Corporate liability

Bankruptcy’s Back Door

People line up to withdraw cash from an automated teller machine (ATM) outside a National Bank branch in Iraklio on the island of Crete, Greece June 28, 2015. Greece's Prime Minister Alexis Tsipras on Sunday announced a bank holiday and capital controls after Greeks responded to his surprise call for a referendum on bailout terms by pulling money out of banks. REUTERS/Stefanos Rapanis
Changes to German bankruptcy law could make corporate board members more personally liable for their actions.
  • Why it matters

    Why it matters

    A change in German bankruptcy law would make managing directors and supervisory board members of companies more personally liable for payments made during the interval between factual insolvency and the legal petitioning for bankruptcy.

  • Facts

    Facts

    • The government agreed to amend insolvency laws to make it much more difficult for liquidators to retrieve money paid to large creditors shortly before insolvency.
    • Under the plan, liquidators could retrieve much less money for bankrupt estates.
    • The German Supreme Court has pushed for more personal liability in the runup to insolvency filings — although legal experts have opposed the interpretation for years.
  • Audio

    Audio

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The federal government is trying to curb excessive delays in insolvency appeals by limiting the rights of bankruptcy administrators to appeal.

Handelsblatt recently reported on a little-discussed amendment known as “Lex Teldafax” a reference to a discount electricity provider whose downfall was the biggest bankruptcy in German business history. The liquidation of Teldafax also ranks as one of Germany’s longest delayed insolvency filings.

If the plan succeeds, bankruptcy administrators could retrieve much less money on bankrupt estates – money spent before insolvency proceedings began — than they do now.

If the plan succeeds, bankruptcy administrators could retrieve much less money on bankrupt estates than they do now.

That does not just affect insolvency administrators. It also has a direct effect on the managing directors and supervisory board members of insolvent companies.

Managing directors and supervisory board members are personally liable for outgoing payments in the period between factual insolvency and petitioning for bankruptcy.

If an insolvency administrator makes a claim for reimbursement — and if the claim is approved by the court — then the administrator would have to turn over to managers any appeal claims against recipients of outgoing payments.

This is to prevent an unjustified increase in the value of the estate. Then, instead of the insolvency administrator, the manager can appeal and reduce his financial liability.

So any limit of appeal law will automatically lead to a reduction in rights of recourse.

It doesn’t necessarily mean an increase in managers’ liability, because the obligations of managing directors and supervisory board members remain unchanged. But there would be an intensification of liability, because the amount that is not recoverable would increase considerably.

And we are not talking about small sums here: The very financial livelihood of directors and officers is at stake.

The federal Supreme Court has a very broad interpretation of liability during delays in petitioning for insolvency — despite the fact that leading legal experts have opposed it for years. The federal court reaches findings here that are nearly impossible to communicate to legal practitioners.

What managers today actually know the extent and limits of liability?

For example, if a managing director permits company clients to pay off debts by transferring funds to a company account, the manager could be liable with his personal assets for payments made into that account — if at the time of the incoming payment the company was factually insolvent and the account was in the red.

But at the same time, outgoing payments made from such a debit account are free of liability.

And outgoing payments from a credit account appear to provide grounds for liability. But incoming payments made into such an account, unlike a debit account, do not lead to liability.

All this is unclear for many managing directors and supervisory board members who are not trained as lawyers.

A change in case law cannot be expected any time soon, however, because the federal court would then have to admit they were wrong all this time. It needs an external initiative – like the insolvency law reform now in the making.

 

Oliver Lange is head of claims adjustments at the manager liability specialists VOV, based in Cologne. To contact him: gastautor@handelsblatt.com

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