by Johannes Fiala, Lawyer (Munich), M.B.A. (Univ.Wales), M.M. (Univ.), Certified Financial and Investment Advisor (A.F.A.), EC Expert (C.I.F.E.), Banker (www.fiala.de)
Alleged insolvency protection: At sales training courses it is often claimed that occupational pension schemes are protected against insolvency. To this money ? In the event of the employer going bankrupt, for example, even an insolvency administrator would not be able to access the reinsurance in particular. However, this is simply wrong, as the example of an insolvent GmbH with a pension commitment for the shareholder-manager shows. BGH ruling: 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 simultaneously means the revocation of all subscription rights, cf. section 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 are allowed to give legal and tax advice. This is a legal so-called auxiliary business under the Legal Advice Act ? but: Insurers are just as liable for the correctness of training courses as intermediaries are 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 violation of the Legal Advice Act ? the new Legal Services Act is expected to bring liberalisation in this area in the future. Revocable subscription right: In practice, at most a revocable subscription right is granted with the pension commitment, even after vesting ? In case of doubt, the subscription right of the reinsurance policy is in practice not irrevocable for the shareholder-managing director. 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 the business consultant Jürgen Abstreiter. Significance of the subscription right: If the protection of the shareholder-managing director is seriously intended even before the benefit event, i.e. before the lien matures, an irrevocable subscription right (as a “genuine contract in favour of third parties”) must be granted. 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. Procedure 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 by a simple declaration ? thus the contract falls to the shareholder-managing director, the private creditors of the shareholder-managing director 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 managing director liability: If a GmbH goes bankrupt, it is not uncommon for the managing director to be additionally held “manager” liable. 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: Do pension commitments offer better protection in the event of insolvency? If the partner has a vested pension commitment, it is often said at some broker training courses that the insolvency administrator pays out the pension and cannot close his file for as long as this lasts. 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 then the dream of the insolvency-protected and/or only partly seizable pension of the partner managing director ends, because with it the entire capital comes to the insured person to the Auszahlung ? and is immediately attachable. There is not only the case of underfunding, but also the opposite: Then the pension cash value is ? calculated according to the today unrealistic 6% according to Dr.Heubeck ? lower than the insured value including the surpluses. In this case, the insurer pays 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. Insurers are at a loss: in cases of doubt – with practically frequent additional personal liability on the part of the shareholder-manager – at the end of the insolvency process at the GmbH level, the shareholder-manager will only be able to 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 insurers approached were spontaneously able to point out the possibilities offered by § 4 BetrAVG. Württembergische Lebensversicherung AG referred to the legal possibilities of 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 insurance broker Siebenhaar knows that the transfer to a pension fund might be sensible and at least achievable by negotiation: “This can also avoid a tax loss for the shareholder-managing director, which usually arises in the event of dissolution. Consulting risk: 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. Necessary expert opinion: In this case, only a concrete expert opinion from a recognised and independent actuary/expert and expert for occupational pensions will help in advance. 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 checked. This is where highly explosive mines (in some tax accountants) are stored in the basement. Typical liability approach: The insurer writes “? A shareholders’ resolution is required for your pension commitment ? talk about it with your tax advisor ?”; however, occasionally the tax advisor is neither trained nor insured as a legal advisor. In addition, a single shareholder resolution is often not sufficient for the pension commitment to become effective. Insolvency solution: 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 labour, tax and insolvency law, hardly anything can be done professionally. Far too few insurers are systematically restructuring their own portfolios. The market of insolvent GmbH�s or GmbH�s in crisis is untapped ? Hardly any intermediary is familiar with insolvency avoidance. 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.
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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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