When a foreign subsidiary becomes insolvent, managing director liability (Geschäftsführerhaftung) quickly comes into focus, and the German parent company faces an uncomfortable question: does the separation between parent and subsidiary under company law hold, or do the parent company, its managing director or a manager seconded from Germany face personal liability risks? The answer is complex because at least three levels overlap: the German company and liability law of the parent, the insolvency and company law at the subsidiary’s seat, and the European conflict-of-laws rules that determine which of these legal systems applies at all.
Three groups are affected: the parent company as shareholder, its own managing director, and the managing director of the subsidiary appointed locally, who is frequently seconded from Germany. This must be distinguished from the case in which a managing director personally moves their residence abroad while the company continues to operate in Germany; more on this under managing director liability when relocating abroad. The legal position is as of September 2026.
The Separation Principle: Why the Parent Company Is Generally Not Liable
The starting point is the separation principle (Trennungsprinzip) of company law. The parent and the subsidiary are two legally independent entities, each with its own assets, its own governing bodies and its own creditors. Asset protection for business owners also builds on this principle. Neither German nor European law recognises an automatic piercing of the corporate veil (Durchgriffshaftung) making the parent liable for the subsidiary’s debts.
The subsidiary’s insolvency therefore generally affects the parent’s assets only to the extent of its shareholding. In addition, however, there are risks arising from intra-group loans and cash pool receivables. In the subsidiary’s insolvency proceedings, depending on the applicable law, these may be subordinated, and their repayment may be avoided (Anfechtung); under German law, this is governed by Section 39 (1) No. 5 and Section 135 InsO (German Insolvency Code, Insolvenzordnung). For a foreign subsidiary, this is as a rule determined by the law of the state in which the proceedings are opened. Further risks arise from letters of comfort (Patronatserklärungen) and guarantees that the parent has given for the subsidiary.
The prevailing view rejects a general duty on the part of the parent company’s managing director to actively steer the subsidiary’s business. Each member of a governing body is primarily bound to the company of which they are an officer. Towards the parent itself, however, its managing director owes careful administration and monitoring of the shareholding (Section 43 (1) GmbHG (Limited Liability Companies Act), for a stock corporation Section 93 (1) AktG (Stock Corporation Act)). If the managing director overlooks recognisable signs of crisis at the subsidiary, for example where cash pool receivables are high, they may be liable to the parent for damages under Section 43 (2) GmbHG. Anyone who concludes from this that the parent company can always withdraw completely from an insolvent foreign subsidiary also underestimates the exceptions to the separation principle.
Exception 1: Piercing Liability for Interference That Destroys the Company’s Existence
The most important exception concerns cases in which the parent company, as the subsidiary’s shareholder, deliberately withdraws assets from it and thereby causes or deepens its insolvency. With the Trihotel decision (BGH, judgment of 16 July 2007, II ZR 3/04), the Federal Court of Justice (Bundesgerichtshof, BGH) placed this category of cases, which had originally been developed as an independent form of piercing liability under company law, on a new footing. Since then, interference that destroys the company’s existence (existenzvernichtender Eingriff) has been treated as internal liability of the shareholder towards the company for intentional damage contrary to public policy under Section 826 BGB (German Civil Code). The claim therefore belongs to the subsidiary itself; in its insolvency, it is asserted by the insolvency administrator, not by individual creditors.
Liability is triggered by a deliberate withdrawal of company assets without compensation for the benefit of the shareholder that impairs the company’s ability to meet its liabilities, for example through a “cold liquidation” or the transfer of valuable orders or assets to affiliated companies. Typical triggers within a group are:
- the abrupt withdrawal of liquidity from a cash pool of the subsidiary shortly before it becomes unable to pay its debts,
- transfer pricing arrangements that systematically work to the subsidiary’s disadvantage,
- intra-group upstream loans without a realistic prospect of repayment,
- the transfer without compensation of intellectual property rights, customer relationships or means of production to the parent or sister companies.
What always matters is whether the outflow of assets took place without compensation and whether it caused or deepened the subsidiary’s insolvency.
Which Law Governs Liability for Destroying the Company’s Existence?
In cross-border situations, a conflict-of-laws question is added: whether the insolvency administrator of the foreign subsidiary can base such a claim on Section 826 BGB and German liability for destroying a company’s existence (Existenzvernichtungshaftung) at all is not automatically determined by the seat of the parent company. Which law applies has not been conclusively settled. The Rome II Regulation expressly excludes from its scope liability issues arising from company law, including the personal liability of shareholders and officers (Article 1 (2) (d) Rome II Regulation).
Depending on the classification, the law that governs may therefore be the company law of the subsidiary, the insolvency law of the state in which the proceedings are opened (Article 7 EuInsVO, European Insolvency Regulation) or, if the liability is regarded as tortious, under Article 4 (1) Rome II Regulation the law of the state in which the damage occurs. According to the European Court of Justice, where the company is harmed, this is as a rule the state of its seat (judgment of 10 March 2022, C-498/20). In each of these variants, German law will frequently not apply to a subsidiary with its seat abroad. Whether German liability for destroying a company’s existence applies, or a comparable basis of liability under foreign law, is therefore a separate preliminary question that must be clarified in the individual case.
Exception 2: De Facto Management and Liability for Instructions within a Group
A second level of liability concerns the position as an officer itself. Anyone who, without having been formally appointed as managing director, actually acts like a managing director and decisively determines a company’s affairs may, as a de facto managing director (faktischer Geschäftsführer), be subject to the same standards of care and liability as a formally appointed managing director. Within a group, this question arises when representatives of the parent company effectively disempower the subsidiary’s appointed managing director and take operational decisions in their place, for example by releasing payments, negotiating contracts or steering the subsidiary’s crisis response, without the appointed managing director retaining any discretion of their own.
For a domestic GmbH subsidiary, the framework is clear: under Section 37 (1) GmbHG, the managing director is generally bound by the instructions of the shareholders’ meeting. The shareholders’ meeting can give binding directions right down to day-to-day business, unless the articles of association provide otherwise. If the parent is the sole or majority shareholder, it thus has a far-reaching formal steering instrument.
This right to issue instructions ends, however, where an instruction endangers the subsidiary’s existence or violates mandatory law. If the subsidiary’s managing director nevertheless follows such an instruction, this does not exonerate them: to the extent that compensation is required to satisfy the creditors, they are liable despite the shareholders’ resolution, for example in the case of breaches of the capital maintenance rules (Section 43 (3) sentence 3 GmbHG) or for payments made after the company has become insolvent or over-indebted (Insolvenzreife) (Section 15b (4) sentence 3 InsO). At the same time, the parent, as the shareholder giving the instructions, may be held liable on the basis of liability for destroying the company’s existence.
For foreign subsidiaries, Section 37 GmbHG does not apply directly; what governs is the law applicable to the subsidiary as a company (Gesellschaftsstatut), that is, as a rule the law of the state in which it was incorporated or has its seat. Many foreign legal systems have comparable liability concepts for persons who in fact determine the management (in English law, for example, the “shadow director”). Whether, and under what conditions, such liability exists in the subsidiary’s state of seat must be examined by an adviser in the respective state. The basic pattern is: mere membership of a group does not as a rule give rise to personal liability as an officer. It becomes risky when representatives of the parent regularly and deliberately steer the subsidiary’s management while bypassing its appointed officers.
Which Law Applies to the Appointed Managing Director of the Foreign Subsidiary?
Frequently, the management of the foreign subsidiary is taken over not by a local professional but by a manager seconded from Germany. That manager’s personal insolvency-law duties (for example a duty to file for insolvency or a prohibition on payments once the company is insolvent or over-indebted) are generally governed not by German law but by the insolvency law of the state in which the main insolvency proceedings concerning the subsidiary are opened (Article 7 of the EU Insolvency Regulation (EU) 2015/848). Under Article 3 (1), jurisdiction lies with the courts of the state in which the subsidiary has its centre of main interests (COMI). The Regulation does not apply to subsidiaries outside the EU or in Denmark; from a German perspective, the law of the state in which the proceedings are opened then likewise applies (Section 335 InsO).
If the subsidiary’s COMI is located, for example, in France, Poland or Austria, the filing deadlines and the personal liability of its managing director are governed by the law there, not by Section 15a InsO or Section 15b InsO (which replaced former Section 64 GmbHG, in force until the end of 2020).
How closely the law governing insolvency (Insolvenzstatut) and officers’ liability are linked is shown by the Kornhaas decision of the European Court of Justice (judgment of 10 December 2015, C-594/14). It concerned the reverse case: a limited company incorporated under the law of England and Wales and registered in Cardiff, over whose assets insolvency proceedings had been opened in Germany. The Court classified the liability provision in Section 64 GmbHG then in force (today, in modified form, Section 15b InsO) as a matter of insolvency law; in doing so, it was still interpreting the predecessor regulation, Regulation (EC) No 1346/2000. Through the law governing insolvency, the provision therefore also applies to the officers of a company incorporated in another EU Member State, without this constituting an impermissible restriction of the freedom of establishment. The Federal Court of Justice subsequently decided the case on this basis (judgment of 15 March 2016, II ZR 119/14). Since Article 7 of the current Regulation continues the substance of the former Article 4, the statement is likely to be transferable to current law; the literature assumes that the same principles apply to Section 15b InsO as to former Section 64 GmbHG (Bitter, ZIP 2021, 321, 331). As far as can be seen, there is not yet an express ruling of the Court on the 2015 Regulation on this point.
For group practice, this means: if the subsidiary’s COMI is actually located abroad, the insolvency-law duties of its managing director are generally governed by foreign law, even if the parent has its seat in Germany and the managing director is German. The fact that the subsidiary is controlled by a German parent does not in itself shift its centre of main interests (ECJ, judgment of 2 May 2006, C-341/04, Eurofood). The position may be different if the subsidiary is actually managed from Germany in a manner ascertainable by third parties (ECJ, judgment of 20 October 2011, C-396/09, Interedil). Main insolvency proceedings may then be opened in Germany, and the German duties under Section 15a and Section 15b InsO apply to the subsidiary’s officers.
In a crisis, the seconded managing director therefore cannot simply rely on their knowledge of German insolvency law. They should have an adviser check at an early stage which insolvency law actually applies to them. If it is foreign law, they must know and comply with its filing deadlines, payment prohibitions and grounds of liability; these must be clarified with an adviser in the state of seat. As a rule, neither ignorance of the foreign law nor the geographical distance from group headquarters will exonerate them.
EU Insolvency Regulation, COMI and the Limits of Concentrating Proceedings
For companies, Article 3 (1) EuInsVO establishes a rebuttable presumption that the centre of main interests is at the registered office. This presumption does not apply if the registered office was moved to another Member State within three months before the application to open insolvency proceedings (Article 3 (1) subparagraph 2 EuInsVO). The aim is to prevent targeted forum shopping in a corporate crisis. If the COMI is relocated shortly before impending insolvency, the courts examine the actual centre of main interests particularly closely. For groups, this is relevant when, in a crisis, consideration is given to relocating the subsidiary’s management at short notice in order to reach an insolvency law perceived as more favourable. Such a relocation will not be recognised without scrutiny and may additionally trigger risks under the rules on avoidance and liability.
A widespread misunderstanding concerns the provisions on group insolvency (Chapter V of the EU Insolvency Regulation, applicable since 26 June 2017). They provide for duties of cooperation and communication between the insolvency practitioners and courts of different group companies, as well as optional group coordination proceedings. However, they lead neither to a pooling of the assets nor to a single jurisdiction for the entire group. Each group company, parent and subsidiary alike, remains the subject of separate proceedings with its own assets, its own creditors and, where applicable, its own law governing insolvency. The insolvency of a foreign subsidiary is therefore not automatically dealt with “within the group”; several parallel proceedings in different states create their own coordination effort.
Managing Director Liability at the Foreign Subsidiary: Typical Case Groups
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| Scenario | Person affected | Liability risk |
|---|---|---|
| Sudden withdrawal of liquidity from the subsidiary before it becomes unable to pay its debts (cash pooling, upstream loans) | Parent company as shareholder | Liability for destroying the company’s existence (Section 826 BGB, to the extent German law applies); avoidance of the repayments under the subsidiary’s insolvency law |
| Transfer prices or licence fees systematically to the subsidiary’s disadvantage | Parent company, possibly its managing director | Liability for destroying the company’s existence, possibly avoidance under the subsidiary’s insolvency law |
| Failure to monitor the shareholding despite a recognisable crisis | Managing director of the parent | Internal liability towards the parent (Section 43 (2) GmbHG) |
| De facto disempowerment of the subsidiary’s appointed managing director by representatives of the parent | Individuals acting for the parent | Liability as de facto managing director or comparable concept under the subsidiary’s law |
| Failure by the seconded managing director to comply with the duty to file for insolvency | Appointed managing director of the subsidiary | Personal liability under the law governing the subsidiary’s insolvency; where applicable, criminal liability under the law of the state of seat |
| Last-minute relocation of the subsidiary’s COMI before the insolvency application | Subsidiary and officers involved | Close judicial scrutiny, risk of avoidance and abuse |
Practical Safeguards for Parent Companies and Managing Directors
The risks described give rise to organisational consequences:
- Clear separation of decision-making levels: operational decisions of the subsidiary should recognisably be taken by its own formally appointed management. Instructions from the parent should, to the extent legally permissible, be given through the channels provided for by company law (shareholders’ resolution) and be documented, rather than informally bypassing the officer.
- Arm’s length principle for intra-group transactions: cash pooling arrangements, transfer prices and intra-group loans should be agreed on market terms and documented in such a way that their appropriateness can be traced in the event of a crisis.
- Monitoring of shareholdings at the parent: the parent’s managing director should regularly monitor the economic situation of material subsidiaries and follow up on signs of crisis in a documented manner, not least to avoid their own liability towards the parent.
- Early advice in the state of seat: for each material foreign subsidiary, it should be clarified in good time, and not only in a crisis, which insolvency law is likely to apply and which filing deadlines and grounds of liability the managing director there must observe. The foreign law must be examined by an adviser in the respective state.
- Local legal support for on-site management: if the subsidiary is run by seconded staff, they should have reliable local legal support, whether through an additional local managing director or through the ongoing involvement of local advisers.
- D&O insurance with actual foreign cover: a D&O policy of the parent does not automatically cover claims against the management of a foreign subsidiary or claims arising from instructions to the subsidiary. The cover should be reviewed for the specific group structure.
- Plan D&O claims handling in a crisis in advance: in insolvency, the D&O insurer will, in case of doubt, take the position that the insurance does not exist to make up for missing equity or missing liquidity. Specialists then call the delaying of the insurance payment strategic claims handling. The art lies in not placing the claims handling in “other hands” in advance, for example those of the insolvency administrator, but in strategically structuring the roles (policyholder, insured person, insured risk) while the subsidiary is not yet in crisis.
- Plan structural decisions early: if a cross-border relocation of the seat or structure is being considered, for example setting up a holding structure before emigrating, the company-law and liability consequences should be thought through in advance. For further detail, see the articles on relocating a GmbH abroad and on the tax consequences when companies relocate their registered office abroad.
Example
Example: Alpha GmbH sets up a sales subsidiary in another EU Member State and seconds its authorised signatory (Prokurist) Stefan as the subsidiary’s managing director. When the subsidiary runs into economic difficulties, Alpha GmbH instructs that all of the subsidiary’s liquid funds be transferred to the parent via the group-wide cash pool. Stefan delays filing for insolvency because he assumes that German law applies anyway and that, as under Section 15a InsO, he has up to three weeks. In fact, under that provision he must act without culpable delay; three weeks is only the maximum period. Above all, however, his duty is governed by the law of the subsidiary’s state of seat, which may require earlier action. The withdrawal of liquidity at the same time creates the risk of the parent being liable for destroying the subsidiary’s existence, and the repayments from the cash pool may be challenged in the subsidiary’s proceedings. The managing director of Alpha GmbH, in turn, must face the question of whether he recognised the subsidiary’s crisis in good time. The risk can be reduced by an early review coordinated with advisers in the state of seat.
Conclusion
The insolvency of a foreign subsidiary does not automatically trigger liability for the German parent company; the separation principle remains in place in principle. It does not apply without limits, however: deliberate outflows of assets to the parent without compensation can give rise to liability for destroying the company’s existence, to the extent that German law applies. Intra-group loans and cash pool repayments can be challenged in the subsidiary’s proceedings, and the de facto disempowerment of the subsidiary’s management can lead to personal liability for the individuals acting. Which insolvency law applies to the subsidiary’s managing director is determined by the state in which the proceedings are opened and thus, within the EU, by the subsidiary’s COMI, not by the parent’s seat. Those who think these connections through early can reduce the liability risks of a group structure with foreign subsidiaries.
Frequently Asked Questions
Is the German parent company liable for the debts of its insolvent foreign subsidiary?
In principle, no. Under the separation principle, parent and subsidiary are independent legal entities; there is no automatic piercing of the corporate veil. The parent does, however, put at risk its shareholding and its loan and cash pool receivables, and it may be called upon under letters of comfort or guarantees it has given.
When does the parent face liability for destroying the subsidiary’s existence?
When it deliberately withdraws assets from the subsidiary without compensation and thereby causes or deepens its insolvency, for example through an abrupt withdrawal from the cash pool. Under German law, this is internal liability towards the subsidiary under Section 826 BGB, which is asserted by the administrator in the insolvency. Whether German law applies to a foreign subsidiary at all must be clarified in the individual case.
Can a manager of the parent be liable as de facto managing director of the subsidiary?
Yes, if they actually take over the subsidiary’s management and bypass the appointed officers. For a foreign subsidiary, this is governed by the law of its state of seat, which frequently recognises comparable liability concepts; the details must be examined by an adviser in the respective state. Merely working for the parent is not usually sufficient.
Which insolvency law applies to the seconded managing director of the foreign subsidiary?
As a rule, the law of the state in which the main insolvency proceedings concerning the subsidiary are opened; within the EU, that is the state of its centre of main interests (COMI). If the subsidiary is actually managed from Germany in a manner ascertainable by third parties, the COMI may be in Germany, and Section 15a and Section 15b InsO then apply. The managing director should have this examined early in a crisis.
Does the parent’s D&O insurance also cover the foreign subsidiary?
Not automatically. Whether claims against the management of a foreign subsidiary or claims arising from the parent’s instructions to the subsidiary are covered depends on the terms of the policy. It should be reviewed with regard to the specific group structure before a crisis occurs. In insolvency, hesitant, strategic claims handling by the insurer must also be expected; who is the policyholder and who is the insured person should therefore be deliberately structured in advance.
Attorney Dr. Johannes Fiala and the firm have published extensively on managing director and officer liability and advise parent companies and managing directors on liability issues relating to foreign subsidiaries at risk of insolvency from a German perspective, from the classification of the applicable law to safeguarding intra-group structures. Please get in touch with the firm without obligation to discuss your individual situation in an initial consultation.
