New rules on directors’ liability in Germany

The German Federal Court of Justice has tightened its grip on company directors again. In a recent judgment on directors’ liability in insolvency situations, the Court clarified the scope of sections 60- 61 of the German Insolvency Act.

In regular insolvency proceedings, the debtor’s right to manage and transfer his property is vested in the insolvency administrator who has the duty to satisfy the different groups of creditors as far as possible. The administrator has the power to take possession of the property and is entitled to sell or dispose of it as may seem to him expedient. If the administrator acts in breach of his duty he can become liable to all parties of the insolvency proceedings on basis of sections 60-61.

However, according to section 270 of the German Insolvency Act, in special debtor-in-possession proceedings the court does not appoint an insolvency administrator. It is the debtor who remains in charge of the insolvency estate, acting under the supervision of a custodian. If the debtor is a company, the question is whether its directors can be held liable not only by their own company (as usual), but by all parties to the insolvency proceedings on basis of section 60-61 of the Act. The Court has answered this question in the affirmative. This exposes directors who are managing their company as debtor-in-possession to higher risks of personal liability.

German company directors and their advisors are therefore more likely to face claims brought by third parties.

Bundesgerichtshof, 26 April 2018, IX ZR 238/17