An ongoing legal discussion not only within the German legal system but across numerous other jurisdictions, revolves whether directors owe (or should owe) a fiduciary duty to consider the interests of creditors in the vicinity of insolvency (creditor duty). Due to the introduction of article 19 (a) of Directive (EU) 2019/1023 (the Restructuring Directive) this discussion has gained new momentum.
I. Introduction
Pursuant to the aforementioned article, Member States shall ensure that, where there is a likelihood of insolvency, directors have due regard, as a minimum, to the interests of creditors, equity holders and other stakeholders. Since the Restructuring Directive came into effect and the transposition period started, it has been heavily discussed whether article 19 (a) of the Restructuring Directive demands a shift of fiduciary duties. And if so, to what scope. Finally, the question arises as to whether national implementation measures are required. Increasing legal certainty in this regard is the aim of my PhD project.
Amongst others, one of the research focuses is a comparative legal analysis of the transposition of article 19 (a) of the Restructuring Directive into German, Austrian and Irish national law. This part of my research was presented at the BWILC PhD Workshop 2024 and will be discussed in this research blog in a simplified and generalised way.
In the following, a brief overview of the legal situation in Germany, Austria and Ireland regarding the Ltd. and PLC will be given. Each respective section initially outlines the legal situation prior to article 19 (a) of the Restructuring Directive and subsequently discusses the implementation measures.
II. Germany
The main focus of my research and basis of the comparative analysis is the German legal system.
1. Legal situation prior to article 19 (a) of the Restructuring Directive
Directors of a Ltd. are required to conduct the company’s affairs with the due care of a prudent businessperson pursuant to section 43 (1) of the Act on Limited Liability Companies (GmbHG). Therefore, directors must act in good faith in “the interest of the company” (Fleischer, in: MüKoGmbHG, 3. edition 2019, sec. 43, mn. 13). Predominantly, “the interest of the company” was (and still is) understood as the interests of the shareholders when the company is solvent (Fleischer, in: MüKoGmbHG, 3. edition 2019, GmbHG sec. 43 mn. 14- 19). Furthermore, a shift of fiduciary duties – towards a more pluralistic approach – in the likelihood of insolvency was not acknowledged (Klöhn, in: Bork/Schäfer, GmbHG, 4. edition 2019, sec. 43 mn. 5; Müller, ZGR 2018, 56-87 (84)). Accordingly, a creditor duty was widely not recognized.
Regarding the PLC, directors’ fiduciary duties are set out in sections 76 (1), 93 (1) of the Stock Corporation Act (AktG). According to these provisions directors must – in simplified terms – act in “the interest of the company” with due care. Yet, in contrast to the Ltd., “the interest of the company” was (and still is) rather understood in a more pluralistic way (Koch, in: Hüffer/Koch, Aktiengesellschaft, 15. edition 2021, sec. 76 mn. 28-33; Higher Regional Court (OLG) Frankfurt a.M., 17.08.2011 – 13 U 100/10, juris mn. 23, 27). Hence, the interests of creditors had to be considered in a directors’ decision-making process, both when the company is solvent and also in the likelihood of insolvency. Nevertheless, the creditors’ interests did not become paramount (Korch, ZGR 2019, 1050 – 1081 (1057)).
2. Implementation measures
Germany did not introduce explicit statutory rules to implement article 19 (a) of the Restructuring Directive. The legislative decision, not to give effect to the initially envisaged sections of the Act on the Stabilisation and Restructuring Framework for Businesses (StaRUG) meant to transpose said article, has left question marks and ample room for discussion in legal literature. Mainly focussing on, whether German company law or other provisions of the StaRUG may be interpreted in accordance with EU law or an amendment is needed. Due to the different legal situations, a distinction must be made between the Ltd. and PLC (see II. 1.). Ultimately, the discussion circles back to the question whether article 19 (a) of the Restructuring Directive implies a shift of fiduciary duties and if so, to the scope of the duty itself.
III. Austria
Given its similarities to German company law, Austria was chosen as a comparator jurisdiction.
1. Legal situation prior to article 19 (a) of the Restructuring Directive
Given the fact, that the provisions of Austrian company law regarding directors’ fiduciary duties are mainly based on the respective German provisions (Feltl/Told, in: Gruber/Harrer, GmbHG, 2. edition 2018, sec. 25 mn. 3; Strasser, in: Schiemer/Jabornegg/Strasser, AktG, 3. Edition 1993, bef. §§ 70-85, mn. 2), the above-mentioned understanding (see II. 1.) basically applies equally to the legal situation in Austria prior to article 19 (a) of the Restructuring Directive.
The normative points of reference are sections 25 (1), (1a) of the Austrian Act on Limited Liability Companies (aGmbHG) regarding directors of a Ltd. (Feltl/Told, in: Gruber/Harrer, GmbHG, 2. edition 2018, sec. 25 mn. 42-43) and sections 70, 84 (1), (1a) of the Austrian Stock Corporation Act (aAktG) regarding directors of a PLC (Reich-Rohrwig, in: Artmann/Karollus, AktG II 6. edition, sec. 70 mn. 83, 86, 91-94).
2. Implementation measures
However, the Austrian legislator introduced section 1 (3) of the Austrian Restructuring Act (ReO) which applies equally to directors of a Ltd. and PLC. Pursuant to section 1 (3) of the ReO directors must have due regard to the interests of creditors, shareholders, and other stakeholders in the likelihood of insolvency (translated freely). This wording is basically the same as set out in article 19 (a) of the Restructuring Directive. Even though Austrian legislation – in contrast to German – gave explicit effect to article 19 (a) of the Restructuring Directive, the question of the actual meaning and scope of the duty prevails.
IV. Ireland
The decision to use Ireland as a comparator jurisdiction is based on the fact that Irish common law – like other common law jurisdictions – has for some time in principle acknowledged a shift of fiduciary duties (Re Frederick Inns Ltd [1994] ILRM 387).
1. Legal situation prior to article 19 (a) of the Restructuring Directive
Pursuant to section 228 (1) (a) of the Irish Companies Act 2014 a director of a company [Ltd.] shall act in good faith in what the director considers to be the interests of the company. This statue applies to directors of a PLC as well (section 1002 (1) of the Irish Companies Act 2014).
Acting in “the interest of the company” has been interpreted as the interests of shareholders when the company is solvent (G&S Doherty v Doherty [1969]; John Quinn & Philip Gavin (2023): The creditor duty post Sequana: lessons for legislative reform, Journal of Corporate Law Studies, p. 4). A different – more pluralistic understanding – is favoured by some regarding the PLC whatsoever (John Quinn & Philip Gavin (2023): The creditor duty post Sequana: lessons for legislative reform, Journal of Corporate Law Studies, p. 5 fn. 24).
Even though, Irish common law recognized a shift of fiduciary duties, the specifics were not sufficiently clear and basically developed on a case-by-case basis (John Quinn & Philip Gavin (2023): The creditor duty post Sequana: lessons for legislative reform, Journal of Corporate Law Studies, p. 3 fn. 16, p. 4-8, 16).
2. Implementation measures
Interestingly enough, the Irish legislator decided to amend the Irish Companies Act 2014, introducing section 224A which states in subsection (1) (a) that a director of a company who believes, or who has reasonable cause to believe, that the company is, or is likely to be, unable to pay its debts (within the meaning of section 509 (3)), shall have regard to the interests of the creditors, (also see the amended section 228 subsection (1) (i) of the Irish Companies Act 2014). This amendment also applies to directors of a PLC (sections 1002, 224A, 228 (1) (i) of the Irish Companies Act 2014). Thus, the creditor duty is now statutory law.
Even though the introduction of section 224A brought some clarity, the actual scope of the duty is still not sufficiently clear.
V. Closing remarks
Since article 19 (a) of the Restructuring Directive came into effect, its meaning and scope are at the core of every discussion held nationally on directors’ fiduciary duties in the likelihood of insolvency. Thus, the importance of interpreting article 19 (a) of the Restructuring Directive diligently, is obvious. Only then may the questions arising on national level in this matter be answered. Additionally, analysing the “three approaches taken” is highly valuable when discussing the necessity of an amendment to German statutory law, another part of my PhD thesis.
*This research blog was written by Sara Ludwig, fully qualified lawyer and PhD candidate at the Martin Luther University, Halle-Wittenberg, Germany.
About BWILC and the PhD Workshop
This research was presented and discussed at the last PhD Workshop on European and International Insolvency law, organised by the Stichting Bob Wessels Insolvency Law Collection (BWILC). Since 2018, BWILC maintains the private insolvency law book collections of Prof. em. Bob Wessels, extended with the collections of the late Prof. Ian Fletcher and the late Gabriel Moss QC, in addition to books that have been kindly donated by scholars and practitioners from around the world. To browse or visit this unique collection, click here.
Since 2019, BWILC organises an annual PhD Workshop for PhD students from Europe and beyond. At this workshop, PhD candidates can present their ideas, but also the challenges and questions they are confronted with in a two-day workshop attended by their peers and senior academics. At the end of the workshop, organised in alternately in Leiden and another city, prizes are awarded for the best presentations.