In the following article, two current judgments will be presented, which have already generated a wide response in the literature and have significantly exacerbated the risk position of decision-makers in the crisis.
Analogous application of §§ 60, 61 in self-administration proceedings
With a ruling of April 26, 2018, the Federal Court of Justice made it clear that a restructuring manager is subject to the same liability rules as an insolvency administrator in the context of self-administration of an insolvent company. Sections 60, 61 apply analogously. The restructuring manager is personally liable to all those involved in the bankruptcy proceedings for breaches of duty (Section 60) and to mass creditors for the non-fulfillment of mass liabilities that are established by the self-administrator (Section 61). The Federal Court of Justice justifies its decision with the fact that a manager in the insolvency of a self-administered company performs the original tasks of an insolvency administrator in addition to his organizational powers. Therefore, he must meet the same liability as an insolvency administrator. In addition to this, the Federal Court of Justice to curb liability analogous to §§ 60, 61 as an effective instrument to (especially) the “increased willingness to take risks” in self-administration.
In practice, the Federal Court of Justice ruling means that self-administration – which is actually intended to replace standard insolvency as the leading form of insolvency administration in America – becomes less attractive for managing directors due to the considerable personal liability risks. If the restructuring does not succeed, business partners such as banks or suppliers can use the self-administrator as a new, potentially liquid substitute debtor in the future.
Federal Court of Justice & Decision Making
The Federal Court of Justice does not express itself on the question of whether the manager is entitled to entrepreneurial decision-making leeway in the event of insolvency. However, if you consider the protective purpose of § 60, 61, the Business Judgment Rule (above under BI) should not apply. Whether in the case of several organs only the Chief Restructuring Officer or the restructuring manager in accordance with §§ 60, 61 is liable or joint and several liability of all organs is given, the BGH also left open. To reduce liability in practice, it is advisable to bring a professionally experienced advisor on board and to obtain the consent of the creditors’ meeting before carrying out particularly significant legal transactions. This does not guarantee faultless self-administration, but at least the management of the self-administered company can use it to mitigate its own liability risks and consult the restructuring manager in the event of a breach of duty to bring a technically experienced advisor on board and to request the approval of the creditors’ meeting before carrying out particularly important legal transactions.
Although this does not guarantee that self-administration will be carried out correctly, the management of the self-administered company can use it to mitigate its own liability risks and, in the event of a breach of duty, call on the restructuring manager. to bring a technically experienced advisor on board and to request the approval of the creditors’ meeting before carrying out particularly important legal transactions. This does not guarantee faultless self-administration, but at least the management of the self-administered company can use it to mitigate its own liability risks and consult the restructuring manager in the event of a breach of duty.
Higher Regional Court: No D&O insurance cover for “replacement claims of their own kind”
The Higher Regional Court of Düsseldorf decided on July 20, 2018 that claims of the insolvency administrator against the insured managing director for reimbursement of prohibited payments that were made after the company was ready for insolvency in accordance with Section 64 Private Limited Company is covered by a D&O insurance policy maintained by the company. In order to justify its decision, the Düsseldorf Higher Regional Court interprets the insurance conditions and states that the claim for compensation under Section 64 is not a claim for damages in the sense of the insurance conditions, but rather a “compensation claim of its own kind”. A prerequisite for the establishment of a benefit claim from the D&O insurance is a financial loss to the company, which is not triggered by payments after bankruptcy, because the payment is regularly offset by the extinction of a liability of the company that has been repaid. The payments are only disadvantageous for the company’s creditors, as their (mass) claims are reduced.
D&O insurance perspectives
The sense and purpose of D&O insurance, however, is not to protect the interests of the creditors. Furthermore, the claim for compensation according to § 64 cannot be compared with a claim for damages, since it depends solely on the payment made and various objections that can be raised under the law on damages (e.g. contributory negligence) cannot be considered in § 64. It would therefore represent a different, more extensive risk for the insurer if he were to provide insurance cover for such reimbursement claims of his own kind. The judgment of the Higher Regional Court is now final.
In practice, liability for claims for compensation according to Section 64 and Section 92 (2) for the stock corporation is the most common basis for claims in the insolvency of the company. The managers find themselves exposed to considerable liability claims from the insolvency administrator even in small companies. In this respect, the judgment of the Higher Regional Court is of great importance for the decision-makers who have previously relied on the D&O insurance to cover these claims of the insolvency administrator. Even for restructuring managers in self-administration there may be a dangerous shortfall in cover if the judgment of the OLG is transferred to the above-mentioned new liability bases in self-administration. Here, too, there might be an uninsured claim for compensation, because the purpose of Sections 60, 61 is to protect the creditors.
D&O insurance in the opinion of the Higher Regional Court
Board members, for whose benefit a D&O insurance has been taken out, should therefore use the judgment of the OLG Düsseldorf as an opportunity to critically review the insurance contract for the coverage of liability risks in the event of insolvency. If claims for compensation in accordance with Section 64 or Section 92 (2) as well as claims under Sections 60, 61 are not included in the insurance cover, a provision for the inclusion of these compensation claims should be quickly reached with the insurance company.
Summary
If the company gets into a crisis, this poses a special challenge for the company managers. At the latest with the first signs of a crisis, the main duty of the management is to keep an eye on the company’s liquidity and, if necessary, in good time if there is a reason for bankruptcy to file, go for bankruptcy attorney. All business transactions that could affect the bankruptcy should only be carried out with caution. The intended purpose of the payment must be documented accordingly, especially when initiating a disbursement of company funds. If the manager lacks sufficient specialist knowledge to examine the insolvency-relevant facts, he should seek advice from a professionally qualified independent person.
Managers who are considering restructuring a company on their own have to make sure in advance of the special obligations they have towards bankruptcy creditors within the framework of self-administration. Here, too, it is advisable to get a professional advisor – ideally an experienced insolvency lawyer – to help at an early stage and, if necessary, to involve them in the management.
Finally, decision-makers are advised to provide coverage for existing D&O insurance
To have reimbursement claims from § 64 and §§ 60, 61 checked. The bankruptcy of the company now represents one of the greatest liability risks for managers of corporations. In a good manager’s liability policy, the aforementioned reimbursement claims should be explicitly included or insured as insured damage claims.
