October 06 2017
German insolvency proceedings aim for the utmost satisfaction of all creditors. This can be achieved only through the preservation of the insolvency estate. In order to maintain an insolvency estate, German legislation has ratified various liability claims against managing directors for payments made after their company has become illiquid or after it is deemed to be overindebted. However, according to recent case law, one thing that all of these claims have in common is that managing directors cannot be held liable for payments made that result in an equivalent compensation for the company. The requirements of an equivalent compensation remain unclear.
Case law is primarily based on Section 64 of the Limited Liability Companies Act:
"managing directors shall be obliged to compensate the company for payments made after the company has become illiquid or after it is deemed to be over-indebted. This shall not apply to payments which, after this point in time, are compatible with the due care of a prudent businessman."
With regard to established case law, managing directors cannot be deemed liable where equivalent compensation is received in direct relation to the payment that caused a reduction of the insolvency estate. However, the term 'directly' is to be read broadly. It is sufficient for the compensation received to have originated from the same legal relationship as the payment. Therefore, a synallagmatic contract is not required. The equivalency of payment and compensation is not determined at the time of the insolvency proceedings, but rather at the time that the compensation is received.
This raises the question of which standards the compensation must meet in order to constitute 'equivalent'. With regard to this, the Higher Regional Courts of Dusseldorf and Munich are of conflicting opinions.
In the Dusseldorf Higher Regional Court case (I-6 U 169/14, October 1 2015), the defendant made various payments for employees and other services provided after the company had become illiquid. The court had to decide whether such services constituted an equivalent compensation and whether the liability of the managing director for payments made after the occurrence of illiquidity could be excluded.
In order to answer this, the court held that the legal principles developed in connection with insolvency clawback, in particular the so-called 'cash transaction defence', should be applied. Based on these principles, the equivalency of a payment and the subsequent compensation must be determined on a purely economic basis. Thus, it is unnecessary for the compensation received in return for the payment to be directly accessible to the creditors of the insolvent company. In this case, therefore, although the employment and other services provided in exchange for the payment were not accessible to the creditors, the managing director was nevertheless not liable for those payments, as the compensation received in return was of equal value from an economic perspective. Further, the court argued that the payments did not lead to loss of assets for the company. Instead, the court held that the payments made were generally to the company's benefit, as they generated a workforce and should therefore be considered to be a shift of assets.
The Munich Higher Regional Court (23 U 3769/16, June 22 2017) had to decide on a similar case. This case saw the managing director of an illiquid limited liability company issue payments to various suppliers, company employees and public authorities.
Contrary to the Dusseldorf Higher Regional Court, the Munich Higher Regional Court held that the legal principles developed in consideration of insolvency clawback should not be applied to Section 64 of the Limited Liability Companies Act. According to the Munich Higher Regional Court, compensation can be considered to be equivalent to the issued payment only if it is accessible to the creditors. Following this line of argument, employment and other services provided cannot be considered to be equivalent to the payment, as such services are never accessible to the creditors.
The Federal Supreme Court (II ZR 319/15, July 4 2017) agreed with the Munich Higher Regional Court in this regard. After insolvency has occurred, compensation can be considered equal to the payments made only if it is directly accessible to the creditors. In other words, the assets attained in return for a payment must result in an increase in the value of the insolvency estate. Employment services, as well as other services, are typically inaccessible to creditors. Such services do not lead to an increase of the insolvency estate. Consequently, they cannot be regarded as equivalent to the payment.
The cases discussed highlight the controversial nature and practical importance of determining which compensations qualify as equivalent to the payment. It is clear that there is a need for a uniform set of rules for the determination of the equivalency of a payment and respective compensation. Generally, the legal principles developed regarding insolvency clawback are best suited to bring clarity to this area of uncertainty. In this regard, the Dusseldorf Higher Regional Court decision was certainly a step in the right direction. Nevertheless, to simply apply the economic perspective assessment to all questions concerning equivalency would be a step too far. Insolvency proceedings aim to preserve the insolvency estate for the optimum satisfaction of all creditors. In light of this, the compensation received in return for the payment must always lead to an increase of the insolvency estate and be accessible to the creditors of the insolvent company. However, according to the Federal Supreme Court, it is unnecessary that the increase of the insolvency estate has already come into existence with initiation of the insolvency proceedings.
In order to prevent liability for payments made after the occurrence of illiquidity, it is crucial for the managing director to vigorously monitor its financial situation at all times. If illiquidity or overindebtedness seems imminent, further payments should be made in consultation with a legal adviser.
For further information on this topic please contact Stefan Sax or Florian Holder at Clifford Chance LLP by telephone (+49 69 7199 01) or email (email@example.com or firstname.lastname@example.org). The Clifford Chance website can be accessed at www.cliffordchance.com.
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