Directors' Duties In Europe: On Insolvency, Where Do Directors Owe Their Duties When The Company's Centre Of Main Interests Is In Another Member State?

Key Points

An English director of a company with main operations in another Member State should take advice on their duties as a director in that Member State if there is a chance the company's centre of main interests (COMI) could be there for the purposes of an insolvency filing.

The question of whether s 64 of the German Limited Liability Companies Act (s 64) is a provision of insolvency law in the sense of Art 4 (1) of the European Insolvency Regulation (EIR) and therefore applicable to an English director of a company with main operations in Germany, is to be considered by the ECJ following a referral by the German Federal Court of Justice in December 2014 in the German case of K Montage und Dienstleistungen Ltd.

There have been several helpful decisions and comment by the English court on the question of jurisdiction over directors of overseas companies in the context of wrongful trading, directors' duties, and disqualification. Most recently, the Supreme Court in Bilta has considered more generally the law applicable to overseas persons.

Introduction: a question of jurisdiction

In K Montage the German Federal Court of Justice has made a request for a preliminary ruling by the European Court of Justice (ECJ). K Montage was an English private company limited by shares with its main business and a registered branch office in Germany. Its director was not domiciled in Germany. Main insolvency proceedings were commenced in Germany in accordance with Art 3 para 1 EIR on the basis that K Montage's COMI was there. The German insolvency administrator brought claims against K Montage's director to recover certain payments made at a time when the company was already illiquid. Agreeing with the decisions of the lower courts, the German Federal Court of Justice considered the director liable under German law for these payments. In so doing, it applied a provision of the German Limited Liability Companies Act to the English-domiciled director of this English limited liability company.

Article 4(1) of the EIR provides that "the law applicable to insolvency proceedings... shall be that of the Member State within the territory of which such proceedings are opened" (the lex concursus). Recital 23 to the EIR provides that the EIR should set out "uniform rules on conflict of laws" to replace national conflict of law rules. Further, "the lex concursus determines all the effects of the insolvency proceedings, both procedural and substantive, on the persons and legal relations concerned". The lex concursus has jurisdiction to hear avoidance actions against defendants who are resident in other EU states (Seagon v Deko Marty Belgium [2009] 1 WLR 2168 and those who are resident in non-EU Member States (Schmid v Hertel [2014] 1 WLR 633).

What are the "laws applicable to insolvency proceedings" under Art (4) EIR? Are they limited to a Member State's domestic insolvency laws? What about Member States whose general corporate or civil law contains provisions that apply in an insolvency context, but are not included in their insolvency law? Should it be substance over form, to avoid inconsistencies in the application of Art 4(1) EIR between those states with all-encompassing insolvency laws and those whose insolvency laws are contained in a wide range of other (eg...