Insolvency administrator’s liability (in the case of rescue attempts)

Having already dealt with the liability of the restructuring consultant  (here, in German) or the managing director (in DIP-procedures, here) in previous posts, a recent landmark ruling by the German Federal Court of Justice (“Bundesgerichtshof“, “BGH“) gives me the opportunity to shed some light on the liability risks of the insolvency administrator, with a focus on the area of corporate restructuring (accordingly, I will not address the liability of a provisional administrator or liability in the event of non-fulfilment of mass debts under § 61 InsO).

1. Liability for criminal offences

Obviously, an insolvency administrator can be prosecuted under criminal law (for a current case, see here, in German) and civil law for intentionally committed tort, such as “grasping” the very funds he is in charge of. As the BGH ruled in 2018, in such cases the administrator also regularly loses his claim to remuneration.

2. Liability for other breaches of duty

(a) General

So far, so clear. The situation is less clear on the question of negligent breaches of duty. In principle, § 60 InsO grants a claim for damages against the insolvency administrator if he culpably breaches his duties. According to § 60 (1) sentence 2 InsO, the standard of duty is “the diligence of a prudent and conscientious insolvency administrator“. The legislator has issued several guidelines for the fulfilment of this standard. Thus, “the special features resulting from the duties of the insolvency administrator and from the circumstances under which he/she performs his/her activities must be taken into account. The administrator regularly faces particular difficulties when continuing an insolvent company. In addition to the problems arising directly from the insolvency of the company, it must be borne in mind, for example, that the administrator needs a period of familiarisation if he takes over an outside company in a field of business with which he may not be familiar and that he often does not find proper accounts. He will therefore normally carry out his duties under much less favourable conditions than the manager of a financially sound company.” (BT-Drs. 12/2443, p. 129, in German). Accordingly, in the early years of the InsO, the courts found it difficult to hold administrators liable at all.

b) From the “obligation to preserve assets” to the “general requirement to increase value”

However, for some years now, case law in this area has been growing, so that the standard of liability for insolvency administrators is beginning to become more concrete. In 2014, for example, the BGH decided that the obligation to preserve and properly administer the assets belonging to the insolvency estate (“obligation to preserve assets”) could also include the obligation to invest funds not required until the final distribution of the assets not only safely but also at a favourable interest rate. In a subsequent decision in 2017, the BGH even elevated this obligation to preserve assets to a “general requirement to increase value”.

(c) “Business decisions”

In the same decision from 2017, the court also commented on the standard of duty in business decisions of the insolvency administrator. Thus, the yardstick for all entrepreneurial decisions of the insolvency administrator in the context of the continuation of operations is the insolvency purpose of the best possible joint satisfaction of the insolvency creditors as well as the procedural objective jointly agreed by the creditors – liquidation of the company, sale or rescue through an insolvency plan – as a means of achieving the purpose. Even when applying a generous standard for business decisions by the insolvency administrator, who in a difficult situation for the company has to make a forecast decision dependent on many factors, some of which are beyond his control, and the wide discretionary scope granted to him, the administrator must therefore, in order to avoid liability, conclude such transactions regarding the assets under his management which considerably increase the value of the estate without any particular effort or risk.

Although the BGH indicated,  with its explicit emphasis on a “generous standard” and a “wide discretionary scope” in “business decisions” of the administrator, a shift towards the so-called “Business Judgement Rule” according to § 93 (1) sentence 2 AktG in its 2017 decision, the court subsequently did not take this step, but – to the general surprise of the experts – declared in a recent decision of 2020 that “the Business Judgement Rule and its legal implementation § 93 (1) sentence 2 AktG does not apply to the standard of care against which business decisions of the insolvency administrator are to be measured.” Rather, the BGH states that the discretionary scope to which the insolvency administrator is entitled in business decisions is exceeded if the measure is no longer justifiable from an ex ante perspective in view of the costs, expenses and risks associated with it with regard to the duty of the insolvency administrator to secure and preserve the insolvent estate.

(d) Furthermore: “use of personal confidence”

In addition to this liability standard resulting from § 60 InsO, the insolvency administrator may run the risk of being held personally liable if he claims special personal trust during contract negotiations, for example, regarding continued deliveries to the insolvent debtor. In a decision from 2005, however, the BGH ruled that a special state of trust could only be attributed if the administrator had caused the negotiating partner to place additional personal trust in the completeness and correctness of his declarations and the feasibility of the agreed transaction. Accordingly, the hurdles for proving liability are high.

3. Enforcement of claims for damages

A further barrier against the liabilty of the insolvency administrator is set out in the provision of § 92 InsO, according to which the material claims for damages can only be enforced in court by a special insolvency administrator. The insolvency creditors themselves, for example, thus, do not have the corresponding legitimation to act – not even in their entirety. Rather, this special insolvency administrator must be appointed by the insolvency court. Practice shows that the insolvency courts are often inclined to protect “their” administrators and have raised the requirements for the appointment of a corresponding administrator to a very high level. Since the appointment of a manager is not subject to any (immediate) appeal, cf. § 6 InsO, there is basically the notorious “blue sky” above the insolvency court only. Nevertheless, in blatant exceptional cases is there to an “appeal in the event of tangible unlawfulness”, cf. only here, in German.

Conclusion: The crux comes at the end, as so often. The most promising liability situation is of no use if the insolvency court simply refuses to appoint a special insolvency administrator. In other words, the long-winded discussions of the BGH about liability standards will (currently still) become relevant only in the rarest cases. And yet the 9th Civil Senate of the BGH additionally (and again) – without good reason – creates a “special insolvency law”, this time with regard to the liability of insolvency administrators. For although the statute of an “Insolvency Judgement Rule” would be an obvious yardstick for the potential liability of administrators, the senate constructs its own yardstick with – overly complex – justification approaches. The senate has already based similar sophistry in previous issues, such as, for example, on the insolvency plan, which it does not regard as a “contract” in the conventional sense, but rather as a “specific instrument under insolvency law with which the creditor community organises its satisfaction from the debtor’s assets”. Thus, the 9th Civil Senate endangers the principle of uniformity of jurisdiction – and does not exactly make it easier for administrators to be released from liability. 

Apart from the factual “enforcement veto” of the local courts, however, the liability standard for insolvency administrators, developed by the BGH in the meantime, appears to be appropriate, especially regarding (liability-prone) restructuring situations.

BGH, Urt. v. 12.03.20 – IX ZR 125/17
BGH, Beschl. v. 22.11.2018 – IX ZB 14/18
BGH, Urt. v. 16.3.2017 – IX ZR 253/15
BGH, Urt. v. 26.6.2014 – IX ZR 162/13
BGH, Urt. v. 24.5.2005 – IX ZR 114/01
all in German

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