German Insolvency Law Applies to Director of English Company Operating in Germany

This post comes to us from Helen Kavanagh, and Andreas Lehmann of Squire Patton Boggs.

The statistics show that over 10,000 English limited companies operate in Germany. Kornhaas Montage und Dienstleistung Ltd (‘KMD’) is a company that is registered in the Companies Register in the UK, but has a branch active in Germany, which is registered in the German Company registries. On 10 December 2015 the Court of Justice of the European Union (‘ECJ’) decided on the question whether the liability of the director of this English registered company, which was subjected to German insolvency proceedings, should be determined by English law or by German law.

Under Article 4 of Regulation 1346/2000 (‘EC Insolvency Regulation’), the law applicable to insolvency proceedings and their effects is the law of the member state within the territory of which such proceedings are opened. Rules relating to the ‘voidness, nullity, voidability or enforcement of legal acts detrimental to all the creditors’ are governed by the law of the state in which proceedings are opened.

German law imposes strict rules on the obligation of a managing director to file for insolvency no later than three weeks after the company has become insolvent, ie after either the company has become unable to pay its debts, or it was established that the company is over-indebted. Furthermore, pursuant to paragraph 64 of the GmbHG (German Act on companies with limited liability), managing directors are required to reimburse the company in respect of certain payments made after the company becomes insolvent.

KMD was registered in the Companies Register in the UK (which is in Cardiff, Wales) as a private company limited by shares. A branch of KMD was established in Germany and, on that basis, it was entered in the companies register administered by the District Court in Jena. The company was mainly active in Germany, installing ventilation systems, so its centre of main interest (‘COMI’) was in Germany, even though its registered office was in the UK. Insolvency proceedings over the assets of KMD were opened by the Local Court of Erfurt, Germany, in November 2007, and Mr Dithmar was appointed as liquidator of KMD. Mr Dithmar found that KMD had been insolvent since at least 1 November 2006, and had made payments between 11 December 2006 and 26 February 2007 totalling over €110,000. Therefore, the Liquidator sought reimbursement of that sum from Ms Kornhaas, who was the managing director of KMD, on the basis of Paragraph 64 GmbHG. Both the regional court in Erfurt and the court of appeal in Jena ruled in favour of Mr Dithmar. The case was then brought before the German Federal Court, who has referred two questions to the ECJ:

• whether such an action against a director could be brought under German law where the company was incorporated in another member state, namely the UK; and
• if such an action could be brought, would it infringe the freedom of establishment.

In respect of the first question the ECJ ruled that the German provision was within the scope of Article 4 of the EC Insolvency Regulation, notwithstanding that the company was incorporated in another member state. The ECJ reached this decision notwithstanding that it was arguable the relevant provision was one of German company law rather than insolvency law, and there was no express extension to overseas companies. The ECJ was satisfied that the provision was ‘directly derived or closely connected’ to the insolvency proceedings.

Regarding the second question, the ECJ ruled that the application of the German provision does not infringe the freedom of establishment.

On the basis of the decision of the ECJ, the German Federal Court has meanwhile rejected Ms. Kornhaas’ appeal by judgment dated 15 March 2016 and confirmed the decisions of the lower courts that she is liable to reimburse KMD for the payments made after KMD’s insolvency.

The ECJ ruling in this case is relevant for a much broader range of questions than those addressed by this specific case. It may apply in a multitude of cross-border insolvencies throughout the EU.

This case is a reminder for directors of companies 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, and that they would be well advised to understand the obligations imposed on directors under the laws of those other jurisdictions.