Managing directors of a GmbH, a type of German private limited company, may be liable in the event of insolvency. A common bone of contention is the matter of payments made by the managing director after the onset of insolvency.
We at the commercial law firm GRP Rainer Rechtsanwälte note that a GmbH managing director’s risk of being faced with personal liability can materialize even in cases involving simple negligence. Liability on the part of the managing director can come into question, for instance, if he or she made payments after the onset of insolvency. The contentious issues here are whether the payments were allowed to have been made or whether they have diminished the insolvency estate. GRP Rainer has experience dealing with cases involving directors’ liability.
In its ruling of July 4, 2017, the Bundesgerichtshof (BGH), Germany’s Federal Supreme Court, took a position on which payments a managing director is still allowed to make after the onset of insolvency and when he or she is obligated to compensate for these payments (Az.: II ZR 319/15). According to the Court, the executive body’s obligation to pay compensation ceases to apply if the reduction in the insolvency estate caused by the payment is offset by a contribution that is directly linked to this. The contribution must be suited for use by the creditors. The BGH noted that performing work or supplying a service is generally not suitable for this purpose.
In the instant case, the insolvency administrator had brought an action against a “director” of a company limited by shares pursuant to English law that was operating in Germany. The provisions under sec. 64 of the GmbHG, Germany’s limited liability companies act, apply to this company. The “director” had initiated payments to public utility and telecommunications companies as well as paid wages between September 14 and December 9 of 2009. According to the insolvency administrator, the company had been insolvent since no later than September 9, 2009, resulting in the former demanding repayment of these costs.
The action was successful. After the onset of the insolvency, the managing director is supposed to preserve the remainder of the insolvency estate. The BGH held that should he or she nevertheless make payments that diminish the insolvency estate then they are liable to pay compensation. It is not the case in this context that any accrual to the estate should be viewed as an offsetting contribution to the diminished estate; there needs to be a direct economic link, it being noted that the rules on cash transactions pursuant to sec. 142 of the InsO, Germany’s Insolvency Act, do not apply here. Performing work or supplying services is generally not suitable for the purpose of offsetting the reduction in the estate.
Lawyers who are experienced in the field of company law can offer managing directors and other executive bodies advice.