New Liability Risk for Managing Directors – Federal Supreme Court Dictates Liability for Breaches of Duty in Insolvency Proceedings of a Debtor in Possession

In insolvency proceedings of a debtor in possession, the managing directors of the respective company have to perform tasks that an insolvency administrator would have to perform in regular insolvency proceedings. The Federal Supreme Court (Bundesgerichtshof, BGH) has now ruled that, therefore, the managing directors will be personally liable for errors specific to the proceedings, as is the case for insolvency administrators.

Background

The legislator has already created the option in 1999 to conduct insolvency proceedings as a debtor in possession and has extended and strengthened this option in 2011 with the law on facilitating the restructuring of companies (Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen, ESUG; entry into force 1 March 2012). Since then, proceedings with a debtor in possession have become increasingly significant.

As opposed to “normal” insolvency proceedings (regular insolvency proceedings), there is no insolvency administrator in proceedings with a debtor in possession. The authority to manage and dispose of the assets of the company remains with the debtor (or the managing directors representing the debtor). In proceedings with a debtor in possession, consequently, the managing directors of the company that is the subject matter of the proceedings with a debtor in possession mostly assume the tasks of the insolvency administrator in regular insolvency proceedings. In doing so, they are being supported and supervised by a trustee.

The particular position of managing directors in proceedings with a debtor in possession raises the question of liability. If insolvency administrators culpably breach their duties in insolvency proceedings for which they are responsible according to the German Insolvency Code (Insolvenzordnung, InsO), they will be personally liable for damages vis-à-vis the parties involved in such proceedings (in particular the creditors) (Section 60 InsO). Moreover, the insolvency administrators will be liable if they establish debts of the insolvency assets (Masseverbindlichkeit) which cannot be fully covered from the insolvency assets (Section 61 InsO). Managing directors of a legal person, on the other hand, generally are not liable vis-à-vis third parties in the external relationship. However, the Federal Supreme Court has now equated the liability of the managing directors of a debtor in possession with that of insolvency administrators in regular insolvency proceedings.  

Decisions of the Federal Supreme Court

The Federal Supreme Court had to provide a decision on the case of a (restructuring) managing director who, before his appointment as managing director, had already acted as a restructuring expert for the later insolvency debtor (more precisely, for the general partner limited liability company of the later insolvency debtor). Shortly after the defendant had been appointed managing director, the insolvency debtor filed an application for the opening of insolvency proceedings with a debtor in possession. In the course of the proceedings with a debtor in possession, the defendant ordered goods from the later claimant which were duly delivered, but not paid. The claimant asserted damages for the bad debt against the defendant. The Federal Supreme Court deemed liability of the defendant to be possible in analogy to Section 61 InsO and therefore set aside the judgment of the previous instance, which had dismissed the action.

The Federal Supreme Court made it clear that managing directors of a debtor in possession would be entrusted with the tasks of insolvency administrators in addition to their original tasks under corporate law. A specific liability requirement would follow from these additional tasks. The legislator would have been aware of this liability requirement, but unintentionally would not have provided adequate regulations in this respect. The applicable legal situation would not provide sufficient protection to the creditors in insolvency proceedings with a debtor in possession from breaches of duty on the part of the managing directors. The Federal Supreme Court deems this to constitute an unintentional regulatory loophole which has to be closed by making managing directors of a debtor in possession liable for damages vis-à-vis the parties to the insolvency proceedings for breaches of their insolvency-specific duties in analogy to Sections 60, 61 InsO.

Practical Implications

The decision has far-reaching consequences. As a matter of principle, managing directors are only liable for breaches of duty vis-à-vis their own company in the internal relationship (Section 43 (2) German Law on Limited Liability Companies, Section 93 (2) Sentence 1 German Stock Corporation Act). A liability in the external relationship vis-à-vis third parties (in particular the creditors of the company), on the other hand, only comes into consideration in narrow exceptional cases. With its decision, the Federal Supreme Court lays down another exception. As a consequence of the analogous application of Sections 60, 61 InsO, the managing directors of a debtor in possession are not only liable vis-à-vis their company but, moreover, are personally liable vis-à-vis the parties to the insolvency proceedings for

(Federal Supreme Court, judgment of 26 April 2018 –IX ZR 238/17)

Uli Schmidt
Lawyer
Munich