Leiden Law Blog

Liability of a director of an English LTD active in Germany

Posted on by Bob Wessels in
Liability of a director of an English LTD active in Germany

On 10 December 2015 the Court of Justice of the European Union (CJEU) had to decide on the question whether the liability of a director of an English company, that was subjected to insolvency proceedings in Germany, should be determined by English law or by German law. In its judgment the CJEU on 10 December 2015, C-594/14 (Kornhaas v Dithmar) decided: German law. In one strike the Court kills a (mainly German) discussion that lasted over a decade. This is the case. Dithmar is the insolvency liquidator of Kornhaas Montage und Dienstleitung Ltd (‘KMD’), against which insolvency proceedings had been opened on 1 November 2006 by the District Court of Erfurt, Germany. KMD, of which Simona Kornhaas was the director, was registered in the Companies Register in Cardiff (UK) as a private company limited by shares (‘limited company’). However a branch of it was established in Germany and, on that basis, it was entered in the companies register administered by the District Court in Jena. The company was mainly active in Germany, installing ventilation systems and providing associated services. Some five weeks after the opening of insolvency proceedings, between 11 December 2006 and 26 February 2007, Kornhaas had made payments borne by KMD totalling over 110,000 euros. A classical theatre play unrolls: Dithmar wishes to have the money returned back to the estate and therefore sought reimbursement of that sum from Kornhaas on the basis of Paragraph 64(2)(i) of the GmbH-Gesetz (German Act on companies with limited liability). The action was upheld by the Regional Court of Erfurt and confirmed in appeal by the Higher Regional Court of Jena, which gave permission for an appeal on a point of law (‘Revision’) to the German Federal Court of Justice, taking the view that the action brought by Dithmar is well founded under German law and that the purpose of Paragraph 64(2)(i) in essence is to prevent the assets of the insolvent estate being reduced before the opening of the insolvency proceedings and to ensure that those assets are available, so that the claims of all the company’s creditors can be satisfied in the insolvency proceedings on equal terms. The Higher Regional Court states that the provision mentioned is formally integrated in legislation on company law. It therefore falls within insolvency law and is enforceable against the managing director of a limited company. Here the Higher Regional Court observes a conflict in that pursuant to Article 4(1) EU Insolvency Regulation (‘EIR’) the law applicable to insolvency proceedings and their effects is German law, which is the law of the Member State within the territory of which such proceedings are opened. The Court’s dilemma is: ‘There is no agreement in German commentaries on the question whether the first sentence of Paragraph 64(2) of the GmbHG may be enforceable against managing directors of companies established in accordance with the company law of other EU Member States, but having the centre of their main interests in Germany’.

The question for the CJEU is therefore: is Article 4 EIR determinative for such action?

The second question touches upon a larger European debate: case law of the CJEU following from, inter alia, the judgments in Überseering (C‑208/00, EU:C:2002:632) and Inspire Art (C‑167/01, EU:C:2003:512) could be interpreted as meaning that the internal affairs of companies established in one Member State but carrying on their main operations in another Member State are, in the context of freedom of establishment, governed by the company law of the Member State of formation. The application of Paragraph 64(2)(i) GmbHG to managing directors of companies of another Member State could accordingly infringe freedom of establishment within the meaning of Article 49 TFEU and Article 54 TFEU. Thus, the second question is: does an action as referred to above infringe freedom of establishment under Articles 49 and 54 TFEU?

In answering the first question the CJEU held that Article 3(1) EIR must be interpreted as meaning that the courts of the Member State in the territory of which insolvency proceedings regarding a company’s assets have been opened have jurisdiction, on the basis of that provision, to hear and determine an action brought by the liquidator in the insolvency proceedings against the managing director of that company for reimbursement of payments made after the company became insolvent or after it had been established that the company’s liabilities exceeded its assets. The CJEU referred to its judgment of just over a year ago, see C‑295/13, EU:C:2014:2410 (H v H.K.). It observed that it had based that decision on the view, in particular, that a national provision, such as Paragraph 64(2)(i) of the GmbHG, under which the managing director of an insolvent company must reimburse the payments which he made on behalf of that company after it became insolvent, derogates from the common rules of civil and commercial law, because of the insolvency of that company. It can be inferred from this, observes the court, that an action based on that provision, brought in the context of insolvency proceedings, is an action deriving directly from insolvency proceedings and closely connected with them (for a similar effect, see the same judgment, C‑295/13). The CJEU therefore ruled that as such, that provision of national law (one of the effects of which is to require, if necessary, the managing director of a company to reimburse any payments which he made on behalf of that company after it became insolvent), may, in accordance with Article 4(1) EIR be applied by the national court hearing the insolvency proceedings as the law of the Member State within the territory of which the insolvency proceedings are opened (‘lex fori concursus’). The CJEU is not uncertain in answering the second question: for a provision of national law such as Paragraph 64(2)(i) of the GmbHG ‘… it is clear that the latter concerns neither the refusal by a host Member State to recognise the legal capacity of a company formed in accordance with the law of another Member State and having transferred its actual headquarters into the territory of that first Member State, nor the personal liability of administrators where the capital of that company has not reached the minimum amount laid down by the national legislation’. Article 49 TFEU and Article 54 TFEU therefore do not preclude the application of a national provision, such as the one mentioned to a managing director of a company established under the law of England and Wales which is the subject of insolvency proceedings opened in Germany.

As a short comment, the case demonstrates that the inter-relationship between insolvency law and corporate law is a challenging and delicate one. Is a certain matter ‘corporate insolvency law’ or ‘company law’? Examples of relevant issues include the ‘punishing’ effect of insolvency law, the functioning of corporate governance, topics such as (cross-border) director’s liability and corporate governance and insolvency. It seems that different models are used for the drafting of European Regulations and Directives. European company law is based on the synchronisation (Gleichlauf) of the incorporation law and the law that applies to the consequences of transferring the corporate seat in the event that a company migrates (i.e. legally transfers its registered office) to a new jurisdiction (e.g. SE Regulation, 10th EU Directive re cross-border merger; 14th EU Directive re transfer of registered office). The company formally abandons the law of forum State A and enters the law of forum State B. Such a situation prompts the question of whether the creditors remain protected. On the contrary European insolvency law is dominated by a ‘split’ or ‘divergence’. There is a ‘split’ between the law of incorporation of a company and the law applicable to it as a debtor, e.g. the determination of the jurisdiction of a Member States’ court to open insolvency proceedings or decide on related actions. The CJEU sets a firm border post to the legal characterization of a certain ‘hybrid’ legal situation (a specific rule for director’s liability) and with subtlety the European Court invalidates heavily gunned company law arguments.

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