Insolvency Update: European Court Highlights Potential Risks for Company Directors
09 May 2016
The European Court of Justice has held that a director of an English company can be liable for breach of German company law where insolvency proceedings are opened in Germany.
In the case of Simona Kornhaas v Thomas Dithmar, acting as liquidator of the assets of Kornhaas Montage und Dienstleistung Ltd , the European Court of Justice ("ECJ") has held that a director of an English company which entered into insolvency proceedings in Germany may be liable to reimburse the company under German law for payments made after the company became insolvent.
Mr Dithmar was appointed liquidator of Kornhaas Montage und Dienstleistung Ltd (the "Debtor Company”). Ms Kornhaas was the managing director of the Debtor Company.
The Debtor Company was registered in England and Wales, however it was primarily active in Germany. The German liquidator applied for the reimbursement of payments, of an amount in excess of €110,000, that were facilitated by Ms Kornhaas after the Debtor Company became insolvent but prior to the filing of its formal insolvency. The liquidator, who was appointed in Germany, brought the action according to paragraph 64(2)(i) of the GmbH-Gesetz, which is German legislation relating to limited liability companies. Mr Dithmar was successful in the lower court of Germany. Ms Kornhaas subsequently appealed against that decision and the German Federal court applied to the ECJ to determine if the claim should be governed by German or English law.
The German statutory regime
Under German law a director of a limited liability company must file for insolvency no more than three weeks after the company has become unable to pay its debts. If the directors fail to do so, they can be held personally liable to reimburse the company for any payments made after it becomes insolvent.
The ECJ considered the following two questions:
- Could such an action against a director be brought under German law where the company had been incorporated in the UK but had its centre of main interest ("COMI") in Germany?
- Would this action infringe on the freedom of establishment as prescribed by the Treaty on the Functioning of the European Union (2012/C326/01) ("TFEU")?
Does German law apply in this case?
The ECJ ruled that the German provision that the liquidator was relying on was within the scope of Article 4 of Regulation 1346/2000 (the "EC Insolvency Regulation"), despite the company being registered in a different member state. Under Article 4, the law applicable to insolvency proceedings is the law of the member state within the territory where the insolvency proceedings are opened.
The ECJ was satisfied that the provision was “directly derived” or “closely connected” to insolvency proceedings.
Does the action infringe the freedom of establishment?
The ECJ also considered whether the application of paragraph 64(2)(i) of the GmbH-Gesetz to an entity incorporated in another member state could infringe the freedom of establishment under Articles 49 and 54 of the TFEU.
The ECJ took a very narrow approach and based its decision on previous judgments. In that regard, it held that the German legislation at issue in no way concerns the formation of a company or its subsequent establishment in another Member State and does not affect the freedom of establishment, to the extent that paragraph 64 is applicable only after that company has been formed.
Directors of companies with operations in other member states of the EU need to be aware of the laws which could govern or impact on their liability if the company becomes insolvent.
As insolvency law in each member state of the EU is still, in many instances, relatively different, directors need to take appropriate advice not only in the jurisdiction of the company’s incorporation but also the jurisdiction where the company operates.
For more information, please contact a member of our Dispute Resolution team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.