German Federal Court of Justice extends limited partner liability

The German Federal Court of Justice (BGH) has ruled that a limited partner is not liable for debts incumbent on the insolvency estate incurred by an administrator in insolvency proceedings.

However, it was unclear who would be liable for debts incumbent on the insolvency estate pursuant to section 55(4) of the German Insolvency Act (the Act) incurred in preliminary insolvency proceedings. A recent BGH ruling on 28 January 2021 (IX ZR 54/20) now provides clarity.

Case summary

During preliminary insolvency proceedings, the debtor sold goods with the consent of the "weak" provisional insolvency administrator. This created a trade tax receivable, which was classified in the opened insolvency proceedings as a debt incumbent on the insolvency estate (section 55(4) of the Act).

Key findings from the case were:

• The BGH ruled that a limited partner is generally liable for all partnership liabilities, including those incumbent on the insolvency estate established by the partnership as debtor.
• Liability is only excluded when the debtor's right to manage and transfer its property is vested in the ("strong" provisional) insolvency administrator. As a result of this, the limited partner loses the possibility of influencing the development of the partnership. 
• However, according to the BGH, the sale of goods by the debtor with the consent of the "weak" provisional insolvency administrator is still within the sphere of influence of the partners. This means that the limited partner is liable for the resultant trade tax receivable.

Key takeaways

The current ruling clarifies that the limited partner's liability should not be based on formal criteria but on their ability to exert influence and manage risk. The principles of this ruling can also be applied to the case of (provisional) self-administration, which was not decided here. Since the partners have no influence on the debtor's management pursuant to section 276a(1),(3) of the Act, limited partner liability is excluded. 

Find out more

To discuss the decision in detail, please contact a member of our Restructuring & Insolvency team.