– Why prudent managing directors render themselves insolvent in good time –
A mid-sized GmbH legal form rarely provides asset protection
In practice, fewer than 20% of mid-sized entrepreneurs have chosen to shield their private assets from operational risks by interposing a GmbH. Yet when a situation of insolvency arises, up to more than 90% of company directors file the insolvency petition for the GmbH too late: what controlling and risk management the law required of them is then briefly explained to them in an indictment by the public prosecutor. The insolvency administrator will then resort to avoidance (clawback) and demand compensation, putting the entire private estate at stake once again. If social-security contributions or taxes are in arrears, the state will likewise reach for the managing director’s private assets by way of a liability assessment.
The insolvency administrator’s access to occupational pension assets
The majority of managing directors rely, when it comes to the insolvency protection of their occupational pension (bAV – betriebliche Altersversorgung), on the marketing claims of bank advisers and insurance intermediaries – only to learn later that the insolvency administrator draws the assets into the insolvency estate, at which point they are lost.
Not infrequently this leads to the company director’s subsequent personal insolvency – for example because of avoidance actions, liability assessments, guarantees or criminal proceedings. Even then the occupational pension assets are regularly lost, even where they were still protected against the GmbH’s insolvency. Industry associations give this topic a wide berth.
No salvaging of assets through timely insolvency proceedings – subsequent administration looms
The Federal Court of Justice (BGH – Federal Court of Justice, order of 20 December 2018, file no. IX ZB 8/17) held, among other things, that “claims of the debtor to the death or survival benefit under a direct insurance policy taken out by the employer for occupational pension purposes are subject to subsequent administration insofar as the claims fall into the insolvency estate” and: “In the case of a life insurance policy, claims to the insurance benefit upon occurrence of the insured event, which are due to the debtor as policyholder or by virtue of an irrevocable beneficiary right, belong to the insolvency estate even before the insured event occurs.”
In practice, the occupational pension assets are only temporarily exempt from attachment until the insured event – such as maturity for payout at retirement age (§ 2 II S.4 BetrAVG, German Company Pensions Act) – thereafter they are subject to subsequent administration and accrue to the creditors and the insolvency administrator.
Where the person concerned is a managing shareholder (GGF – geschäftsführender Gesellschafter), the BetrAVG does not apply at all: with a revocable beneficiary right, the GGF’s direct insurance falls into the estate at once.
Creative structurers recommend assigning the beneficiary right to a third person
If, when the managing director’s personal insolvency is imminent, the beneficiary right to the occupational pension is transferred to a third person, this deprives the managing director of earned remuneration – which may raise potential criminal liability for withholding it, § 266a StGB (German Criminal Code). The GmbH renders itself liable for damages; and this legal claim would, in personal insolvency, frequently also be attachable by the insolvency administrator. In suitable cases the tax office will raise the question of “de facto double” taxation by way of a hidden distribution of profits.
The grant to a third party may give rise to an allegation of breach of trust (Untreue); including personal liability of the persons acting in tort. Without suitable contracts offering the hoped-for legal certainty, such dispositions or grants cannot be implemented in any halfway secure manner.
Granting the beneficiary right to the occupational pension to a third party when personal insolvency is imminent almost always leads to voidability. It also requires careful structuring – after all, a mere gift would additionally be taxable as such, with both donor and beneficiary liable for the tax. There then follows the further question of whether such gifts must be declared for tax purposes already upon (possibly irrevocable) designation, or only when the occupational pension benefit falls due.
So-called sporting structures designed to provide for the event of insolvency must in any case be planned and implemented while times are still good. The assets must always be transferred in good time and as early as possible, so that the risk of losing everything in a personal insolvency does not become too high. Otherwise it was – in hindsight – evidently not in good time. The beneficiary could, for example, be a foreign insurer or a corporation enjoying statutory enforcement protection. Or, just as readily, an irrevocably entitled trust foundation whose purpose is to direct the money to someone later, as and when it fits, and at a freely selectable point in time.
The risk of the wrong bAV contractual partners and do-it-yourself solutions
Most of those affected will nonetheless try it themselves – and many of them then remember from whom they got the idea, as soon as it has gone wrong. The result of similar attempts with electrical trickery can be viewed in the Electropathological Museum of Dr Jellinek in Vienna’s Narrenturm. Repair work often costs up to more than ten times the effort compared with good structuring from the outset.
Involving a life insurer is in itself already a major risk, because it may have its own views on who is entitled to the money, and every increase in complexity merely makes everything more prone to error. Those affected then discover that, in the insolvency or benefit scenario, they still need a war chest and sufficient patience. Ultimately one arrives at the following experience:
“It is no use having the law on your side. You also have to reckon with the courts.”
(Dieter Hildebrandt)
By contrast, many believe that greater security and the desired outcome could be achieved through greater complexity. Which is above all expensive.
Revocation by the employer or insolvency administrator destroys all claims
Any beneficiary designations – and even the transfer of the policyholder status of a direct insurance or other life insurance policy serving occupational pension purposes from the employer to the insured – are ultimately not securely valuable either. For as the Federal Court of Justice has held (orders of 23 February 2022 – IV ZR 150/20 and of 4 May 2022 – IV ZR 201/20), a right of revocation – which under ECJ case law may continue to exist without time limit – is, even where a life insurance policy is transferred from the employer to the insured as the new policyholder, never transferred along with it, but instead remains with the employer. This is so that the employee cannot revoke and thereby jeopardise the purpose of the pension provision.
The employer or its insolvency administrator, however, can still revoke, so as to receive the entire premiums paid – without the risk-cost component but plus all benefits derived – for example to increase the insolvency estate. The life insurance contract is then destroyed retroactively from the outset, and with it all beneficiary designations. Any claims under the pension commitment may then be lodged, as with any insolvency creditor, against the insolvency dividend, which at best lies in the lower single-digit percentage range.
Professional advisers recommend a brief foreign insolvency – followed by a surprisingly long prison sentence
A well-known tennis star preferred a personal insolvency in England; it ended with a conviction to over two years for delaying insolvency – for the multiple Grand Slam champion.
Foreign insolvency does not lead to the goal anyway if the absconding debtor stays in the home country too often – for example with his family (Art.26 EuInsVO, the European Insolvency Regulation, ordre public; e.g. AG Nürnberg, order of 15 August 2006, file no. 8004 IN 1326 – 1331/06).
The star was, in any event, welcome and settled in well. Above the entrance gate stood “Welcome to Her Majesty’s Prison”!
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
with the kind permission of
www.hm-infinity.de (published in Infinity Magazin 12-2022, pages 30 and 31)
and
www.experten.de (published on 30 November 2022)
Link: www.experten.de/2022/11/wie-gmbh-geschaeftsfuehrer-ihre-altersversorgung-nicht-behalten/
and
www.paderzeitung.de (published on 30 November 2022 under the headline: Why prudent managing directors render themselves insolvent in good time
Link: www.paderzeitung.de/2022/11/warum-vorsichtige-geschaeftsfuehrer-rechtzeitig-vermoegenslos-werden/
and
www.pt-magazin.de (published on 30 January 2023)
and
CampingImpulse, issue 1.2023, pages 36 and 37
