Background

According to German law, managing directors of limited liability companies are personally liable for payments that have been made despite insolvency. This can lead to widespread liability.

Background

The German Insolvency Act says an insolvency administrator may sell a "moveable object" on which a right to separate satisfaction (Absonderungsrecht) exists if such object is in his possession. The right to separate satisfaction entitles creditors with such a right to be satisfied ahead of all other creditors from the proceeds of selling a separate pool of assets within the insolvent estate

The German Federal Court of Justice has tightened its grip on company directors again. In a recent judgment on directors’ liability in insolvency situations, the Court clarified the scope of sections 60- 61 of the German Insolvency Act.

Background

On 21 April 2018, new rules regarding the handling of “group” insolvency proceedings of companies in Germany become effective.

The regulations aim at better coordination between separate insolvency proceedings which must be implemented for every company within a group under German insolvency rulings. Up to now, coordination was quite difficult, due to separate responsibilities of different courts and insolvency administrators.

Background

In cases where upstream or cross-stream securities are granted by a German limited liability company (”GmbH“), the German capital maintenance rules need to be considered. Under these rules assets that are required for the maintenance of GmbH’s registered share capital may not be paid out to the shareholders. This payout prohibition concerns not only payments, but also granting of securities in favour of loans granted to the shareholders. The managing directors of a GmbH are personally liable for payouts made in violation of these rules.

In a recent judgment, the German Federal Court of Justice (Bundesgerichtshof) took the opportunity to clarify its position on sec. 17(2) German Insolvency Act (Insolvenzordnung, InsO). According to sec. 17(2) InsO a debtor is deemed insolvent if he is unable to pay his debts as they fall due (Zahlungsunfähigkeit).

In the German market, target companies are generally acquired out of insolvency through an asset sale. While this still holds true for the lion’s share of transactions, an increasing number of target companies are being acquired through a share sale.

German insolvency proceedings expose company directors to high risks of personal liability. Claims brought on the basis of sec. 92(2), 93(3) German Companies Act (Aktiengesetz, AktG) and sec. 64 German Limited Liability Companies Act can have disastrous financial consequences. Damages can be in the millions. Therefore many company directors purchase directors’ and officers’ liability insurances (D&O insurance) to protect their personal assets.

Summary

In May 2017, the German Federal Supreme Court (Bundesgerichtshof), Az. XI ZR 571/15, has given its views for the first time on bridging loans (Überbrückungskredite) and their validity in a restructuring scenario.