Full Personal Liability of Managing Directors for Supplier Fraud in the Event of the Customer’s Insolvency in Germany

If, after performance has been rendered, payment is not made in whole or in part because of the customer’s insolvency, intentional damage contrary to public policy or supplier fraud is often involved. This is the case whenever the management of the ordering company places orders for supplier services, or continues to call them off, even though the management knew, or must have known, that because of the company’s financial crisis the ordered services would not be paid for when due.

In such cases, German law provides for the unlimited personal liability of the managing directors of the ordering company for the default losses suffered by the injured supplier. In other words, the managing director or managing directors must compensate the injured party in full out of their private assets.

According to the settled case law of Germany’s highest civil court, strict standards must be applied to the conduct of the persons managing companies with limited liability (GmbH, AG, UG, GmbH & Co. KG) in order to ensure the necessary protection of creditors. Accordingly, the question whether the managing director of a GmbH, AG, UG or GmbH & Co. KG was still permitted to place or call off a particular order despite the company’s crisis is subject to full — and strict — judicial review.

Necessary insider knowledge from the insolvency proceedings
In Germany, the injured creditor can most reliably obtain the necessary insider knowledge regarding the circumstances giving rise to allegations of intentional damage contrary to public policy or supplier fraud in the insolvency proceedings of the insolvent German customer.

The insolvency administrator in German insolvency proceedings provides creditors and the insolvency court, from the outset, with comprehensive reports including information on the beginning and causes of the company’s crisis and on the actions taken by the management during that crisis. All creditors in German insolvency proceedings have a full right to information in respect of the information obtained by the insolvency administrator. This right to information, however, requires that the creditor’s claim be acknowledged or established by the insolvency administrator. For this reason, in practice it is important to register the unpaid claim in the insolvency proceedings even where the primary intention is to pursue liability against the managing director.

We have the necessary know-how to obtain and assess the information referred to above and to evaluate, on the basis of the available facts, whether taking action against the management is promising and appropriate in procedural practice in the individual case.