Where an attorney represents several creditors in an insolvency proceeding and in the event of a conflict-of-interest favours one over the other, it may result in a breach of trust (Parteiverrat), a criminal offence that cannot be defended as a justifiable conflict of duties (rechtfertigende Pflichtenkollision).
Decision
The German Court of Appeal considered a potential breach of trust committed by an attorney who represented seven different insolvency creditors. The attorney's aim was to represent enough creditors to dismiss the currently installed insolvency administrator. At the creditors’ meeting the attorney admitted certain claims and contested others, among them a claim of one of his own clients.
The lower court found him guilty of breach of trust but the Court of Appeal overruled the verdict on grounds that the evidence was not properly considered at first instance and referred the proceeding back to the lower court. The Court made it clear that the lower court should consider whether a breach of trust could be committed even where the different mandates had distinct scopes (the attorney's central argument). The Court of Appeal emphasised that in the event of an obvious conflict of interest the attorney is obliged to resign the mandate.
Key takeaways
This decision is important for German attorneys and their creditor clients as it is common in larger insolvency proceedings with diverse creditor interests to pool majorities with one attorney.
While this practice is completely legitimate and enhances the efficiency of the insolvency proceeding, the Court of Appeal has highlighted the dangers for the pooling attorney and their clients.
Find out more
To discuss the issues raised in this article in more detail, please contact a member of our Restructuring & Insolvency team.
(Court of Appeal Celle, decision from 2 October 2024 - 3 ORs 18/24).
