated by the personal liability of directors of an English limited company pursuant to sec. 64 GmbGH.

Conclusion

it has been under discussion in German legal literature if and to what extent the liability according to sec. 64 GmbHG could be limited by European law. It is now clear that any liability of a director of a foreign company which has its COMI in Germany can be subject to such a liability. Especially in case foreign citizens are managing directors in German entities it is important to apply all the insolvency related rules under German statutory law in order to avoid that such foreign citizend find themselves to be personally liable for payments being made in the past. Notabls, the good faith of payments made prior to opening of the insolvency proceedings but after an insolvency event has occurred does not limit the liability. We would assume, that any comparable liability provisions with respect to other types of companies will also apply. At least it is strongly recommended to be aware of this risk.

*****

Permanent link to this article: http://blogs.dlapiper.com/derestructuring/2016/02/09/director-liability-in-an-international-context/

Federal Ministry of Finance changes VAT rules for non-performing loan deals

By Konrad Rohde (Tax) and Peter Jark (Restructuring)

The German Federal Ministry of Finance has changed their administrative view and issued a circular on 2 December 2015 (available here). The main topic of the circular is a revised view of the German Federal Ministry of Finance on how to deal with VAT in relation to non-performing loan deals in Germany.

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Risk of taxable profits due to subordination agreements

The Federal Fiscal Court (BundesfinanzhofBFH) on 14 April 2015 issued a decision (case no. I R 44/14, available here) that is of immense relevance for all creditors and debtors that face the need of a subordination agreement (Rangrücktrittvereinbarung) under German law.

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Subordination clear? German Federal Court of Justice clarifies the scope and limits of subordination agreements

By Peter Jark, Marei Hellmig, Mareike Schwedler and Tom Brägelmann

The Federal Court of Justice (BundesgerichtshofBGH) on 5 March 2015 issued a decision (case no. IX ZR 133/14, available here) that is of immense relevance for all creditors and debtors that face the need of a subordination agreement (Rangrücktrittvereinbarung) under German law. Basically, the court hammered out in clear terms the legal scope and nature of a subordination agreement and its position at the intersection of insolvency law, contract law and the law of unjust enrichment. The BGH had to deal with two questions concerning clawback rights of an insolvency administrator, this being unjustified enrichment and gratuitous benefit. More importantly for the daily business of restructuring the BGH discussed and decided on necessary conditions that need to be fulfilled in order for the management of a company to not include a liability in the special balance sheet for the overindebtedness test.

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Clawback reduced? Germany limits claw back regime – somewhat

By Mareike Schwedler, Tom Brägelmann and Marei Hellmig

On 29 September 2015, the German government came into agreement on an official legislative draft for the limitation of the German claw back regime. This draft for the “Act for the Improvement of Contestations pursuant to the German Insolvency Code and the Creditor’s Avoidance of Transfers Act” (Gesetzesentwurf zur Verbesserung der Rechtssicherheit bei Anfechtungen nach der Insolvenzordnung und nach dem Anfechtungsgesetz) will now be debated and eventually approved (with some changes to be expected in the process) by the German parliament.

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Impending major reform of German insolvency clawback regime

By Peter Jark, Andrea München and Tom Brägelmann

A key objective of the current German coalition government is the reform of the clawback provisions in the German Insolvency Code (Insolvenzordnung – InsO). To address this, the German Federal Ministry of Justice and Consumer Protection recently published a draft bill for discussion. The German government is expected to remain in office until 2017, making it highly likely that this reform will become law, in the course of 2015-2016.

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Federal Court of Justice: Positive knowledge of Ponzi scheme implies creditor’s knowledge of wilful discrimination

The Federal Court of Justice (BGH, 8 January 2015, IX ZR 198/13) acknowledged the creditor’s positive knowledge of a Ponzi scheme run by the debtor when enforcing a claim for the repayment of an investment as a material sign of evidence that the creditor intends to discriminate other creditors pursuant to § 133 (1) German Insolvency Code (InsO) and that the debtor was aware of that.

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Permanent link to this article: http://blogs.dlapiper.com/derestructuring/2015/07/20/federal-court-of-justice-positive-knowledge-of-ponzi-scheme-implies-creditors-knowledge-of-wilful-discrimination/

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