German court rules on managing directors' payments to employees of insolvent company

Background

German insolvency law prohibits managing directors from making payments on behalf of the company after it has become illiquid or over-indebted. This does not apply to payments made when acting with the due care and diligence of a prudent business manager. Such payments are privileged as they do not reduce the insolvency estate and do not disadvantage creditors if they allow the business to continue and enable corporate recovery.

Decision

The Higher Regional Court of Düsseldorf recently clarified that managing directors are prohibited from paying employees’ salaries in the event of insolvency where corporate recovery is unlikely. The court decided that employee salaries do not constitute privileged payments because the performance of work and services does not benefit the insolvent estate if there is no serious chance of corporate recovery - work and services do not increase the value of assets under insolvency proceedings and so do not compensate for the cash outflow.

The court also expressly highlighted that managing directors may not justify salary payments on the grounds that they have followed shareholders’ instructions. The test is whether a prudent business manager acting with due care and diligence would make the payment. Managing directors are obliged to pay compensation to the company if acting in breach of these duties of care.

Comment

Although the court decision (OLG Düsseldorf, ruling of 9 December 2021 – 12 U 23/21) related to the Insolvency Statute as formerly enacted, the decision applies to the amended statute as of 1 January 2022 and sets out the principles by which managing directors should act.

Find out more

To discuss the issues raised in this article in more detail, please contact a member of our Restructuring & Insolvency team.