Occupational Pensions: Federal Labour Court confirms its established ruling on limited liability in case of acquiring a company out of insolvency

By judgment of 26 January 2021 (docket number: 3 AZR 878/16, 3 AZR 878/17) the Federal Labour Court (Bundesarbeitsgericht – BAG) has ruled that the acquirer of an insolvent company is only liable for vested entitlements and claims to occupational pension that had been earned after the opening of insolvency proceedings. He is not liable for the pension based on periods before, even if the German Insolvency Protection Fund (PSV) does not fully cover this part of the pension.

Facts / Background:

The court had to decide on several cases and exemplified 2 of them. In these 2 cases, the plaintiffs had been granted pension commitments by their companies. When the companies became insolvent, they were bought out of insolvency by the acquirers. The plaintiffs took legal action against the acquirers as these did not take into account the periods of service prior to the opening of insolvency proceedings when determining the plaintiff’s pension benefits. Although the PSV is responsible for the part of the pension up to the opening of the insolvency proceedings, the total benefits were lower than claimed by the plaintiffs. This was because the PSV does not secure all such entitlements and claims without restriction. For example, it does not protect entitlements that are not yet vested, nor does it protect certain developments which arise from the pension commitment after the opening of insolvency proceedings. As a result, in one of these cases the pension was lower than claimed by the plaintiff and in the other case no pension entitlement had yet arisen because the vesting period (according to the German Company Pensions Act) had not yet been fulfilled at the time the insolvency proceedings were opened.

This division of liability, according to which the PSV is liable for the part of the pension up to the opening of insolvency proceedings and  the acquirer is liable only for the part thereafter , is based on the established ruling of the Federal Labour Court. The Federal Labour Court had referred these two cases to the European Court of Justice in 2018, asking it to examine whether this established ruling is in accordance with European law. This was confirmed by the European Court of Justice in 2020, as long as a certain minimum protection for the beneficiaries was observed.  This minimum protection is provided if it is ensured that a former employee receives in case of insolvency at least half of the old-age pension that he would have received if the insolvency had not been taken into account. The concrete assessment of this question (minimum protection), the European Court of Justice stated, was, however, up to the national courts. Therefore, the cases had to be decided again by the Federal Labour Court.

Ruling:

The Federal Labour Court rejected the plaintiffs’ claims. The court referred to its established ruling and found that the minimum protection (as required by the European Court of Justice) was guaranteed in Germany by the fact that a claim against the PSV can be asserted. Therefore, the acquirer was not liable. The court did not consider the minimum protection (as required by the European Court of Justice) to have been fallen short of in the two cases.

Conclusion:

The detailed reasons of the ruling are not yet available. However, the result of the judgement is to be welcomed. By confirming its established case law, the Federal Labour Court has ensured that liability for acquirers of companies in insolvency remains limited. A different decision would have had serious consequences in practice, as it would have made the sale of insolvent companies considerably more difficult.