The “weak” German preliminary insolvency administrator in business continuation

Quick read

The German Federal Court of Justice (the Federal Court) has considered whether a so-called "weak" preliminary insolvency administrator, entrusted to continue business operations with the management during the preliminary proceeding, may take actions in the interest of these operations, where it is unclear whether the debtor has discontinued the business.

Background

An insolvency administrator of a freight-forwarding company sued his predecessor, the preliminary insolvency administrator, for making payments related to operating costs including gas and custom duties. He was installed as a preliminary insolvency administrator with power only to supervise the management of the company and to approve the management’s decisions and was not in full control of business operations.

The previous court instances regarding this case found that the preliminary insolvency administrator acted in accordance with his duties because the insolvency court entrusted him with the continuation of the business. The only issue was that the preliminary insolvency administrator had, only days after the payments were made, concluded that the general business operations of the company did not actually exist.

Decision

The Federal Court held him liable for the payments emphasising that while the weak preliminary insolvency administrator may generally be asked to continue business operations, he may not actually run the operation himself unless specifically entrusted to make such payments (by individual authorization - Einzelermächtigung). Where it is unclear whether the business is in operation, payments must be put on hold unless they cannot be postponed.

Key takeaways

This is very important clarification as it is often unclear in preliminary insolvency proceedings what the status of the business is. The potential conflict between the preliminary insolvency administrator's obligations to continue business operations and to protect the interests of general creditors should be decided in favour of the latter.