On 20 July 2018, the Higher Regional Court of Düsseldorf ruled that standard D&O insurances do not cover restitution claims for payments which managing directors of a limited liability company make after the company becomes insolvent. Whereas it is possible to obtain coverage for restitution claims, many older policies do not provide for this. Directors are well advised to check the scope of their insurance coverage.

Background

Managing directors of a limited liability company (GmbH) are generally liable according to Sec. 64 of the Limited Liability Companies Act (GmbHG) for restitution of payments made after the company becomes insolvent (i. e. illiquid or over-indebted). The same applies to directors of stock corporations, pursuant to Sec. 92 (2) Stock Corporation Act. Whether this liability risk is covered by a standard D&O insurance policy has been discussed since a few years. With its recent decision rendered on 20 July 2018, the Higher Regional Court of Düsseldorf has cast a spotlight on this issue. The court decided that a basic D&O insurance does not cover restitution claims due to payments made after the occurrence of the company's illiquidity or over-indebtedness.

Facts of the case and reasoning

The plaintiff was a managing director of a limited liability company. After the company became insolvent, the insolvency administrator had successfully sued her for restitution of EUR 200,000. The managing director then brought an action against her D&O insurer for indemnification. She argued that her D&O insurance should cover the insolvency administrator's restitution claim as a typical risk of a managing director who has the duty to preserve the company's assets in the interest of the creditors according to Sec. 64 GmbHG. The Higher Regional Court did not follow this line of argument and ruled in favor of the D&O insurer. According to the court, the restitution claim pursuant to Sec. 64 GmbHG does not qualify as a damage claim, as it is aimed at compensating losses suffered by creditors rather than damages suffered by the company. Therefore, and because the restitution claim is not subject to various defenses that are typically available against damage claims, the court found that it should not fall under the insurance cover of a standard D&O insurance.

The decision of the Higher Regional Court is only subject to a very limited appeal that would have to be granted by the German Supreme Court. It is therefore not unlikely that the decision will become binding and a prominent authority in Germany.

Practical consequences

The Higher Regional Court’s decision emphasizes the risks that managing directors of a GmbH and directors of stock corporations face in a financial crisis. To pursue claims according to Sec. 64 GmbHG an insolvency administrator only has to demonstrate that the payments were made after the company has become insolvent. Managing directors must therefore closely monitor the financial condition of the company and take appropriate measures to mitigate their liability risks, which often involves retaining professional advice. Following the decision of the Higher Regional Court, it is also advisable to check the scope of any existing D&O insurance policies. Whereas D&O insurance taken out recently may already comprise additional coverage for restitution claims, this is typically not the case with older insurance policies.

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