When the advisor “suddenly” warns…

“Just in time” for the upcoming economic crisis (see only here), the German higher courts are expanding the duties of advisors in general and lawyers in particular. After the BGH’ IXth Civil Senate had already tightened the liability of tax advisors with regard to omitted warnings of reasons for insolvency in a judgement from January 2017 (see in-depth here), the court now turns to lawyers and the duties of care to be observed by them. Shortly thereafter, the Higher Regional Court of Bamberg ruled in a similar manner on the duties of care of a restructuring advisor. The mostly stringent rulings complement each other and are groundbreaking for advisory practice in the event of corporate crises.

Inclusion of (de facto) managing directors in the scope of protection of the mandate agreement

While in the aforementioned 2017 ruling of the German Federal Court of Justice (BGH) the tax advisor could be (directly) sued by the insolvency administrator of the company for breach of his duties arising from the tax advisory mandate, the cases decided by the BGH and the Higher Regional Court of (OLG) Bamberg concern the recourse of (de facto) managing directors of the company against the advisor. This group of persons is not the direct client of the advisor when mandated by the company and therefore has no original recourse against the advisor.

The BGH and the OLG Bamberg now respectively ruled that the managing director may be within the scope of protection of a general “explicit duty of the legal advisor to inform and warn in the event of a possible reason for insolvency” (BGH, loc. cit., marginal no. 14), or that he “comes into contact with the question of the GmbH’s readiness for insolvency in the same way as the GmbH itself as the client on the basis of § 64 (1) GmbHG old version, which is why the expert opinion contract according to IDW S6 – Standard has a protective effect in favour of the managing director“. The dogmatic derivation of this extension of the scope of protection to the managing directors of the company is quite comprehensible. The extension of third party protection to de facto managing directors seems less comprehensible – even if the BGH states in its brief justification in this regard (BGH, loc. cit., marginal no. 27) that the legal advisor does not have to expect the existence of a de facto managing director without further ado. The inclusion of the de facto managing director in the scope of protection of the contract therefore additionally presupposes at least the recognisability of its existence for the legal advisor. For the legal figure of the de facto managing director was created – as the BGH also states – so that persons acting de facto cannot escape their liability. Why these are then included in the scope of protection of rules that were created for persons adhering to applicable law is not readily apparent, to say the least.

Concretisation of the duty to warn

According to the BGH (para. 22), if a company entrusts the adviser with the assessment or handling of a crisis situation, it follows from the assignment that there is a close relationship between the main service and the duties for early crisis recognition and crisis management, which are now summarised in § 1 StaRUG across all legal forms and which, like the duty to file for insolvency under § 15a para. 1 InsO, affect the managing director. If, during the processing of such a mandate, the conditions for the duty to inform and warn in the event of a possible reason for insolvency arise, the protection of this (secondary) duty should extend to the (de facto) managing director, because the duty to file for insolvency incumbent on him and the liability consequences threatening in the event of its disregard have a sufficient connection to the main service owed (arg ex contrario BGH, para. 21). In a nutshell, the “advisor” has the duty to inform the (de facto) management of the possibility of insolvency grounds and the resulting obligation to file for insolvency.

The BGH subsequently restricts the scope of duties somewhat by stating (para. 23) that “the duty to inform and warn in the case of a possible reason for insolvency only applies under narrow conditions. The duty to inform or warn only applies if the advisor becomes aware of the possible reason for insolvency, if it is obvious to him or if the reason for insolvency becomes apparent to him during the proper handling of the mandate. Mere recognisability is not sufficient. Furthermore, the advisor must have reason to believe that the manager is not aware of the possible reason for insolvency and the resulting duties to act. Moreover, the duty to advise and warn does not require an independent examination or determination of the reason for insolvency.” Due to the previous tendency of the BGH’s XIth Civil Senate to hang the burden of proof relatively high for the respective advisors (cf. the comments here), however, it might be advisable for advisors to issue the warning rather early, as formally as possible and with proof that the manager has taken it in and understood it.

According to the OLG Bamberg (lead sentence), one of the core requirements for the business consultant commissioned to prepare a restructuring expert opinion in accordance with the German IDW S6 (roughly equivalent to be adhered to when establishing an IBR) standard is to point out an insolvency that has occurred in a form that is suitable to encourage the responsible persons to initiate the (urgent) measures required under insolvency law. This results – as the OLG Bamberg rightly points out in para. 22 – already follows from the regulations of the IDW S6 standard itself.

For the professional groups of lawyers, tax advisors and auditors, this duty is now also laid down in § 102 StaRUG outside of a concrete crisis situation, insofar as they are commissioned with the preparation of the company’s annual financial statements. In this respect, the duty to warn itself concerns a secondary duty, as the main duty consists in the preparation of the annual financial statements.

The OLG Bamberg also points out that “a restructuring consultant with specific expertise, when comprehensively commissioned in accordance with the IDW S6 standard, [takes] a special trust into account, as is the case with auditing professions with a special liability regime regulated by law. A clause limiting the liability for a breach of the central principal duties to gross negligence in addition to a limitation of the amount disadvantages the client unfairly and is ineffective due to a breach of the principles of good faith pursuant to § 307 (1), (2) BGB.” (Guiding principle)

Conclusion: It should now be clear for all professional groups providing advice – lawyers, tax advisors, auditors and management consultants – that they are subject to the ancillary duty in the context of a mandate to “assess or deal with an [economic] crisis situation” (main service), to “point out an insolvency [or over-indebtedness] that has occurred in a form that is suitable to encourage the responsible persons to initiate the (urgent) measures required under insolvency law“. This duty might also protect third parties, such as shadow directors. A limitation of liability for a lack of advice seems only be possible within the limits indicated by the OLG Bamberg.

It is also clear that duties to warn arise in any case if there are indications of the existence of reasons for insolvency. The crux of the BGH’s ruling, however, is that it leaves it at the following, more than sibylline elaboration with regard to other occasions that might require a warning (para. 22):

Whether liability consequences from the breach of duties for early crisis detection and crisis management, such as the consequences of disregarding the duty to file for insolvency, are ordered in the interests of third parties and therefore third party protection can also arise in this respect, does not need to be decided. The necessary relationship of proximity exists in any case with regard to the obligation to file for insolvency, which must regularly be considered in the context of an economic crisis of the company.

With regard to the “violation of duties for early crisis detection and crisis management“, the BGH itself explicitly refers to the duty to implement an early risk detection system, which is now stipulated in § 1 StaRUG across all legal forms (see here for more details). Consequently, it cannot be ruled out that advisors whose primary duty relates precisely to risk aspects of the company (compliance?) may have a secondary duty to warn if they realise that an early risk detection system is not in place in the company or not in an adequate form.

Contrary to the opinion of some commentaries on this decision (see e.g. here, in German), it should not depend on the fact that the respective advisor provides advice “on a regular basis” for the assessment of whether the (ancillary) scope of duties to warn of insolvency is opened. This is because both the BGH and the OLG Bamberg focus on the (respective) main service. If the main service is the regular enforcement of the client’s claims (e.g. payment of purchase prices after conclusion of sales contracts in the retail sector), the regularity of the mandate alone should not lead to a duty to warn (see also BGH ruling, para. 21). Against the background of the – again evident here – constant expansion of the due diligence and thus liability obligations through case law, however, also and advisor mandated on a “regular” basis should – for reasons of self-protection – equally “regularly” check the economic status of his client (“KYC”, more here) and a warning of any risks he recognises in the process has not been prohibited by the BGH.

Clients should therefore not be too surprised if they soon receive sophisticated warning letters from their (“regular”) advisors.

BGH, Ur. v. 29.06.2023 – IX ZR 56/22
OLG Bamberg, Urt. v. 31.7.2023 – 2 U 38/
(both judgements in German)

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