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.
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.
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.