(Federal Constitutional Court, judgment dated 12 January 2016, case ref. 1 BvR 3102/13)
Germany’s Federal Constitutional Court has now ruled on whether the exclusion of legal entities from being appointed as insolvency administrator is constitutional or not in its judgment dated 12 January 2016. The ruling was triggered by a constitutional complaint from a firm of lawyers specialising in insolvency administration, which had previously argued in vain before the civil courts for inclusion by a local court on its pre-selected list of insolvency administrators.
Insolvency administrators in Germany are appointed by the local courts, acting as insolvency courts. These courts typically have a pre-selected list from which a candidate that appears suitable to them is chosen. Admission to these pre-selected lists is not governed by statute and is largely at the discretion of the insolvency courts. There is no separate professional requirement for acting as an insolvency administrator. Rather, candidates must demonstrate that they have the required knowledge and the necessary expertise and independence. Most of the insolvency administrators appointed are also lawyers, although no specific professional training or prior experience is required by law.
The Federal Constitutional Court rejected the law firm’s constitutional complaint. The exclusion of legal entities from the insolvency courts’ pre-selected lists and thus effectively from being appointed as insolvency administrators is constitutional in the Court’s opinion. Although the Court held that the complainant was affected in terms of its basic right to occupational freedom under Article 12 (1) of the German Basic Law, this infringement was justified in the Court’s view.
It stated that the aim of insolvency proceedings was to ensure the best possible settlement of creditor claims and to preserve jobs. The Court held that ensuring effective proceedings aimed at enforcing established claims forms part of the functional administration of justice and is included in the constitutional guarantee of effective legal protection. As a result, the Court took the view that effective insolvency proceedings not only benefit the individual creditors but are also in the public interest.
The current provision in section 56 sub-section 1 (1) of the German Insolvency Code to which the complainant’s action related restricts selection to natural persons not least by virtue of its wording. Restricting the selection of insolvency administrators to natural persons was a controversial aspect during the legislative process. The fact that lawmakers ultimately decided on the restriction was based on the increased risks related to supervision, liability, independence and possible conflicts of interest seen to be associated with the appointment of legal entities.
The Federal Constitutional Court has now confirmed the status quo. It stated that effective supervision of insolvency administrators by the insolvency court is a legitimate purpose of the statutory provision. The Court held that the specific type of supervision is at the discretion of the insolvency court, which is required to take into account the assessment of the personal and professional qualities of the insolvency administrator in its decision, as well as the existing trusted relationship between the insolvency administrator and the insolvency court. The effectiveness of that supervision would be cast in doubt if there were no direct contact person authorised to take decisions on all matters, due to a legal entity’s organisational structure, the Court said. Since a legal entity can replace its legal representatives without the insolvency court having any influence over such a change, the Court decided that there is no permanent and reliable basis for determining suitability.
The Court also believed that the proposed structure whereby a legal entity is appointed as insolvency administrator and at the same time a natural person is appointed as the executive administrator with personal responsibility is unsuitable. This would result in the legal entity holding the office of administrator without actually performing the associated tasks, while the natural person would be performing the associated tasks without actually holding the office of administrator. The legal entity would thereby be reduced to a mechanism for restricting the liability of the natural person.
Closer monitoring of insolvency administrators would also be impossible in the Court’s view, since the insolvency courts do not have the required staff capacity.
Lastly, the complainant and other companies specialising in insolvency administration could also largely achieve the same commercial result within the scope of existing business practice, i.e. the provision of personnel and services for insolvency administrators, as would be the case with direct appointment as the insolvency administrator.
The Federal Constitutional Court has confirmed the existing practice of restricting admittance to the office of insolvency administrator to natural persons. The decision helps to draw a line under a long-lasting discussion in this regard. It is also hardly surprising, since quite apart from the civil case law on this point virtually all the professional associations involved have always assumed that the existing arrangement is constitutional.