Compliance + Governance Blog

Two new forays on our Blog are dedicated tot the concept of illiquidity. The term is of pivotal importance, and one would think that enough time has passed since 01 January1999, when the German Insolvency Act (Insolvenzordnung [InsO]) came into force, to clarify the details. Indeed, the German Federal Court of Justice (IXth Senate) issued a fundamental ruling on the notion of illiquidity in 2005. According to ruling, illiquidity is determined on the basis of a combination of the static (calculation date related) figures of a status with the dynamic figures (related to the 3 weeks following the calculation date) of a financial plan. Pursuant to recent decisions of the Federal Court of Justice, however, under certain circumstances a series of financial status is sufficient to "prove" illiquidity, a legal tomography so to speak, which is not intended to provide a picture of the financial infarction by means of a dynamic finacial plan, but by a „layer-by-layer“ representation. So does the "proof" change what is to be proven? The question is weighty, since the dynamic 3 week financial plan has substantial impact on the determination of the illiquidity, both in legal and calculatory terms.

Now the new standard IDW S 11 of the Institute of Public Auditors bases its guidance for the calculation of illiquidity on a series of financial status, by the same token increases the relative (in percent) "coverage gap" compared to the calcualtion under the formula of the Federal Court of Justice and even warns that a calculation according to the Federal Court of Justice carries a risk of liability for legal practitioners and advisors. That is not to be followed.

Legal violations in the event of delay in filing for insolvency consitute, as reagrds case numners, an important area of manager liability practive. In principle, the law makes managers liable for all payments made by the company once it has become insolvent. When asserting such claims, however, a whole series of substantive and procedural hurdles must be overcome, which are not only the subject of many court decisions, but are also included in settlement negotiations. The legislator amended the matter some time ago. At the same time, the number of insolvencies is currently on the rise again. All of this leads us to expect more disputes of this kind. For this reason, from time to time our blog will take a look at practical aspects of section 15b InsO that may be of significance in court and in settlement discussions. The following article is the first of these forays.

Manager liability cases can give rise to questions regarding D&O insurance cover (see the blog post from 26.03.2024, https://www.reutercomplianceblog.com/artikel/leitpfosten-des-lg-frankfurt-zu-brennpunkten-von-manager-haftung-bussgeldregress-und-d-o-versicherung/). Two recent decisions of the Higher Regional Court of Cologne and the Higher Regional Court of Schleswig address such questions. They mainly deal with (i) the definition of an "insured event", (ii) the consequences of an assignment of coverage claims from the insured manager to the policyholder, i.e. the injured company, (iii) the proof of exclusion of coverage in the event of a "knowing breach of duty" and (iv) the consequences of breaches of duty and seting aside by the insurer of the policy. Such issues frequently arise in D&O liability practice. They harbor legal pitfalls. This article outlines the two decisions.

A recent decision of the Regional Court of Frankfurt sets guide posts on key issues of manager liability, recourse for fines and D&O insurance. It addresses issues (1) regarding the admissibility of the advance coverage proceedings by declaratory action of the insured manager against the insurer (vorweggenommene Deckungsklage), (2) regarding the admissibility of D&O insurances against recourse for corporate fines and (3) regarding the conditions under which the typical exclusion of coverage (carve out) due to "knowing" breaches of duty applies. All three areas are important in practice. Furthermore,. the legislator is also getting involved in the discussion on recourse for corporate fines against managers in connection with the planned implementation of the EU's NIS 2 Directive. This post is to outline anc comment the decision.

The draft of the EU Supply Chain Directive (Corporate Sustainability Due Diligence Directive or CSDDD-E) has once again sparked a debate at political level following a vote in the "trilogue" of the Council, Commission and Parliament working levels. And rightly so from a legal perspective: the CSDDD-E violates the principle of proportionality, which, according to the European Court of Justice (ECJ), also applies in EU law and breaks the contrary consensus reached in the trilogue of the working levels. According to its draft, the CSDDD would significantly interfere with companies' fundamental rights, namely the freedom to conduct a business, the freedom to choose an occupation, the right to work and the fundamental right to property (Art. 15 et seq. of the EU Charter of Fundamental Rights; "CFR"). Although these rights and freedoms of companies are not absolute by nature, they can be restricted, but only to the extent that this is proportionate. Considering the integrated effects of the EU's multiple ESG regulations, the disproportionality of the CSDDD-E is indeed evident. This article is intended to highlight these legal anchor points once again in the current legal policy debate.

The draft of the EU Corporate Sustainability Due Diligence Directive (Supply Chain Directive) has once again sparked a debate at political level following coordination of the draft in the "trilogue" of the Council, Commission and Parliament working levels. And rightly so from a legal perspective: the draft CSDDD violates the principle of proportionality, which, according to the European Court of Justice (ECJ), also applies in EU law and breaks the contrary consensus reached in the trilogue. According to its draft, the CSDDD would significantly interfere with companies' fundamental rights, namely the freedom to conduct a business, the freedom to choose an occupation, the right to work and the fundamental right to property (Art. 15 et seq. of the EU Charter of Fundamental Rights; "CFR"). Although these rights and freedoms of companies are not absolute by nature, they can be restricted, but only to the extent that this is proportionate. Considering the integrated effects of the EU's multiple ESG regulations, the intended CSDDD indeed is disporortionate. This article is aimed at again setting out these legal anchor points once again in the current legal policy debate.

If fines are imposed on companies for illicit conduct, the question arises as to whether the companies can seek recourse against the responsible managers. The question is controversial. However, the higher fines become, the more important the question becomes. Because of their exorbitant amount, it is in particular fines for violations of European and national antitrust law which fuel the debate. Two very recent - contradictory - rulings of the Dortmund Regional Court and the Düsseldorf Higher Regional Court, as well as the German lawmaker, are giving new impulses to the discussion.

The article sums up the new decisions and draws the consequences for practice. As long as the issue has not been decided by the court of last instance, supervisory bodies have to decide on the assertion of claims. They cannot refrain from asserting the claims solely on the grounds that recourse is not legally possible. Furthermore, they must also observe the rules on the statute of limitations that the Dortmund Regional Court and Düsseldorf Higher Regional Court have drawn up on the commencement and the end of the limitation period. Furthermore, the question of how the situation stands under EU law remains open. Last but not least, the draft amendments to the new German BISG also gives new impetus. In the end, the question must be asked as to whether the overall system of corporate fines is not suffering from a systemic flaw.

On June 1, 2023, the EU Parliament adopted a joint position on the draft Corporate Sustainability Due Diligence Directive (CSDDD). The CSDDD is to become a further central pillar of the regulatory building for "Corporate Social Responsibility" (CSR) and "Environment/Social/Governance" (ESG) that the EU is currently establishing. The following will first provide an overview of the regulations. The regulations significantly expand and sharpen the concept of "sustainability" and harness accounting and company law tools. The legislative purpose is to guide investment, transform the entire EU economy, hold companies accountable to this end, and give third parties means to enforce the relevant obligations. The rules impose high costs and other burdens on companies. In many cases, however, the rules are neither necessary nor suitable for the protection of the climate, the environment and human rights; this applies in particular to the rules addressing governance issues. This brings into focus the principle of proportionality, which sets limits for legislators at the EU and national levels. Companies should insist in the upcoming political process that proportionality is maintained. This does not only apply to the CSDDD, but also to the Corporate Sustainability Reporting Directive (CSRD) and its implementation.

The European Court of Justice (“ECJ”) has developed a broad concept for the definition of an “undertaking”
for purposes of EU corporate fines. According to this concept, an „undertaking“ within the meaning of Art. 101 TFEU is „any entity engaged in an economic activity, irrespective of its legal form and the way in which it is financed“ . The ECJ determines the scope of such an „economic unit“ according to rules similar to those of a group of affiliated companies. The ECJ has recently extended the scope of application of this wide definition to the area of damage claims in case of competition law infringements. The ECJ has made such extension so as to enhance “effective” enforcement of completion rules. The article describes the judgment and its practical consequences. It also sets out that such “effective enforcement” calls for “effective protection” of the fundamental rights of the persons concerned lest the rule of law be impaired. This also has procedural consequences.