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We look at the imposition of onerous German law provisions, particularly the liability of managing directors (MDs) to reimburse payments made after the company becomes cashflow or balance sheet insolvent in Kornhaas v Thomas Dithmar, acting as liquidator of the assets of Kornhaas Montage und Dienstleistung Ltd (C-594/14).
The Court of Justice of the European Union (CJEU) considered a request for a preliminary ruling on the interpretation of article 4 of Council Regulation (EC) 1346/2000 of 29 May 2000 on insolvency proceedings (the EC Regulation on Insolvency) and of articles 49 and 54 of the Treaty on the Functioning of the European Union (TFEU). The request was made in proceedings between Mr Dithmar, acting as liquidator of the assets of Kornhaas Montage und Dienstleistung Ltd (the debtor company), and Ms Kornhaas, concerning an action for reimbursement of payments which Ms Kornhaas had made as MD of the debtor company after it had become insolvent.
The key points to note from this case are:
Kornhaas Montage und Dienstleistung Ltd was a company which although incorporated in England and reg-istered at the English Companies House, had its COMI in Germany. It was mainly active in Germany (installing ventilation systems and associated services), had a branch there and on that basis was also entered in the German companies register administered by the local Jena court. Main insolvency proceedings had been opened in Germany. As a matter of German law, MDs are under various onerous obligations, including:
The German liquidator started proceedings in Germany against the MD seeking recovery of EUR 110,151 for payments made after the company became insolvent.
The German court referred the following questions to the CJEU:
The German court referred these questions to the CJEU as it was unclear whether the German provisions could be enforced against MDs of companies established in accordance with the law of other EU Member States (here England), but having their COMI in Germany.
The CJEU found that German law provisions on the liabilities of the MDs did apply in this case and referred to its previous decision of Re H v HK; the EC Regulation on Insolvency, art 4(1) must be interpreted as meaning that the courts of the Member State in the territory of which insolvency proceedings regarding a company's assets have been opened have jurisdiction, on the basis of that provision, to hear and determine an action brought by the liquidator in the insolvency proceedings against the MD of that company for reimbursement of payments made after the company became insolvent or after it had been established that the company's liabilities exceeded its assets.
The CJEU based that decision on the view that a national provision, such as this provision under which the MD of an insolvent company must reimburse the payments which he made on behalf of that company after it became insolvent, derogates from the common rules of civil and commercial law, because of the insolvency of that company. It therefore inferred that an action based on that provision, brought in the context of insolvency proceedings, is an action deriving directly from insolvency proceedings and closely connected with them.
It follows that the provisions are covered by the law applicable to insolvency proceedings and their effects (under the EC Regulation on Insolvency, art 4(1)). As such, the provisions may be applied by the national court hearing the insolvency proceedings (here the German court) as the law of the Member State within the territory of which the insolvency proceedings are opened (the lex fori concursus).
The CJEU explained that the rationale for making MDs liable in this way was to sanction any failure to file for insolvency within the three-week deadline-MDs of an insolvent or over-indebted company who have failed to apply for insolvency proceedings to be opened can be found personally liable. In fact, once such proceedings have been opened, it is no longer for the MD of the insolvent company, but for its liquidator, to make or authorise payments on behalf of that company. As a result, if the MD has complied with the obligation to file for insolvency within three weeks, the penalty will not apply.
National provisions such as these, which have the effect of penalising a failure to fulfil the obligation to apply for the opening of insolvency proceedings, must be considered to fall within the scope of the EC Regulation on Insolvency, art 4.
This CJEU distinguished the present situation from the following previous CJEU case law where:
Here, the CJEU found that the German law provisions didn't affect the principles of freedom of establishment as:
This is a reminder for directors of a company incorporated in England that they may be subject to additional legal regimes (which impose more onerous liabilities than English law) in cases where the COMI is located in a country other than the registered office. Here, the onerous director's liability regime of Germany was found to apply to MDs of an English company. In practice, directors will be aware of any operations in or connections with other countries which the company has, so will be alerted to the possibility of liability under alternative regimes should the company enter insolvency. Where the company operates in countries with onerous directors' duties, it may be prudent for the directors to take local law advice on these potential liabilities, to the extent not already covered by any Directors and Officers (D&O) insurance.
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First published on LexisPSL Restructuring and Insolvency
Kathy Stones, solicitor in the Lexis®PSL Restructuring & Insolvency team.
0330 161 1234