Company pension scheme in the event of insolvency Insolvency administrator can collect reinsurance of a pension commitment of the shareholder-managing director
Alleged bankruptcy protection:
At sales training courses it is often claimed that company pension schemes are protected against insolvency. Even an insolvency administrator cannot access this money – in particular the reinsurance – if, for example, the employer goes bankrupt. However, this is simply wrong, as the example of an insolvent GmbH with a pension commitment for the shareholder-manager shows.
It is correct, as the Federal Court of Justice (Case IX ZR 138/04) recently ruled, that the insolvency administrator can collect and realise the reinsurance policy, despite vesting and pledging (!) to the shareholder-managing director.
The insurer sued by the insolvency administrator had unsuccessfully invoked the pledge and had to be instructed about the basic features of the lien (§§ 1228 II 1, 1281, 1284 BGB): According to this, a lien on a claim can only take effect when the claim of the pledgee (i.e. here the shareholder-manager) is due. Only in the case of performance does the so-called pledge maturity occur; and only then does the right of collection pass to the pledgee.
Until then, the insolvency administrator can terminate the reinsurance policy, which at the same time means the revocation of all subscription rights, see § 13 I 2 ALB 86.
The insolvency administrator may incur personal liability as a result of this method of realisation, in particular if there are more lucrative realisation options, cf. section 168 InsO. In particular, the insurer was unable to raise the argument of avoidable cancellation deductions and tax disadvantages in the aforementioned BGH proceedings.
Liability for incorrect training or sales advice:
Financial service providers may provide legal and tax advice. This is a legal so-called auxiliary business under the Legal Advice Act – but: insurers are liable for the correctness of training courses in the same way as brokers are liable for correct legal information. The remuneration of the financial service provider for pure fee-based advice, on the other hand, is regularly invalid due to a breach of the Legal Advice Act – the new Legal Services Act is expected to bring about a liberalisation here in future.
Revocable Subscription Right:
In practice, at most a revocable subscription right is granted in the pension commitment, even after vesting – in case of doubt, the subscription right of the reinsurance policy is not irrevocably held by the shareholder-manager in practice. In the opinion of Swiss Life Pensions Management (SLPM), this is part of the essence of reinsurance. Scientific studies show that security could be designed differently.
“The customer needs to be properly educated. If the GmbH goes bankrupt and the shareholder-managing director is personally liable – for example through a guarantee – the creditors can often access the reinsurance”.
explains economic consultant Jürgen Abstreiter.
Significance of the subscription right:
If the coverage of the shareholder-managing director is seriously intended even before the benefit event, i.e. before the lien matures, an irrevocable subscription right must be granted (as a “genuine contract in favour of third parties”). Only then can an insolvency administrator no longer access the reinsurance. This is also not a silver bullet if the shareholder-director is personally liable alongside his GmbH.
Action of the insolvency administrator:
The pledgee (shareholder-manager) of a pension commitment can only demand security from the insolvency administrator, §§ 1282 I, 1228 II BGB. One practical way of doing this is to deposit the money with the court. In this case, as a rule, no interest is paid in accordance with the deposit regulations. The insolvency administrator can only be instructed by the creditors’ meeting or by the insolvency court as to where and under what conditions the money is to be invested, section 149 InsO.
According to the conditions, the deposit lasts until the insured event occurs. If the condition later fails, for example because the benefits under the pension commitment can no longer be paid, the insolvency administrator distributes the money retrospectively among the creditors. This means that there can no longer be any talk of “insolvency-protected occupational pension schemes”.
In practice, many insolvency administrators release the reinsurance policy by means of a simple declaration – this means that the contract falls to the shareholder-manager, and the private creditors of the shareholder-manager could therefore seize it. In practice, no insolvency administrator will pay out the pension in instalments because this service is probably simply not worthwhile. Without payment in instalments, the shareholder-managing director does not even have the monthly garnishment-free amount (§ 850 ff. ZPO) from the pension at his disposal. Taxation according to the so-called one-fifth rule is then regularly applied, § 34 EStG.
No insolvency protection for directors’ liability:
When a GmbH goes bankrupt, it is not uncommon for the managing director to be held additionally liable as a “manager”. The most frequent opponents are the insolvency administrator, the tax office and the health insurance companies.
If, for example, the shareholder has an irrevocable subscription right to a direct insurance policy which the employer (the GmbH) has set up for him, any creditor of the managing director will be able to seize this claim immediately. Protection against enforcement is offered here at most by arrangements with contact to foreign countries. In the case of a garnishment, however, payment is only made when the pension becomes due, i.e. when the insured event occurs.
In the case of pension commitments:
Does the pension commitment offer better protection in the event of insolvency? If the shareholder has a vested pension commitment, it is often said at some broker training courses that the insolvency administrator pays out the pension and that as long as this lasts, he cannot close his file. In that case, the shareholder-manager would receive a pension that is at best only partially attachable.
What is concealed in such “partial training” is that the insolvency administrator can have the pledgee (shareholder-manager) set a deadline by the insolvency court for the realisation of the reinsurance, § 173 InsO. This is also emphasised by the BGH in this most recent decision on pension commitments of 07.04.2005. According to the M/N-tel rule, the cover capital up to the opening of insolvency proceedings is affected here. At the latest this ends the dream of the insolvency-protected or only partially attachable pension of the shareholder-managing director, because the entire capital is then paid out to the insured person – and is immediately attachable.
There is not only the case of underfunding, but also the opposite: Then the pension cash value – calculated according to the today unrealistic 6% according to Dr. Heubeck – is lower than the insurance value including the surpluses. In this case, the insurer pays out the additional amount to the insolvency administrator – which again means no insolvency protection; and mathematically no more fully funded reinsurance.
Protection against this “tax basis of calculation” for the shareholder-managing director is sought in vain in the vast majority of pension commitments. The question of how the replacement value is calculated will be the subject of many a legal dispute.
In the event of a cessation of operations or liquidation, the insolvency administrator can also release himself from the entire pension payment obligation from the insolvency period in accordance with § 3 of the German Occupational Pensions Act (BetrAVG) by offering the shareholder-managing director a one-off settlement; however, this provision of the German Occupational Pensions Act (BetrAVG) only applies to the pension entitlements earned after the opening of insolvency proceedings.
Perplexity among insurers:
In case of doubt, in such cases – with practically frequent additional personal liability of the shareholder-manager – at the end of the insolvency proceedings at the GmbH level, the shareholder-manager will only apply for social assistance. Possible solutions for the reorganization of the shareholder-manager are mostly overlooked.
More than a dozen insurance employees and broker advisors who were approached were at a loss as to how the pension commitment (with insolvency protection at the level of the GmbH) for the often personally liable shareholder-managing director could be guaranteed to be paid.
Because the then former shareholder-managing director can probably not force the insolvency administrator to pay out the pension in instalments and subject it to taxation in accordance with § 19 EStG – within the framework of payroll accounting? The possibility of § 173 InsO aims at a time-saving settlement – this also applies to the simple release of the insurance.
Competence as an exception:
Only three of the insurers approached were spontaneously able to point out the possibilities offered by § 4 BetrAVG. Württembergische Lebensversicherung AG referred to the statutory options for transferring the pension commitment. Barmenia Lebensversicherung aG was immediately prepared to discuss and calculate this case individually with the actuary. SLPM pointed out that liquidation insurance, which is not offered by every insurer, can only be obtained prior to insolvency, via an ordinary shareholders’ resolution and company liquidation.
The transfer to a U-Kasse does not meet with the approval of insolvency administrators, because even with the reinsured variant the company (the GmbH in insolvency) must legally continue to exist.
The transfer to a pension fund might be sensible and at least attainable by negotiation, knows the insurance broker Siebenhaar: Thus also a tax damage can be avoided with the partner managing director, which usually develops with the dissolution.
The design of the subscription right is only one pitfall. Numerous points come into play which can not only endanger the entire pension commitment (hidden profit distribution) but also manoeuvre the GmbH into enormous difficulties if there is a lack of control (target/actual comparison). According to insurance broker Hermann Siebenhaar, more than 70% of the pension commitments he reviewed were incomplete or at high risk in the event of an audit.
In a current checkup of the text modules of a pension commitment for a controlling shareholder-managing director of a GmbH, up to 95% of all audited pension commitments do not comply with the current employment and/or tax law regulations and conditions. In the last 10 years, there have been a large number of administrative directives and court rulings on pension commitments of shareholder-managing directors. The formalities of most existing pension commitments, on the other hand, remained unchanged and were not adapted to the new case law or legal situation. As a result, many pension commitments are no longer formulated in a legally secure manner or the insolvency protection no longer exists. This often leads to the immediate and total loss of the entire insurance values (assets) in the event of insolvency, irrespective of whether the reinsurance policy is pledged or not.
An example of this is the so-called revocation proviso in pension commitments, which is justified under tax law in accordance with the income tax guidelines in the case of commitments for traditional employees, but in the case of controlling shareholder-managing directors this clause automatically and irrevocably leads to the loss of the entire reinsurance policy in the event of insolvency. Any pledge thus comes to nothing. Consequence: The shareholder-managing director’s entire pension is lost, and there is also the threat of a high tax liability due to the reversal of the provisions.
The only thing that can help here in advance is a concrete expert opinion from a recognised and independent actuary/expert and expert for company pension schemes. The liability of the tax advisor is also overlooked. While the advice given when taking out a reinsurance policy is still acceptable, hardly any advice is given during the savings phase. Important changes in the legislative process are hardly taken into account and the congruence of a reinsurance policy is criminally neglected or hardly controlled. This is where highly explosive mines (in some tax accountants) are stored in the basement. Typical liability approach: the insurer writes “… a shareholder resolution is required for your pension commitment – talk to your tax advisor about this …”; however, occasionally the tax advisor is neither trained as legal counsel nor insured. In addition, a single shareholder resolution is often not sufficient for the pension commitment to become effective.
At present, the solution does not always lie within the country, as the latest draft law from the Federal Ministry of Justice proves (cf. press release of 23.06.2005). In Germany, there is currently at best a surprising potential for liability due to incomplete sales training and incorrect advice by occupational pension brokers.
The restructuring of pension commitments is proving to be a growth market – without competence in employment, tax and insolvency law, hardly anything can be done professionally here. Far too few insurers are systematically restructuring their own portfolios. The market of insolvent GmbH’s or GmbH’s in crisis is unexplored – hardly any intermediary is familiar with the contestation of insolvency. At least before the crisis, the intermediaries could help the shareholder-managing director to get his pension commitment out of the GmbH almost tax-free: The commission is on the street, you just have to bend over a bit.
by Dr. Johannes Fiala
by courtesy of
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About the author
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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