Legal background

Under German criminal law, it is illegal for the management not to fulfil tax obligations when due, whereas under German insolvency law a company must treat all creditors equally when the company is illiquid. By paying taxes after the company becomes illiquid, the management would violate this obligation and prefer the state.

If “regular“ preliminary insolvency proceedings are opened, the management does either not have any power left to decide upon payments (this competence then is shifted to a so-called “strong” preliminary insolvency administrator) or, in case of a so-called “weak” preliminary insolvency administrator, he has to consent to such payments. Therefore, in both scenarios there is no predicament for the management.

In preliminary self-administration proceedings pursuant to sec. 270a Insolvency Code however, German insolvency law bears a dangerous gap, as the management stays in charge of the debtor’s actions. The court only appoints an insolvency monitor, who is responsible for verifying the debtor’s economic situation and monitoring the management. The law does not provide for the order of disposal restraints which could “save” the management from facing diverging legal obligations.

Different approaches to solve this issue

In order to solve this problem, courts follow different approaches: a) The Regional Court Hamburg ruled that the insolvency court could transfer the power of cash management onto the insolvency monitor. Consequently, the management was not competent to make payments anymore (and thus cannot violate criminal or insolvency laws). b) The Regional Court Düsseldorf on the other hand granted an insolvency monitor the right to reserve approval to payments made to the state as insolvency debtor and created a situation like in “regular” preliminary insolvency proceedings.

Comment

In self-administration proceedings the management is primarily obliged to serve all creditors equally, especially by not withdrawing necessary liquidity from the debtor. Allowing it to fulfil tax duties arising from a time before the opening of these proceedings would contradict this obligation and needs to be prevented. To achieve this goal the decision of the Regional Court Hamburg is more appealing, although due to the lack of an explicit ruling its legal basis remains questionable. Yet, unlike the Regional Court Düsseldorf’s ruling it does not violate sec. 270a Insolvency Code which expressly forbids granting rights to reserve approval to the insolvency monitor. Further, it has a lower impact on the management’s rights than the decision from Düsseldorf, as competences are only partly shifted to the insolvency monitor. However, both courts’ approaches succeed in saving the management from facing divergent legal duties.