In July of this year, the second civil senate of the German Federal Court of Justice (BGH) ruled that “the deliberate delaying of the filing for insolvency with the intention of delaying the end of a company, which is recognised as inevitable, for as long as possible, constitutes immoral damage within the meaning of § 826 of the German Civil Code (BGB). The conditions of § 826 of the German Civil Code if damages to the company’s creditors is thereby condoned.” This decision is interesting because, on the one hand, it possibly contradicts a decision of the BGH’s sixth civil senate, but also because some commentators (wrongly?) see in the decision a proven remedy against so-called “corporate zombies”.
In 2015, the managing director of a limited liability company accepted an order to carry out facade work and received an advance payment of Euro 13,000. When his company was not able to complete the work even after a grace period, independent evidence proceedings revealed that the GmbH had actually completed only 5% of the agreed order, but that the work had caused (further) damage to the building of around €6,400. In 2016, a penalty order was issued against the managing director for deliberately delaying the filing for insolvency of the company. Only then did he file for insolvency. The insolvency proceedings were opened in 2017. The client for the facade work asserted claims for damages dircetly against the managing director for the expenses incurred for the independent procedure for taking evidence. In the lower instances, the managing director was ordered to pay damages under the general tort provision of § 823 para 2 German Civil Code (BGB) in conjunction with § 15a German Insolvenccy Act (InsO).
The decision of the BGH
In the final instance, the BGH ordered the managing director to pay damages for intentional immoral damage under § 826 BGB in accordance with the guiding principle stated above. The court went on to state that “the scope of protection of an intentional immoral delay in the filing for insolvency also covers persons, who have entered into contractual relations with a GmbH before the onset of insolvency and are burdened with costs for which they cannot obtain compensation from the company as a result of a lawsuit initiated against the company, which in the meantime has become insolvent undetected, […]. ” However, the deciding senate left unanswered the question of a potential liability under § 823 para 2 BGB in conjunction with § 15a InsO.
The decision of the BGH’s second civil senate initially appears somewhat contrived with regard to the – in contrast to the previous instances – omitted reasoning on the provision of § 823 para 2 BGB. The question of whether the BGH wanted to avoid a discussion on the so-called “quota damage” or “new creditor damage” here (but see para. 51 of the judgement) or whether it simply wanted to put its considerations on § 826 BGB in the foreground cannot be answered.
However, the judgment is interesting precisely because of the reasoning on § 826 BGB in comparison to another judgment of the BGH from May 2019, which, however, originated from the pen of the sixth civil senate. In that ruling, the BGH had rejected a direct claim of creditors of an insolvent GmbH against the managing director under § 826 BGB – after a “reach into the till”. While the Sixth Civil Senate rejects liability under § 826 BGB because the managing director owes no fiduciary duty towards the company’s creditors (cf. para. 10 of the judgement), the Second Civil Senate apparently does not examine this factual feature at all, but simply includes the respective creditors in the scope of protection of § 826 BGB (cf. para. 35 of the judgement). This divergence in case law does not appear to be exactly conducive to legal certainty.
Finally, it is questionable whether this case law can actually – as some commentators claim (e.g. here and here, in German) – lead to the containment of the so-called “zombie problem” (see on the phenomenon here and here, in German). For – beyond all differences in definition – a “corporate zombie” no longer makes a profit, but its solvency is secured, usually by constantly extended credit lines. This is intended to prevent – and usually does prevent – the occurrence of the insolvency grounds of illiquidity and/or over-indebtedness. In the case discussed here, however, the company in question was already so far insolvent that the managing director could be convicted of deliberate delay in filing for insolvency even without insolvency proceedings. In itself a rare case, but accordingly one can safely assume that the company in question was not (any longer) a zombie. Thus, the decision of the Second Civil Senate is unlikely to be a “panacea” against zombie companies.