Federal Court of Justice (BGH) on the Liability of Former Managing Directors – Case No.: II ZR 206/22
In cases of insolvency or over-indebtedness of a company, the managing director is obliged to file for insolvency without delay. In its ruling of July 23, 2024, the German Federal Court of Justice (BGH) decided that former managing directors can also be held liable for delayed insolvency filing towards new creditors (Case No.: II ZR 206/22).
If insolvency conditions exist, the insolvency petition must be filed without culpable delay. If a company continues to make payments despite being insolvent, which are not consistent with the diligence of a prudent and conscientious business manager, managing directors or board members may be personally liable. A managing director who has violated the obligation to file for insolvency and has since left the company can still be held liable to new creditors. New creditors are those who became creditors of the company only after the company became insolvent, according to MTR Legal Rechtsanwälte, which advises on corporate law, among other areas.
Managing Director Fails to File for Insolvency
In the case before the BGH, the defendant was the sole heir of a now-deceased managing director. The deceased had served as the managing director of several sales companies between 2013 and 2016. These companies had already been insolvent since 2011, but no insolvency petition was filed. Between 2013 and 2016, the plaintiff concluded four investment agreements with these sales companies. Three contracts were concluded while the deceased was still managing director, and one was signed afterward. In 2018, insolvency proceedings were initiated against the sales companies. The plaintiff lost approximately €51,000 from her investments and sued the former managing director or his sole heir for damages, including for delayed insolvency filing.
The BGH ruled that the former managing director was liable to the plaintiff as a new creditor because he had violated his duty to promptly file for insolvency. This liability also extended to the contract concluded by the plaintiff after the managing director had left the company, according to the BGH.
Insolvency Administrator Liable to New Creditors
It was undisputed that the sales companies were already over-indebted before the contracts with the plaintiff were concluded. However, no insolvency petition was filed, meaning the managing director at the time had breached his duty. The BGH clarified that the liability of a former managing director for delayed insolvency filing is not limited to damages that arose before their departure. Instead, a former managing director is generally also liable for damages suffered by new creditors who entered into business relationships with the company only after the director’s departure. The prerequisite is that the risk created by the breach of duty still existed and that the delayed insolvency filing was the cause of the damage. In this case, the BGH determined that if the insolvency petition had been filed in a timely manner, the contracts between the plaintiff and the company would not have been concluded.
Breach of Duty Not Retroactively Eliminated
The BGH clarified that resigning as a managing director does not retroactively eliminate previously committed breaches of duty, such as the failure to file for insolvency. This also applies to damages resulting from delayed insolvency filing. A managing director is generally liable for losses suffered by new creditors who only became contractual partners of the company after the director had left if the violation of the obligation to file for insolvency was (partially) responsible for the damage. In such a case, the former managing director must still bear responsibility for the damage as a consequence of their failure to fulfill their obligation to file for insolvency. The liability of the former managing director only ceases if the risk created by the breach of duty no longer exists. This may be the case, for example, if the company had sustainably recovered after the director’s departure but later became insolvent again, according to the BGH.
With this decision, the Federal Court of Justice has further tightened the liability of managing directors for delayed insolvency filing. This liability also extends to business transactions over which the director had no influence after leaving the company. This underscores the importance for business leaders to always be informed about their company’s financial situation and to file for insolvency in a timely manner when necessary.
MTR Legal Rechtsanwälte advises on corporate and insolvency law.
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