Federal Court of Justice: Extension of lawyers’ liability in the event of failure to provide insolvency advice

In late 2009, M. formally succeeded his father M.sen. as managing director of M GmbH & Co. KG (hereinafter: KG). At the same time, M.sen. de facto continued to act as a managing director of the KG. From 2009 onwards, the sued lawyer was repeatedly instructed to provide “legal advice to the KG” (the closer details and matters concerned were not disclosed). Three years later, insolvency proceedings were opened against the assets of the KG and, in that context, M. as the formal managing director and M.sen. as a de-facto managing director were held liable for prohibited payments made at a time when a reason to open insolvency proceedings had already existed. An amount of EUR 85,000 was paid to the insolvency administrator by way of settlement. The claimants then asserted a corresponding claim for damages against the lawyer who had been acting at the time (or rather against that lawyer’s liability insurer).

The appeal on points of law brought against the decision of the Higher Regional Court denying the claim for damages was successful, leading to the contested judgment being set aside and the matter referred back to the Higher Regional Court. With its recent decision, the Federal Court of Justice has extended and complemented its previous rulings.

According to the judgment of 26 January 2017 (IX ZR 285/14), an advisor may be liable for delay in filing for insolvency even if he or she was (merely) instructed to compile the annual financial statements for a limited liability company.

In its more recent judgment, the Federal Court of Justice has, in addition, expressly established the general protection afforded by advisory agreements to third parties. The Court argued that even though the advisory agreement existed only with the company, the company’s managing directors must be included in the protective scope of the agreement, according to the principles governing agreements with protective effect for the benefit of third parties.

As a result, even de-facto managing directors may benefit from third-party protection, as they are subject to the same duties (to file for insolvency) as formal managing directors. The third-party protection for managing directors must be determined on a case-by-case basis and depends on how closely the duties to inform and warn are associated with the principal obligation to be performed under the relevant contract.

The ruling of the Federal Court of Justice constitutes another extension of the liability of advisors: managing directors and senior members of supervisory bodies must now be advised of their duties resulting from the possible existence of a reason to open insolvency proceedings as soon as indications to that effect become known or are obvious or ought to be identified by the advisor if properly doing his or her work, provided that it must be assumed that the client is not aware of the possible existence of a reason to open insolvency proceedings.

In light of the increased liability risk, we would recommend that when drafting new advisory agreements or providing advisory services, particular attention should be paid to potential reasons to open insolvency proceedings. This might apply not only to lawyers and tax advisors but also, and in particular, to management consultants, who generally have in-depth insights into the (future) debtor’s figures.