Directors' liability for payments made to companies in insolvency

Background

According to German law, managing directors of limited liability companies are personally liable for payments that have been made despite insolvency. This can lead to widespread liability.

For example, where third party payments are made to a business account of the insolvent company, if the account has a negative balance, a director may be liable, since such a payment constitutes a payment by the insolvent company to the bank. Therefore, a managing director should principally direct payments to a credit account of the company, in order to avoid liability.

There are exceptions to this, for example, if the bank is secured by collateral, eg a blank assignment (Globalzession). The Higher Regional Court of Hamburg has recently made a further exception, where a third party payment held to be an advance payment in favour of the insolvent company.

Case summary

• The court held that there is no liability, because if the managing director had acted in accordance with his duties (ie filed for insolvency and/or directed the payments to a credit account) the insolvent company’s business partners would not have made the advance payment at all.
• The court thought that the business partners would no longer have made any advance payments, if they had been told to pay to a new bank account, as this would have indicated that the company was already bankrupt.
• The liability for payments that have been made despite insolvency must not lead to an enrichment of the insolvency estate, which would be the case if the managing director had been liable for the advance payments of the company's business partners.

Practical relevance

The ruling shows that the rules on liability for payments made during insolvency are complex. Every managing director should redirect payments to accounts held in credit, if the company is illiquid.

Nevertheless, the details of liability remain uncertain. As the court admitted an appeal, it is unclear, if the Federal Court of Justice (BGH) will accept the decision making of the Higher Regional Court.