Germany: no d&o protection for gmbh managing directors for payments after maturity of insolvency

If a Gmbh makes payments after it becomes insolvent, the Managing Directors are personally liable vis-à-vis the company, regardless of the internal allocation of responsibilities. They are not liable if the payment was consistent with the due diligence of a prudent businessman. This legal situation applies equally to the members of the Board of Directors of Aktiengesellschaften [joint-stock companies].

Decision of the OLG Düsseldorf
In a current, fundamental decision important for practice, the Higher Regional Court of Düsseldorf determined on 20/07/2018 (ref. no 4 U 93/16), that there is no initial obligation for Directors and Officers Insurance (D&O for short), if a claim is asserted against the Managing Director due to such a payment. Such situations occur when the management is late in filing for insolvency, and the court-appointed insolvency administrator asserts the claim for compensation of the GmbH against the Managing director personally in accordance with Section 64 GmbHG [Limited Liability Companies Act].

The court justifies its decision on the grounds that there is no damage eligible for compensation in accordance with the D&O insurance conditions. If a Gmbh still makes payments after it becomes insolvent, any liabilities of the company are generally extinguished, which means that no loss occurs in the usual meaning. In the opinion of the court, the associated impairment of the creditor interests (which follows from the withdrawal of the liability mass) does not constitute any damage according to the D&O insurance conditions. In such cases, the concept of damage in insurance law should be narrowed down as a so-called "claim of its own kind" in favour of the D&O insurance.

Practical recommendations
The decision as to whether and when an insolvency application is to be made, normally poses great challenges for the management. After the OLG decision, there is no D&O protection if payments are made after the company has become insolvent. Personal liability within the framework of a subsequent insolvency can usually only be avoided if the Managing Director succeeds in proving the legality of the payments, in other words that the payment was made with the diligence of a prudent businessman and the insolvency application was submitted in a timely manner. The so-called business judgement rule is extremely important in this process. It is decisive whether reliable, current financial and liquidity figures are available in accounting/controlling and to what extent future payments from a business plan prepared by management are predictable.

Early identified crisis situations can often be managed over a longer period without an insolvency application if appropriate preparations are made in the departments and processes are defined. Management must focus on the possibility of insolvency in order to be able to provide exculpatory evidence by means of particularly precise documentation. Difficult cases occur in corporate structures if, for example, a dependent subsidiary in the crisis is still making payments at the instigation of its controlling parent company.

Author: Thomas Scharpf