Under German law, when a company becomes insolvent or over-indebted, its directors are obliged to file for insolvency. If they fail to fulfil this duty, according to s 64 German limited liability company Act (GmbHG) from this point in time onwards, they have to compensate the company for those payments which (objectively) would not have been made by a prudent businessman. Such imprudence is presumed.
In practice, s 64 is one of the most powerful tools available to insolvency administrators claiming against directors.
Kornhaas was a UK private company limited by shares, with a branch office in Germany.
Its director authorised payments after Kornhaas became insolvent. After insolvency procedures were opened in Germany, the insolvency administrator filed a s 64 GmbHG claim against the directors.
The ECJ Decision
Art. 4 of the Council Regulation (EC) No 1346/2000 on insolvency proceedings states that the laws of the Member State within whose territory insolvency proceedings are opened govern all insolvency proceedings and their effects.
Accordingly, the ECJ (judgment 10.12.2015 – C-594/14) decided that if insolvency proceedings in respect of an English limited company were opened in Germany, s 64 GmbHG was available as a line of attack against its foreign directors. Although the provision was implemented via a corporate law statute, its material content especially concerns insolvency proceedings.
The Court took the view that:
- Art. 49, deeming it unlawful to restrict the freedom of establishment of Europeans in other Member States, and
- Art. 54, determining equal treatment of companies of a Member State with their principal place of business within the Union and nationals
do not hinder such claims.
S 64 is applicable to foreign companies within the EU.
The ECJ ruling supports the operation of s 64, which is intended to prevent the dissipation of a distressed company’s assets before the opening of insolvency proceedings. The aim is to ensure that corporate assets are available to satisfy creditors.
It seems just to apply the provision equally to directors of foreign debtors as well as to national debtors, if insolvency proceedings are opened in Germany.