Insurance fraud in connection with partial retirement, working time accounts and pension commitments via double trust (CTA)

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Total loss in the case of partial retirement, working time accounts and pension commitments

How directors, other officers, or self-employed agents completely lose their retirement benefits due to ineffective trust models.

One of the business models of renowned corporate consultants for company pension schemes is to protect the reinsurance assets from the access of the insolvency administrator by means of a trust or double trust agreement (in the international context called Contractual Trust Arrangement or CTA for short). This pension model, which is popular with medium-sized companies and even DAX corporations, has been under suspicion of commercial deception of industry and medium-sized companies for years because the Federal Court of Justice (BGH) has judged the legal situation differently.

BGH 2002: Trust assets unprotected in the event of insolvency of the trustee

If the trustee becomes insolvent, the employer will generally not be able to demand that the trustee’s insolvency administrator segregate the existing collateral. Instead, the employers as trustors must file their claims in the normal way in the insolvency table. The reason for this is that the trustee acquires new rights of his own for the employer by paying insurance premiums or purchasing investments. However, these acquired trust assets are not a so-called surrogate, i.e. they are no longer the assets which the trustee had originally received directly from the employer as trustor. The employer then only has a normal claim under the law of obligations against the trustee (BGH judgement of 18.07.2002, ref. IX ZR 264/01).

If insolvency or bankruptcy protection were important, a trust model would not normally be required, but in rem security, for example by way of pledge, irrevocable subscription right or assignment.

BGH 2010: Trust assets unprotected in the event of enforcement against the employer/trustee

Any creditor who has a title (e.g. a judgment) against an employer/trustee may have execution levied against the trustee by way of attachment and transfer order even if he does not have a title of his own. The claim of the trustor/employer against the trustee arising from the trust relationship is then attached by way of sovereignty, for example the (possibly future) statutory claims under sections 667, 812 of the German Civil Code (Bürgerliches Gesetzbuch – BGB) for the surrender of what has been obtained or the retransfer of the trust assets (Federal Court of Justice (Bundesgerichtshof – BGH), decision of 22.04.2010, ref. no. VII ZB 15/09).

BGH 2012: Acceptance of money and forwarding of money are each contestable in their own right

In its judgment of 26 April 2012 (Case IX ZR 74/11), the BGH ruled: “A disinterested trustee is subject to avoidance with intent if, after becoming aware of the debtor’s insolvency, he forwards sums of money left to him in accordance with the agreement to certain creditors of the debtor who are to be satisfied preferentially.” This allows insolvency administrators to declare a rescission for ten years. Creditors also have this right of avoidance, for example if the opening of insolvency proceedings is refused for lack of assets.

In addition, the transfer of assets to “disinterested administrative trustees” (e.g. a CTA) is already disadvantageous for creditors and can regularly be challenged. According to the Federal Court of Justice: “Consequently, it must be maintained that even the surrender of funds to a disinterested administrative trustee of the debtor is disadvantageous for the debtor’s creditors.”

Trust and double trust models thus prove to be a clumsy deception about the fact that they do not protect assets in the event of insolvency, but actually have the opposite effect – by making these pension assets “easy prey” for any insolvency administrator.

No asset protection, but planned asset destruction through trust models

Even if the transfer of assets to a trustee subjectively (from the point of view of an employer/trustee), possibly (dolus eventualis), among other things, also merely indirectly serves to disadvantage creditors and this is accepted as a mere presumed consequence, it is subject to the ten-year avoidance period if the trustee is aware of it, § 3 I AnfG, § 133 I InsO. This disadvantaging of creditors is, among other things, the declared purpose of the contract, both according to the CTA advertising and according to the contents of usual CTA contracts.

It is not decisive that the trustee was already aware of impending insolvency at the time of transfer of the trust assets. It is already sufficient that the CTA trustee knew “in the case of security” or “in the case of disturbance” that precisely then an insolvency case already existed and therefore his “instruction-based, (previously contractually) agreed payment of money to allegedly secured employees” disadvantaged the other creditors. The Insolvency Code protects both existing creditors and future new creditors, so that any trust model is doomed to failure from the outset.

Already the laying down of declarations of knowledge and motives regarding asset protection for employees, as is usual in CTA models “in the event of insolvency as an open motive of the security trust”, leads to the fact that on the one hand the transfer of assets to trustees and/or double trustees is contestable for ten years in each case, and on the other hand also any payout “in the event of security”, because then the trustee knows that other creditors are disadvantaged “by his payments in accordance with instructions to employees contractually favoured by CTA”. Such assignments to fiduciaries prove to be unconscionable from the outset.

Beneficiaries of the trust agreement and trustee are jointly and severally liable

In its second guiding principle, the BGH states: “A disinterested trustee who pays out the debtor’s money obtained in a contestable manner to the debtor’s creditor in accordance with instructions is obliged to pay compensation for the value, (recently) without being able to invoke a lapse of enrichment.” The pension beneficiary benefiting from the trust model is liable to the insolvency administrator as a joint and several debtor – since he was unlawfully given preferential satisfaction as a creditor – and the trustee. In the internal relationship, the pension beneficiary is liable to the trustee.

If a group CTA trustee has to “pay twice” after the funds are paid to the employee, the trust assets of the other employers/trustees are also put at risk of misappropriation or enforcement. The remaining employers/ trustors will feel deceived in retrospect about the content of the purported security provided by CTA/ Trust. This is because if the CTA trustee then becomes insolvent itself, even the solvent employers/trustees regularly expect only a “bankruptcy rate” when it comes to the return of their trust assets.

BGH 2012: Even a trustee acting in good faith is liable alongside beneficiaries from the commencement of proceedings

“With the opening of insolvency proceedings against the assets of the trustor. [Arbeitgebers] the trust agreement expires pursuant to §§ 115, 116 InsO and the trust assets fall economically into the insolvency estate”. If the bona fide, unsuspecting trustee pays on the instructions of the trustor/employer after the opening of the insolvency proceedings, the claim of the insolvency administrator to the trust assets against the trustee is not extinguished, the trustee may have to pay twice, because the instruction of the trustor/employer is invalid, section 81 InsO, as the BGH states (judgment of 12.07.2012, ref. IX ZR 213/11).

If the insolvency administrator decides to subsequently approve this ineffective disposition of trust property in order to spare the disinterested administrative trustee, the insolvency administrator may also seek reimbursement from a bona fide recipient of trust property. This is because the recipient of the payment is legally considered to be a non-entitled party, so that good faith is not even relevant, § 816 II BGB.

CTA termination without notice to avoid losses as the safest route

If a CTA trustee pays out funds to (ex-)employees, the insolvency administrator has several options:

  • By contesting coverage, the InsO administrator will ask the employee for the money back.
  • The insolvency administrator can also claim payment from the trustee or CTA trustee. The fact that the trustee acted “as directed” pursuant to an order does not help him escape liability.

As a rule, the parties involved (settlor, employer, trustee) will have to be assumed to have the intention to disadvantage the creditors. Even good faith on the part of the trustee and the beneficiary cannot prevent claims for reimbursement in the case of payments made after the opening of proceedings.

Supervisory boards have a duty

The Federal Court of Justice (BGH) has reiterated its case law on the liability of supervisory board members in the event of insolvency in its ruling of 16 March 2009 (Case No. II ZR 280/07): “If the supervisory board determines that the company is ready for insolvency, it must ensure that the management board files an insolvency petition in good time and does not make any payments that are incompatible with the due care and diligence of a prudent and conscientious manager. If it culpably violates this, it may be liable to pay damages to the company.”

This makes it clear that supervisory boards are even obliged to examine the occupational pensions situation or to arrange for auditors, actuaries and legal counsel to examine its content, including economic and legal security – also from the point of view of compliance and risk management. The Supervisory Board must also prevent CTA trustees who are presumably “legally meaningless and only costly” from collusively making any payment at the expense of other creditors. This is because such trust models are and were regularly “built on sand” from the outset in accordance with the law.

Thus, trust models, double trusts or contractual trust arrangements (CTA) are suspected of encouraging contestable dispositions by trustees through their use. Such deliberately planned preferential treatment of creditors – in this case the pension beneficiaries – could also be punishable under §§ 283 et seq. StGB (German Criminal Code).

Reversal of trust models for working time accounts and company pension schemes

In many cases, trustees and double trustees violate the Legal Services Act because they are not licensed, so that trust agreements and powers of attorney given are “null and void”. This could be triggered, for example, by advisory agreements on the CTA as well as a variety of contractual ambiguities and the trustee’s scope for decision-making.

Occasionally, the trustee does not have a licence for asset management (in regulatory terms: financial portfolio management) in accordance with the German Banking Act. § The German Federal Financial Supervisory Authority (BaFin) has issued a certificate in accordance with Section 32 of the German Banking Act (KWG). In this context, financial portfolio management is any management of individual assets invested in financial instruments on behalf of others with decision-making powers (section 1(1a) no. 3 KWG). The violation of such prohibition laws always means liability in tort, § 823 II BGB.

In addition, in view of the legal situation since 01.01.1999 in the InsO, such fiduciary models will generally constitute intentional immoral damage to the employer as principal and the pension beneficiaries who are thus not protected. Finally, it is foreseeable that domestic trust models, in the unsuitable attempt to transfer constructs that may work in other legal systems to the completely different German legal sphere, will have exactly the opposite effect to that intended: the reinsured funds, for example for company pension schemes, will in many cases certainly fall into the insolvency estate.

It can be seen from company practice that employees who have been given a pension are not aware of these circumstances and that it is often precisely the security against insolvency that is advertised. In this context, employees usually have direct claims against the acting actors personally from the point of view of the contract with protective effect for the benefit of third parties. This increases the chance of old-age poverty for corporate bodies and investment sales.

loan fraud

Trust models were developed under different legal conditions abroad in order to be able to balance the assets “outsourced” with the pension provisions and thus to show lower external debts as liabilities in the balance sheet. This improves the rating and more favourable credit terms can be obtained from banks – also for the shareholder.
the investment in shares of the company becomes seemingly more attractive. If, however, due to the specific German legal situation, the fiduciary model cannot function at all or is even ineffective and the prerequisites for the “accounting trick” are therefore not met, banks and shareholders could feel cheated – consequences in terms of damages and criminal law could hardly be prevented.

Dominant illegal organisation of the distribution of occupational pensions

Training and further training in the field of occupational pensions is offered above all to those market participants from whose “unqualified advice” the Legal Services Act (RDG) and the established case law of the Federal Court of Justice (BGH) would like to protect clients: the BGH judges legal advice contracts with persons who are not licensed as null and void. In particular, these are seminars or, for example, a short course of study at a university of applied sciences to become a “bAV company consultant” for tax consultants and insurance intermediaries. Not infrequently, semi-skilled insurance intermediaries are used to advise customers, encouraged by prefabricated forms, with case-by-case sales support from the internal insurance service, and incentivised by high brokerage promises. In this context, the Federal Constitutional Court (BVerfG) has already ruled that the creation of new occupational profiles (“financial planner”, “succession planner”, “bAV company consultant”, “social security auditor for status determination and contribution reimbursement vis-à-vis the German pension insurance”) cannot avoid the need for legal advice. The appearance is maintained by the respective distributors and, by circumventing the UWG, the distributors are even asked to actively advertise this area.

In the same way, it turns out to be illegal for financial institutions (banks, structural distributors or insurance companies) to have lawyers or tax advisors (who work for them as so-called in-house counsel) provide legal or tax advice to their clients. Thus, the Federal Court of Justice (BGH) already decided years ago (default judgment of 29.07.2009, file no. I ZR 166/06): “An agency of third party legal matters, which is provided without the corresponding permission, is not justified because the acting party uses the assistance of a lawyer for this purpose”.

This also applies if the chamber professional had previously worked on the occupational pension concept for the financial institution, for example as a cooperation partner, or if he acts as a subcontractor of the financial institution or financial distributor. This is where reversal or liability for damages comes into question – a frequent topic after tax audits. Here too, from the point of view of compliance and risk management, auditors in particular should examine whether the formal requirements were complied with when setting up occupational pension schemes, in order to exempt possible liabilities that only become apparent in the event of a claim from the liability of the executive bodies or to rectify possible deficiencies.

In the case of management – but also, for example, in the case of pension commitments for self-employed agents – the (partial) protection by the PSVaG does not apply at all, nor does it apply to working time accounts. According to the new BGH ruling, the trustee must usually hand over these assets to the insolvency administrator without any ifs or buts. It is thus clear that fiduciary and double fiduciary models achieve exactly the opposite of what the financial sales force has come up with in this area through apparently inferior qualified personnel.

For true connoisseurs of the matter would have known that for almost a hundred years of high court legal history it has been considered immoral, frowned upon, ineffective, null and void if an attempt is made to reduce the insolvency estate literally at the last second – with or without a trustee. The failure of the CTA initiators lies in the fact that they did not look for alternatives at home and abroad that could be implemented on the basis of an already secure legal situation and case law.

Falsification of balance sheets as the main purpose of the CTA models with significant liability of the auditors

The fact that employees’ pensions were not really protected in the CTA model in insolvency is usually less significant for employers than the CTA balance sheet embellishment purpose according to the International Accounting Standard (valuation rules for balance sheets), specifically “IAS 19.7”.

However, this standard is not complied with, because in the absence of insolvency security the assets are not exclusively available to the employees on a fully secured basis – as IAS 19.7 would require – and in the event of the insolvency of the trustee (which is more likely with such flawed models) the employer can even segregate them, which may not be permissible under IAS 19.7.

However, in the absence of compliance with IAS 19.7, this means that the accounting is incorrect. Of particular relevance to employers and auditors is the fact that in many cases the requirements of IAS 19.7 for a CTA are not met, and that for years the CTA should not have been reported in this way.

Bottom line:

As sensible as precautions may seem, it is difficult in today’s world for companies to foresee or estimate a period of more than 20 years. The economic situation can change drastically during such a period, so that although the pension beneficiaries can be partially secured by means of security measures, on the other hand the companies reach the limits of their carrying capacity as a result of heavy burdens due to pay-as-you-go systems, such as the PSV.

If one affirms a mature society and the set of rules of the valid laws, the old age provision is put more and more into the area of responsibility of the individual citizen. According to the political will-building process, the farewell to the intergenerational contract is probably irreversible. In hindsight, this will be hailed as one of the most successful lobbying efforts for the insurance industry. It remains to be seen whether the Rürup and Riester pension instruments will share this fate, or whether they will be seen as a “scrapping premium for statutory pension insurance”.

The authors can only urge companies and their auditors to put the entire occupational pension scheme under the microscope, not in the sense of a lawsuit, but to obtain certainty as another dimension.

Watch out

Managing directors, board members and supervisory board members are liable with their private assets

Representatives of corporations without sufficient expertise of their own, e.g. in the field of occupational pension schemes, are obliged to delegate to experts without thereby encouraging prohibited legal advice. Due to the personal liability of board members and managing directors in the event of organisational culpability, the work results of external experts must be subjected to a careful plausibility check, as the Federal Court of Justice (BGH) stated (ruling of 20.09.2011, Ref. II ZR 234/09).

In its ruling of 19 June 2012 (Case No. II ZR 243/11), the BGH goes one step further by assessing it as organisational culpability with a reversal of the burden of proof if the executive bodies of an AG or GmbH do not continuously monitor the economic situation and include and evaluate the provisions not included in business management evaluations. Coverage gaps in the occupational pension system, but also dubious “trust models in the occupational pension system”, can objectively turn the economic situation upside down. Even with the best of intentions, organisational negligence leads to personal liability on the part of the executive body, in which case the manager’s liability insurance is usually exempt from payment.

(expert report special 08/2012, 1-4)


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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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