Former managing director’s extended liability for failure to file for insolvency – Federal Court of Justice judgment of 23 July 2024, case no. II ZR 206/22

In the first instance, the regional court found for the claimant only with regard to the three investment contracts that had been entered into prior to the deceased managing director’s dismissal.

During the subsequent appeal proceedings, on 20 October 2020, insolvency proceedings were opened against the estate of the deceased former managing director. As a result, the appeal proceedings were interrupted in accordance with Section 240 of the German Code of Civil Procedure. The claimant filed a claim in the amount of EUR 73,100 as a “damages claim” to be entered into the insolvency schedule; this claim was disputed by the insolvency administrator and denied by the defendant.

Upon resumption of the interrupted proceedings, the court of appeal also found for the claimant with regard to the fourth investment contract. With her appeal on points of law, the defendant continued to pursue her motion to dismiss the entire action.

The Federal Court of Justice overturned the judgment on appeal in its entirety. It held that the legal dispute was still interrupted in part as the proceedings had not been validly resumed and that the court of appeal should not, therefore, have made a decision on the merits, and it also pointed out that, furthermore, the motions had not been correctly adjusted.

The Federal Court of Justice found that the court of appeal had overlooked the fact that the legal dispute had been validly resumed in part only, namely only with regard to the claimant’s principal claims (claim for payment and claim for indemnification), as could be seen from the interpretation of the claimant’s claim, whereas no claim had been filed with regard to the interest and legal fees. This would, however, have been a prerequisite for the resumption of the legal dispute, according to a Senate decision made in a parallel judgment (case no. II ZR 222/22).

The Federal Court of Justice stated that according to its rulings, such a partial resumption of an interrupted legal dispute was only possible if there was no chance of contradictory decisions being issued with regard to the part resumed and the part not resumed. Even though it was not possible to rule out that risk in the case at issue, a partial resumption had nevertheless to be permitted, as the claimant’s interest in effective legal protection prevailed. One of the reasons given by the Federal Court of Justice to justify this view was that the claimant had to be put on an equal footing with creditors whose claims were not yet in litigation at the time the proceedings were opened and for whom it was therefore no problem at all to file only part of their claims in order for them to be entered into the schedule and, should those claims be denied by the creditor, bring a new action to have them established and entered into the schedule. In light of that fact, however, creditors whose claims were already pending in court at the time the insolvency proceedings were opened had also to be able to pursue solely the claims filed in the insolvency proceedings.

Finally, the court of appeal should also have taken into consideration that, as a result of the insolvency proceedings against the deceased debtor’s estate, the motions should have been changed from motions for performance to motions for a declaratory judgment establishing the claims to be entered into the schedule. The fact that this did not happen was another reason why the judgment could not be upheld.

With regard to the removed managing director’s liability, the Federal Court of Justice confirmed that he was also liable for losses that were only incurred after his removal from office, provided there was still a causal relationship between his failure to file for insolvency and the losses incurred. The Senate thus expressly rejected the notion of limiting the managing director’s liability to losses incurred prior to the termination of his office, or within the three-week period stipulated in Section 15a (1) of the German Insolvency Code (old version).

As a result, the removed managing director’s liability also includes new creditors who did not enter into contracts with the company until after the managing director’s removal from office if and as long as the risk situation created by his failure to file for insolvency continues to exist and, therefore, has caused or contributed to the damage caused by delay in filing for insolvency.

The Federal Court of Justice held that the change in management in the case at issue ultimately only led to the new managing director becoming liable in addition to the removed managing director, also pointing out that the question of whether one of the managing directors was “closer to the damage” than the other was only relevant for internal compensation purposes.

The Federal Court of Justice stated that the removed managing director could only have ceased to be liable if the risk created by his failure to file for insolvency had no longer produced any effect at the time the new creditor entered into the contract. This would have been the case, for example, if the company had made a sustained recovery after the breach by the managing director of his duty to file for insolvency and had only become insolvent again after the managing director’s removal from office. As this was not the case, however, the managing director had extended liability.

The judgment of the Federal Court of Justice can be summarised as follows:

• Creditors who have already asserted their claims in court prior to the opening of insolvency proceedings can also file only part of these claims in order to have them entered into the schedule and resume the legal dispute only with regard to that part.
• Upon resumption of the interrupted legal dispute, the motions must be changed to motions for a declaratory judgment establishing the claims to be entered into the schedule.
• A managing director is liable for losses incurred by new creditors after his removal from office if the risk situation that was caused by his failure to file for insolvency continues to exist at the time the loss is incurred.
• A change in management does not lead to the former managing director’s extended liability being interrupted but can instead, if the new managing director also acts in a manner giving rise to liability, result in the new managing director being liable in addition to the former managing director.
• A removed managing director does not cease to be liable unless and until the company achieves a sustainable economic recovery following his removal from office, thus putting an end to the risk situation caused by him.

In the case at issue, the Federal Court of Justice overturned the judgment of the court of appeal mainly due to the procedural errors regarding the resumption of the proceedings and the adjustment of the motions. In the reopened proceedings, the parties now have the opportunity to adjust their motions and supplement their submissions.