Background

In Germany, corporate entities are not allowed to act as insolvency administrators (sec 56 I 1 Insolvency Code). Instead, the insolvency court selects and appoints experienced individuals.

Supporters of this modus operandi argue that the appointment of corporates as insolvency administrators would increase liability risks and could lead to conflicts of interest, as the shareholders of the corporation might interfere with the interests of the creditors. The insolvency court is accustomed to working with its cadre of experienced individuals. Their relationship is mainly built on trust. Changing accustomed practice would lead to disruption.

Infringement of fundamental rights

The Federal Constitutional Court recently held that the exclusion of corporates in this manner does not infringe constitutional rights.

Although this exclusion infringes on the freedoms associated with choosing an occupation (Art. 12 German Constitution) this was considered justifiable under constitutional law. In its reasoning, the Federal Court focused on the effectiveness of the insolvency court’s supervision of the administrator. This was better achieved when natural persons were appointed. Individuals were also more likely to maintain the independence of the profession.

The case has affirmed that corporate entities may support insolvency administrators with the provision of research, information and personnel resources.

As such, the Federal Court has taken the view that companies have not been restricted in entirety from participating in the handling of insolvency cases; their constitutional rights have therefore been preserved. Their partial exclusion does not violate the constitutional right of equal treatment (Art. 3 para 1 German Constitution). The bar on corporates serving as administrators is justified and serves a higher purpose.

Comment

In our view, the Federal Court’s reasoning is not particularly persuasive.

Corporate entities may be insured like natural persons, and this provides another line of defence.

Furthermore, it is not convincing that the appointment of a natural person (in practice being supported by advisors and staff) enhances quality and continuity. In a corporate entity, the management controls the quality of the offering, and could equally be held accountable by the insolvency court.