Change in the law regarding director's personal liability

Background

The German Federal Court of Justice (Bundesgerichtshof) has clarified that a managing director of an insolvent company may not offset any personal liability found against him under German company law against unpaid wages the director claims as a creditor of the insolvent company.

German company law provides that managing directors are obliged to reimburse the company for payments made after the company becomes insolvent or is found to be over-indebted. The purpose of this provision is to prevent depletions in assets prior to the insolvency proceedings. Additionally, under the German Civil Code directors have a duty to act in good faith.

Therefore, where an insolvent company's liabilities are greater than its assets a director has to ensure that the company's assets are restocked so that they are available in the insolvency proceedings to pay off all the company's creditors in an equal manner. The Bundesgerichtshof considers that the ability to offset unpaid wages against the liability for failing to maintain a sufficient level of assets is contrary to the purpose of the provision and the duty to act in good faith.

Commentary

The Bundesgerichtshof's decision upholds the principle that it is contradictory to oblige a director to compensate for an insolvent company's depleted assets on the one hand, but at the same time to give him the opportunity to evade this obligation by offsetting any damages the director has to pay against their own unpaid wages.

Bundesgerichtshof, 10 October 2019, II ZR 425/18

Melanie Jörg