In its decision of 8th November 2007,
the German Federal Court of Justice (Bundesgerichtshof, Abbr.: BGH)
affirmed the criteria for defining the COMI of an individual pursuant
to Article 3 sec. 1 of the EC Regulation on Cross Border Insolvencies
on the basis of a more or less special case: the insolvent debtor had a
registered residence in Luxemburg where the centre of his main
interests was situated. Then he was taken into custody pending trial in
a German prison (Untersuchungshaft) and applied for the commencement of
insolvency proceedings over his assets to the (locally competent)
German insolvency court.
In its decision, the BGH clarifies that being in custody is not sufficient to change and establish a new COMI of an individual as the mere fact of being in custody before or pending trial is not sufficient to establish a new residence. In this case, the debtor had kept this residence in Luxemburg also during the time he was kept in custody. Hence, there was not even a shadow of a doubt that the COMI of this individual was in Luxemburg and not in Germany. Consequently, this decision clarifies that the residence is a very strong criteria to define the COMI of an individual, that this criteria is very hard to overrule and, in particular, that it is not sufficient to be in custody to effectively establish a new residence and therefore, a new COMI.
Nicole Müller
German Attorney-at-Law, Schultze & Braun
German Federal Court of Justice eases burden of personal liability for managing directors
With the decision of 14th May 2007, the German Federal Court of Justice has considerably altered its precedents on the personal liability of managing directors confronted with a crisis of the company.
Up until this decision, the managing director of a company facing insolvency was confronted with a no-win situation: According to the various codes pertaining to corporations with limited liability (e.g. sec. 64 para 2 GmbHG [law pertaining to companies with limited liability]) the managing directors are obliged to reimburse the company for any payments effected after the onset of the company’s insolvency. On the other hand, sec. 266a StGB (German Criminal Code) provides for a punishment of up to five years imprisonment if the managing directors do not pay their employee’s compulsory contributions to the social welfare system. As a consequence, the managing director could either pay the amount necessary out of his own pockets or face criminal charges.
With the above cited decision, the German Federal Court of Justice eased this burden: the court decided that payments to social security will fall under the exception to sec. 64 para 2 GmbHG contained in its second sentence stating that the managing director will not face personal liability for payments which are in accordance with the duty of a prudent businessman. Therefore, the Court’s decision now enabled the managing director to contribute to the social security systems without having to fear to have to be personally held liable for such payments.
On the other hand, this decision will most probably lead to a more rigorous approach of the social security institutions to “collect” outstanding contributions - on the long run this might ultimately impose a priority system regarding the creditors through the backdoor which has originally been abandoned with the introduction of the new German insolvency act in 1999.
Dr Volker Beissenhirtz, LL.M. (London)
German Attorney-at-law, Schultze & Braun, Berlin, London
German Federal Court of Justice: Blanket assignments are in general only voidable as congruent coverage
German Federal Court of Justice, judgement of 29th November 2007
According to a recent decision of the German Federal Court of Justice, blanket assignments regarding receivables coming into existence in the future are in general only voidable as congruent coverage.
The defendant bank granted a credit facility to a company later falling into insolvency. The facility was secured by an already previously agreed blanket assignment, by means of which the debtor assigned all its existing, future and conditional receivables from deliveries of goods and services to the bank to secure all claims arising from the business relationship with the bank. The debtor reduced the debit balance by about EUR 930,000 during the three-month period preceding the initiation of insolvency proceedings. The plaintiff administrator requested the re-payment of the amount by which the debit balance had been reduced and considered the set-off declared by the bank to be impermissible on the ground that the assignment was contestable as so-called incongruent coverage.
The German Federal Court of Justice decided on the question regarding the extent to which blanket assignments should be treated as congruent or incongruent cover. The distinction is particularly important for credit institutions that have agreed on such security with borrowers. Any incongruent cover (sec. 131 InsO) in the month immediately preceding the application for insolvency proceedings allows the insolvency administrator to avoid such transaction without any further conditions. The higher regional case law on this issue was contradictory.
In its bank-friendly ruling, the German Federal Court of Justice states that in principle a blanket assignment has to be considered as a congruent coverage since the amount of the receivables to be assigned to the bank in future as a result of the blanket assignment has already been abstractly determined in a way that is legally binding. It is a condition, however, that the ad rem business has already been completed and also that the legal aspects of the debt to be assigned have already been duly appropriated as far as possible to the contract. The assigned receivables must at least be determinable. The German Federal Court of Justice considered that this condition had been met in the case under consideration (blanket assignment according to a printed form). However, the German Federal Court of Justice ruled that the realisation of future receivables resulting from performance actions such as production of the work or the handover of the item purchased remained contestable as distinct transactions (congruent coverage under § 130 Abs. 1 InsO). The credit institution could certainly not invoke the cash transaction privilege (sec. 142 InsO) (obiter dictum).
Hence, the question remains under which conditions the cash transaction-exemption will be accepted.
Dr Rainer Riggert
German Attorney-at-law, Schultze & Braun
In its decision, the BGH clarifies that being in custody is not sufficient to change and establish a new COMI of an individual as the mere fact of being in custody before or pending trial is not sufficient to establish a new residence. In this case, the debtor had kept this residence in Luxemburg also during the time he was kept in custody. Hence, there was not even a shadow of a doubt that the COMI of this individual was in Luxemburg and not in Germany. Consequently, this decision clarifies that the residence is a very strong criteria to define the COMI of an individual, that this criteria is very hard to overrule and, in particular, that it is not sufficient to be in custody to effectively establish a new residence and therefore, a new COMI.
Nicole Müller
German Attorney-at-Law, Schultze & Braun
German Federal Court of Justice eases burden of personal liability for managing directors
With the decision of 14th May 2007, the German Federal Court of Justice has considerably altered its precedents on the personal liability of managing directors confronted with a crisis of the company.
Up until this decision, the managing director of a company facing insolvency was confronted with a no-win situation: According to the various codes pertaining to corporations with limited liability (e.g. sec. 64 para 2 GmbHG [law pertaining to companies with limited liability]) the managing directors are obliged to reimburse the company for any payments effected after the onset of the company’s insolvency. On the other hand, sec. 266a StGB (German Criminal Code) provides for a punishment of up to five years imprisonment if the managing directors do not pay their employee’s compulsory contributions to the social welfare system. As a consequence, the managing director could either pay the amount necessary out of his own pockets or face criminal charges.
With the above cited decision, the German Federal Court of Justice eased this burden: the court decided that payments to social security will fall under the exception to sec. 64 para 2 GmbHG contained in its second sentence stating that the managing director will not face personal liability for payments which are in accordance with the duty of a prudent businessman. Therefore, the Court’s decision now enabled the managing director to contribute to the social security systems without having to fear to have to be personally held liable for such payments.
On the other hand, this decision will most probably lead to a more rigorous approach of the social security institutions to “collect” outstanding contributions - on the long run this might ultimately impose a priority system regarding the creditors through the backdoor which has originally been abandoned with the introduction of the new German insolvency act in 1999.
Dr Volker Beissenhirtz, LL.M. (London)
German Attorney-at-law, Schultze & Braun, Berlin, London
German Federal Court of Justice: Blanket assignments are in general only voidable as congruent coverage
German Federal Court of Justice, judgement of 29th November 2007
According to a recent decision of the German Federal Court of Justice, blanket assignments regarding receivables coming into existence in the future are in general only voidable as congruent coverage.
The defendant bank granted a credit facility to a company later falling into insolvency. The facility was secured by an already previously agreed blanket assignment, by means of which the debtor assigned all its existing, future and conditional receivables from deliveries of goods and services to the bank to secure all claims arising from the business relationship with the bank. The debtor reduced the debit balance by about EUR 930,000 during the three-month period preceding the initiation of insolvency proceedings. The plaintiff administrator requested the re-payment of the amount by which the debit balance had been reduced and considered the set-off declared by the bank to be impermissible on the ground that the assignment was contestable as so-called incongruent coverage.
The German Federal Court of Justice decided on the question regarding the extent to which blanket assignments should be treated as congruent or incongruent cover. The distinction is particularly important for credit institutions that have agreed on such security with borrowers. Any incongruent cover (sec. 131 InsO) in the month immediately preceding the application for insolvency proceedings allows the insolvency administrator to avoid such transaction without any further conditions. The higher regional case law on this issue was contradictory.
In its bank-friendly ruling, the German Federal Court of Justice states that in principle a blanket assignment has to be considered as a congruent coverage since the amount of the receivables to be assigned to the bank in future as a result of the blanket assignment has already been abstractly determined in a way that is legally binding. It is a condition, however, that the ad rem business has already been completed and also that the legal aspects of the debt to be assigned have already been duly appropriated as far as possible to the contract. The assigned receivables must at least be determinable. The German Federal Court of Justice considered that this condition had been met in the case under consideration (blanket assignment according to a printed form). However, the German Federal Court of Justice ruled that the realisation of future receivables resulting from performance actions such as production of the work or the handover of the item purchased remained contestable as distinct transactions (congruent coverage under § 130 Abs. 1 InsO). The credit institution could certainly not invoke the cash transaction privilege (sec. 142 InsO) (obiter dictum).
Hence, the question remains under which conditions the cash transaction-exemption will be accepted.
Dr Rainer Riggert
German Attorney-at-law, Schultze & Braun