Federal Court of Justice (BGH): No protection against access by the insolvency administrator in the case of pension commitments

– Why up to more than 95% of managing partners lose their pension-

A new ruling by the Federal Court of Justice (BGH) dated 1 April 2013 (ref. IX ZR 176/76) shows that managing partners and controlling directors often face the complete or predominant loss of their pension as a retirement benefit despite “pledging the reinsurance for alleged insolvency protection”.


Right of recovery solely with the insolvency administrator

If a GmbH or AG becomes insolvent, only the insolvency administrator is authorised to collect the reinsurance funds, i.e. in particular the life insurance for old-age provision, § 173 Insolvency Code (InsO). The insurer no longer has to make joint payments to the company and the person to be provided for.


The fortune is gone for now

The ex-director or ex-managing director could first demand “security on the basis of a security interest on account of pledge”. However, the insolvency administrator will first of all deduct from the assets 4% determination costs and 5% realisation costs, in each case plus value added tax, §§ 170, 171 InsO. The right to collect remains with the insolvency administrator even if individual instalments or pensions fall due month after month – whether these are then also paid by the insolvency administrator is often written in the stars.


Total loss of old-age pension with good prospects of social security benefits

The insolvency administrator will dutifully examine whether a claim can be made against the ex-director or the ex-board member on the grounds of organ liability or manager liability. In up to more than 95% of cases, the insolvency application is filed too late or there are other management errors, so that a personal liability of the business performance opens the door for the insolvency administrator to offset.


Approximately every second pension commitment without assets to cover the pension

According to the experience of experts, about every second pension commitment to a managing company comes under the radar of the tax audit because there is simply no reinsurance to finance it. This also applies to the frequent case where the house bank has secured first-ranking access to the reinsurance assets as loan collateral via the general terms and conditions without the management noticing. In that case, no effective pledge of the reinsurance policy will help, because the bank’s claim takes precedence.


Life expectancy and occupational disability risk often not covered

Insofar as a cover capital is available, this is of course far from sufficient to cover a medium life expectancy – if only because of the contributions no longer paid until the start of the pension in the event of insolvency. This is especially not the case if the managing director lives longer, which is to be expected in 50% of the cases with a remaining life expectancy of 7 or more years. If he becomes unable to work and therefore also has claims from the pension commitment, the capital will often be used up long before the retirement pension starts – a surrender value for the occupational disability benefit – if it exists – is very low. All the more so if the insolvency administrator deducts his costs and then earns far less interest on the remainder than the insurer would have earned. If the insolvency administrator cancels the reinsurance policy, protection in the event of invalidity and, in many cases, any protection for widows and orphans spontaneously ceases.


Even premature withdrawal alone can lead to total loss

Managing partners regularly receive a so-called immediately vested pension commitment from the outset. However, for tax reasons, the amount of this may only relate to the period between the granting of the commitment and the departure from the company due to the prohibition of subsequent payments (BMF letter dated December 9, 2002, Federal Tax Gazette I 2002, page 1393). In many cases, tax auditors and insolvency administrators will identify a loophole in the pension commitment which leads to a hidden distribution of profits (vGA).


Hidden profit distribution leads to tax damage and manager liability

A vGA will be assumed in particular if the amount of the legal entitlement to a pension recognised for tax purposes is lower than the legal entitlement granted under civil law in the commitment to a company pension. In many cases this means that objectively the facts of a breach of trust are present, i.e. a classic case of directors’ and officers’ liability. There is then “double” taxation as measurable damage. In other cases, for example, there is a lack of formal shareholder resolutions, so that no vesting occurs at all – this will not escape the insolvency administrator, which means that the managing director then no longer receives any pension at all – and without a pension entitlement, the pledge for this also comes to nothing. In retrospect, the ex-board member or ex-managing director would have done better to have his pension commitment checked year by year for effectiveness.


Effective domestic asset protection?

Occupational pension schemes are particularly prone to errors and losses. Being self-employed for a good 30 years statistically means that every third person has already experienced insolvency. In addition, there are the risks associated with forms that are deficient from the outset, as well as the failure to take account of changes in the law and unexpected twists and turns in case law. A more effective safeguarding of assets for old-age provision (asset protection) would be more often feasible within the framework of private pension schemes. In many cases, the asset protection of occupational and private pensions works better abroad.


by Dr. Johannes Fiala

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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

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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