Not surprisingly, at least for the experts, the German Federal Civil Court (BGH) decided in April 2018 that (at least) the “Chief Restructuring Officer” (CRO) (“Eigenverwalter” = managing director responsible to guide the company through the DIP-insolvency procedure) is liable in the same way as an insolvency administrator for contracts concluded with creditors while under insolvency protection.
Since several years, it is established practice in Germany to appoint a well-known insolvency practitioner or restructuring expert as CRO before filing for insolvency in order to be allowed to go through the procedure as a “Debtor-in-Possession” (DIP; “Eigenverwaltung” according to §§ 270 et seq. InsO).
In the case in the question, the CRO, acting for the company in the DIP-proceedings, had ordered new goods without any recourse to a particular confidence as to his function or person. After the insolvency proceedings were endedon 28 January 2015 following confirmation of the original insolvency plan, the allegedly restructured company filed for bankruptcy again less than six months later, on 18 June 2015. However, the facts of the case do not explain the reason for this rapid renewed insolvency. The supplier sued the CRO for personal liability for the damage incurred. After the lower courts had rejected a liability of the CRO in accordance with the principles on the liability of an insolvency administrator, the BGH affirmed the fundamental application of the corresponding provisions of §§ 60, 61 InsO.
In its decision, the BGH, first of all, denies a liability which would only be based on the position as CRO if this function is not specifically referred to, i.e. a liability based on “recourse to special personal trust” (paras 38 et seq. of the judgement). Subsequently, however (paras 60 et seq.), the BGH states that it “cannot be disregarded that in many cases the managing directors of the company who were active before the application was filed and now manage the company themselves bear the entrepreneurial responsibility for the insolvency. (…) If, despite previous entrepreneurial failures, the managing directors are granted the – so to speak last – possibility of restructuring the insolvent company on their own – thanks to DIP – the continuation of management inevitably entails increased liability in accordance with principles of insolvency law.” Here the BGH disregards the fact that both in the concrete case and in the predominant cases of DIP, the insolvency was not initiated by the previous management – which is in fact often responsible for it (and for the previous crisis) – but by the said specially appointed “CRO’s”, who are supposed to drive the restructuring forward in the insolvency. Based on this, the BGH then draws a ring conclusion by stating – without further justification – that the “inevitably intensified insolvency liability” for the CRO is inevitable.
With this decision, the BGH creates a liability institution of its own, which is not only added to other existing liability grounds affecting managing directors, but even goes beyond them. Although the BGH did not decide in rem but referred the case back to the lower courts for deciding, the recitals (“intensified insolvency liability”) indicate that the conditions under which liability occurs for CRO’s could be lowered.
Ok, and what does that mean in practice?
In the BGH’s favour it must first be admitted that the restructuring as described in the case may not have been sustainable – for which a renewed filing for insolvency within six months after the end of the previous one is a strong indication. Therefore, a (general) exclusion of liability in favour of the CRO would be presumptuous. However, the question is whether there is an actual need for a new institution to infer such liability.
As a result of the BGH’s decision, several scenarios can now develop: Either the liability prerequisites for CRO’s in DIP, insolvency administrators and supervisors in DIP-procedures remain on the same level. In this case, the cases of actual liability on the part of the CRO are more likely to remain the exception. Because, the cases of actual liability of insolvency administrators are quite manageable, if the insolvency administrator does not act with criminal intent or is involved in doubtful self-dealings. Or the liability requirements for CRO’s in DIP, insolvency administrators and supervisors in DIP-procedures are brought into line with those for managing directors. Then the liability insurance contributions for insolvency administrators are likely to explode – since managing directors incure a personal liability much more often. It is more likely, however, that the BGH will in the long run develop an increased liability for the CRO in DIP-procedures in comparison to the liability of insolvency administrators and supervisors in DIP-procedures. After all, the judiciary is generally very critical of the institute of DIP (see more details here). The present decision of the BGH also underlines this suspicious attitude.
The BGH did not answer the question of whether turnaround professionals acting below management level will also be affected by this new liability jurisprudence. Because, probably also against the background of the emerging increased liability, the practice has developed the habit of appointing the CRO as “general representative” (legally i.e. as authorised signatory) and rather not as a managing director.
Also against the background of the current decision of the BGH on the possibility of limitation of liability on the basis of a (provable) division of responsibilities in the board (more on this here, in German), the question arises to what extent this new liability concept can only be applied to CRO’s. It would also be interesting to compare the liability requirements of the CRO with those of insolvency administrators in a similar situation (the company falls back into insolvency shortly after the “restructuring”)
Even if the case discussed here speaks against a general iability exception in favour of the managing director, the question still is whether the creditors must be granted a direct claim against the CRO that circumvents both company law and insolvency law and, if so, whether the institute would not have been systematically better suited to the concept of “claiming special personal trust”.
Possibly, the decision leads actually to the fact that further chaff from the wheat separate, thus professional offerers from the market do not withdraw themselves, as a ?self-administration-tested? reorganization enterprise writes in its newsletter. It is also possible, however, that the institute of DIP will find itself between the millstones of justice (liability) and legislation (forthcoming reform of DIP following the ESUG evaluation, see here for further details) – and will thus again be marginalised. In view of the dark clouds that can no longer be overlooked in the “economic sky”, the question then arises as to whether such “fair-weather insolvency law” will be able to effectively allow for the turnaround of important German companies in the event of a real crisis unfolding.
Against this backdrop, the lower instance will have to clarify in particular the reasons why the allegedly restructured company was able to fail again so quickly – and if it was indeed a fault of the CRO.
BGH, decision as of 26.04.2018 – IX ZR 238/17 (in German)