CJEU applies onerous German law provisions to MDs of English company—Kornhaas v Thomas Dithmar

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).

Original news

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.

What are the key take-aways?

The key points to note from this case are:

  • an MD of an English company can be subject to onerous German law provisions if the company's centre of main interests (COMI) is in Germany
  • accordingly, such an MD can be liable under German law for any payments made by the company after the company became insolvent or after it was established that the company was over-indebted
  • these German law provisions do not infringe the principle of freedom of establishment

How did the issues arise?

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 obligation to file for insolvency forthwith and at the latest three weeks after the company has become unable to pay its debtor is over-indebted (ie is cashflow or balance sheet insolvent)
  • the obligation to reimburse the company with any payments which they made after the company became insolvent or after it was established that the company was over-indebted

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:

  • if a liquidator brings an action before a German court against a director of a private company limited by shares under the law of England and Wales, in respect of whose assets Germany insolvency proceedings have been opened pursuant to the EC Regulation on Insolvency, art 3(1), the purpose of the action being to seek reimbursement of payments which the director made before the opening of the insolvency proceedings but after the company had become insolvent, is that action governed by German insolvency law within the meaning of the EC Regulation on Insolvency, art 4(1)?
  • does an action as referred to above infringe freedom of establishment under TFEU, arts 49 and 54?

Does German law apply in this case?

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.

Does the action infringe freedom of establishment?

This CJEU distinguished the present situation from the following previous CJEU case law where:

  • the refusal by one Member State to recognise the legal capacity of a company formed in accordance with the law of another Member State in which it has its registered office on the ground that the company has moved its actual centre of administration to its territory constituted  a restriction on the freedom of establishment (see Uberseering BV v Nordic Construction Co Baumanagement GmbH (NCC))
  • penalties attached to non-compliance with national provisions concerning minimum capital were also incompatible with freedom of establishment (see Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd)

Here, the CJEU found that the German law provisions didn't affect the principles of freedom of establishment as:

  • the legal capacity of the debtor company was in no way called into question
  • the personal liability of the MDs of a company under German law was not related to the fact of insufficient capital, but only due to the fact that the MDs had made payments at a stage when they would have been required to apply for the opening of insolvency proceedings
  • they didn't concern the formation of a company in a given Member State or its subsequent establishment in another Member State—to the extent these German provisions were applicable only after that company has been formed, in connection with its business—and more specifically, either from the time when it must be considered (pursuant to the national law applicable under the EC Regulation on Insolvency, art 4) to be insolvent, or from the time when its over-debtedness (ie balance sheet insolvency) is recognised in accordance with that national law

What does this mean in practice for directors of English companies with a foreign COMI?

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.

Further reading

If you are a LexisPSL Subscriber, click the link below for further information:

Table comparing European directors' duties (Subscriber access only)

Not a subscriber? Find out more about how LexisPSL can help you and click here for a free trial of LexisPSL Restructuring and Insolvency.

First published on LexisPSL Restructuring and Insolvency

Kathy Stones, solicitor in the Lexis®PSL Restructuring & Insolvency team.

Relevant Articles
Area of Interest