In its ruling dated 10 December 2015, case ref. C-594 / 14, the ECJ decided that the liability of a managing director for prohibited payments following insolvency under section 64 of the GmbHG is a provision covered by insolvency law and therefore falls within the scope of application of the EU Insolvency Regulation.

In the case before the Court, the liquidator of a private company limited by shares registered in Wales, which had operated mainly in Germany and for which primary insolvency proceedings were opened in Germany, was therefore able to claim reimbursement of prohibited payments from the former managing director in accordance with section 64 of the GmbHG.

According to section 64 of the GmbHG, a managing director is personally liable for the company’s payments if the company is already insolvent at the time the payments are made, i.e. is illiquid (unable to pay its due liabilities) or over-indebted, and the payments are not compatible with the diligence required of a prudent managing director. The benchmark for the diligence of a prudent managing director is set high in this context. The payment of employee contributions to social insurance is one example of permitted payments, since failure to pay these may result in criminal liability on the part of the managing directors.

The purpose of the provision is to protect the creditors of a company from any reduction in future insolvency assets. The aim is also  to ensure that managing directors comply with their duty to file for insolvency within three weeks of becoming illiquid or over-indebted, pursuant to section 15a of the German Insolvency Code.

Under Article 4 of the EU Insolvency Regulation, the law applicable to primary insolvency proceedings is that of the Member State within the territory of which such proceedings are opened (“lex fori concursus”). This affects in particular the provisions on opening and implementing insolvency proceedings, as well as the rules aimed at regulating the consequences of breaches of the provisions related to opening the proceedings and to the duty to file for insolvency.

In the ECJ’s opinion, which is also shared by the German Federal Court of Justice, section 64 of the GmbHG therefore represents an insolvency law provision, even though it is formally enshrined within the law on limited companies, i.e. the GmbHG. As such it falls within the scope of application of Article 4 of the EU Insolvency Regulation and is applicable in German primary insolvency proceedings.

This is a positive decision from the creditors’ perspective, since it creates legal certainty and is likely to increase the insolvency dividend for creditors in future. The decision has also been welcomed by insolvency administrators.

The background to the problem is that a large number of German companies chose foreign legal forms such as a UK limited company in the past in order to benefit from a limited liability structure without having to provide a significant minimum amount of capital, but with Germany remaining the focus of their business activities. The number of companies in Germany using foreign company forms did fall with the introduction of the entrepreneurial company (with limited liability), or “UG”, in 2008, which can be founded with less share capital than the EUR 25,000 required for a “GmbH” limited company.

The judgment primarily affects a smaller number of old cases. However, there is good reason to assume that the basic principles behind the judgment can also be applied to other foreign company forms, provided that the requirements for opening German primary insolvency proceedings are met. Managing directors of foreign companies with significant operations in Germany should therefore be aware of the risk of potential liability.