Clarification that the liability of the administrator and liquidator is fault-based

WPK has advocated that it should be clarified in the proposal for a directive that liability of the administrator and liquidator can be consider only in the case of fault. Public and chartered accountants can work as administrators and liquidators. Under the current wording of the proposal for a directive, the administrator and the liquidator are liable for damages incurred by creditors and third parties affected by the pre-pack proceedings due to non-fulfilment of their duties. Liability for violations of duties committed without culpability is not explicitly excluded. Although the liability rules of German insolvency law also provide for extensive third-party liability, this is limited to culpable violations of duties (Article 60 InsO or Article 274 in conjunction with Article 60 InsO).

The principle of culpability applies in principle in German tort. Liability of an administrator/liquidator regardless of culpability would not be acceptable because these activities are difficult and characterised by balancing the interests of multiple parties. Even in their function as auditors, public/chartered accountants are liable only for intent and negligence, whereby upper liability limits are set for minor and sometimes even for gross negligence. Moreover, the risk of a service provider must be insurable.

Deletion of public accountants and advisers from the definition of “a party closely related to the debtor”.

Public accountants and advisers are explicitly named as “a party closely related to the debtor”.

Under current case law in Germany, public/chartered accountants and other freelance service providers can only be classed as closely related parties only in exceptional cases.

The reversal of this exception-to-the-rule-relationship would mean that the fee agreement of a public/chartered accountant who was possibly only engaged for tax advice or other business advice to a potential debtor could be declared null and void. Under the proposal for a directive, it should be supposed that he should have been able to recognise that his client was close to insolvency. Although it remains possible to reduce the risk of legal challenges in individual cases by refuting the suspicion of knowledge of the client being close to insolvency, there is still a risk for public/chartered accountants.

Otherwise, the proposal for a directive deals with the following subject areas:

• Basic conditions and legal consequences of challenging insolvency;
• Tracking and recovering assets that are part of the estate, especially improving access to various registers of assets;
• Pre-pack sales as a preliminary method for a fast sale of companies, or parts of companies, from the insolvency estate;
• Obligation of the company management to file for insolvency;
• Simplified liquidation proceedings for micro-enterprises;
• Formation and working methods of creditor committees.

The regulation of the rights and duties of the administrator is especially interesting because public/chartered accountants can also work as administrators (and subsequently as liquidators). The proposal for a directive provides for the deployment of an administrator within the context of the pre-pack proceedings, in other words, a preparatory phase before the actual insolvency (the liquidation proceedings). The aim should be for the company to be completely or partially sold in the preparatory phase. The administrator should organise this sales process, i.e., find suitable buyers and filter out the best offer. At the start of the liquidation phase, the administrator should be appointed as liquidator.

Specifically, according to the proposal for a directive, the administrator must

• Document and disclose every stage of the sales process;
• Disclose the extent to which the sales process can be seen as determined by competition, transparent and fair and corresponding to the market standards;
• Propose the bidder with the best offer as pre-pack purchaser and state whether, in his estimation, the best offer does not represent an obvious violation of the criterion of creditors’ interests.

These actions must be made in writing and made available to all of the parties involved in the preparatory phase at short notice and in digital form. Moreover, the regulation states that the administrator or the liquidator must ensure interim financing that is as cheap as possible if it is needed.