Freedom of Establishment versus Creditor Risk in Germany: A Clash of Principles?

Table of Contents

Introduction

Literature Review
Freedom of Establishment – Articles 43 and 48 EC
German Creditor Protection and Articles 43 and 48 EC
I. Duty to file insolvency proceedings
II. Equity Capital Maintenance and Replacement
III. Destroying a company’s existence

Methods and Methodologies
I. Research Methods
II. Theoretical Orientations in Qualitative Research
III. Research Styles
IV. Data Collection Methods
V. Actual Data Sources

Principles, Conflict, Theory
Right of Establishment within Europe
Principles of Creditor Protection
I. Director Statutes
II. Shareholder Statutes
European Insolvency Regulation

Relevant Case Law
European Court of Justice
I. Segers Case C-79/85 [1986]
II. Centros Case C-212/97 [1999]
III. Überseering Case C-208/00 [2002]
IV. Inspire Art Case C-67/01 [2003]
German Courts
I. LG Stuttgart 5 KfH O 76/01 10.8.2001
II. AG Hamburg 67g IN 358/02 14.5.2003
III. LG Hannover 20 T 39/03 2.7.2003
IV. AG Duisburg 63 IN 48/03 14.10.2003
V. LG Berlin 102 T 57/04 31.8.2004
VI. AG Saarbrücken 106 IN 3/05 25.2.2005
VII. BGH Case II ZR 5/03 14.3.2005 (LG Hagen)
VIII. AG Bad Segeberg 17 C 289/04 – 24.3.2005

Creditor Risks – real or illusory
The Informed Creditor
I. Access to Company Information
II. Reliability of Company Information
Limited Companies in Germany
I. Registrations
II. Insolvencies
Legal (Un) Certainty for Insolvency Proceedings

Conclusions

Selected Bibliography

Appendix

List of Cases

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Acknowledgments

The author wishes to thank Tom Mortimer for his patience and support during the production of this thesis.

Glossary Of terms

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Abstract

Award: LL.M. International and European Business Law

Date: 25 November 2005

Student: Renate M. Eichin - ID 0408652

Title: Freedom of Establishment versus Creditor Risk in Germany: A Clash of Principles?

The aim of this dissertation is to analyse the potential clash of the principle of free establishment and the creditor protection principles in Germany. It researches the position of unsecured creditors of insolvent pseudo-foreign companies following the rulings of the European Court of Justice in Segers, Centros, Überseering and Inspire Art with the focus on German creditors of companies with limited liability incorporated in England and Wales.

Research is carried out through reviewing and analysing academic and professional opinions voiced concerning the applicability, restricted or non-applicability of specific German creditor protection instruments following the ECJ rulings considering that the law of the country of incorporation governs foreign companies. European case law defining the current understanding of the fundamental freedom of establishment is reviewed and contrasted with subsequent rulings by German courts involving insolvent English companies.

The result of the analysis shows that the number of English limited companies (Limited) is still relatively insignificant compared to the total number of German GmbH companies. Limiteds don’t seem to replace the GmbH and don’t yet present a threat to the German economy. Questionable is the accuracy and completeness of company information a German creditor can obtain. The main reason is the lack of a formalized or regulatory information process between the company registers of England and Germany.

Based on the research performed it can be concluded that the principles of creditor protection in Germany differ greatly from those applied in England. The German creditors can no longer rely on the applicability of German creditor protection instruments and face legal uncertainties. In Germany the majority of creditor protection instruments are part of company law, in England they are part of insolvency laws. The European Insolvency Regulation is not specific enough to solve these uncertainties and can even aid forum shopping. Until further clarifications are provided by the ECJ through appropriate case law the situation will remain highly unsatisfactory for the German creditor.

Chapter 1

Introduction

The European Treaty Articles 48 EC^[1] (ex 58) and 43^[2] (ex 52) EC grant nationals and companies of the European Union (EU) the fundamental freedom of establishment and movement within the EU. The European Court of Justice (ECJ) has always taken a very broad view and interpretation of these Treaty articles and has consistently rejected national legislation which might hinder or make the establishment and/or movement of individuals and, in recent times, companies within the EU less attractive^[3]. The unrestricted establishment and movement for companies were laid down in the landmark cases of Segers^[4], Centros^[5], Überseering^[6] and Inspire Art.^[7] In Inspire Art the ECJ ruled: ‘ that a national of a Member State who wishes to set up a company can choose to do so in the Member State the company-law rules of which seem to him the least restrictive and then set up branches in other Member States^[8] ’.

These decisions have had far-reaching consequences in regard to the various national conflicts of law rules, company laws, insolvency laws and even tort laws. The ECJ rulings are still the cause of many legal uncertainties and the subject of a fair amount of academic debates. While initially most discussions centred on the continued viability of the real seat theory ^[9] subscribed to in Germany, these have now moved on to the more pragmatic issues such as the subject of creditor protection. The principles of creditor protection, based on legal and cultural history, differ greatly among the European Member States and work due to an intricate web of company law, insolvency law and sometimes tort law. As the ECJ rulings seem to have acted as a promoter for the creation of pseudo-foreign companies^[10] in those EU Member States with very liberal formation rules and without the need for raising share capital, at the time of incorporation, creditor protection is of particular concern to the German business world.

This dissertation will analyse the position of unsecured creditors of insolvent pseudo-foreign companies. Focus will be on creditors of companies with limited liability incorporated in England/Wales but solely operating in Germany. The general belief seems to be that particularly individuals operating small companies without sufficient funds^[11] to establish a Gesellschaft mit beschränkter Haftung^[12] (GmbH), are attracted to the formation of a private company limited by shares (Limited ^[13] ) and therefore pose a considerable risk to their creditors^[14].

From a German perspective the potential problem of the influx of pseudo-foreign companies started theoretically in 1986 - with Segers . In Segers, and earlier in the same year in Commission v France^[15], the Court observed that the location of the registered office was the connecting factor to the legal system of a particular country. A Member State cannot arbitrarily treat non-national companies differently from those registered within the Member State as this ‘ would deprive Article 48 of all meaning^[16] ’.

While the general business community, law professionals and academics alike largely ignored^[17] Segers in 1986 some 13 years later Centros ^[18] caused uproar^[19] and made the subject of pseudo-foreign companies formed in England/Wales headlines. The ECJ ruled in Centros that Articles 43 (ex 52) and 48 (ex 58) allow nationals of a Member State to avoid local company formation rules, such as paying up a minimum share capital, by forming a private limited company in accordance with the law of another Member State without ever conducting any business there^[20].

In Überseering ^[21] the company wasn’t formed abroad in order to circumvent national company law but moved its company headquarters from The Netherlands to Germany without reincorporating the company in Germany. According to the real seat theory ^[22] applicable in Germany Überseering has been refused legal standing in German courts. The ECJ stated that ‘ the requirement of re-incorporation of the same company in Germany is tantamount to outright negation of freedom of establishment^[23] ’.

The case of Inspire Art ^[24] in 2003 was for all practical purposes a repeat of Centros. Inspire Art was formed as a private limited company under the laws of England and Wales by a Dutch national and executed all its business in The Netherlands. The ECJ restated Segers ^[25] and Centros^[26] and held ‘ the fact that the company was formed in a particular Member State for the sole purpose of enjoying the benefit of more favourable legislation does not constitute abuse even if that company conducts its activities entirely or mainly in that second State.’^[27]

Inspire Art removed all doubts, if they still existed, that Member States have to fully recognize companies formed in accordance with the law of a Member State in which they have their registered office but in which they conduct no business and accept the fact that these pseudo-foreign companies are connected to the legal system of the country of their incorporation.

The ECJ seems to expressly encourage forum shopping as an instrument to increase economic competition within Europe. Darmon AG in Segers submitted that the possibility of forum shopping left open by Articles 43 and 48 was a ‘ logical consequence of the rights guaranteed under Treaty ’^[28].

The Commission in Segers^[29] stated that by virtue of Article 43 (ex 52) a company formed in another Member State is entitled to conduct its business in the host country under the same conditions as those applying to companies formed in the host country. Conducting business under the same conditions as nationals, however, seems only to find application when the host country offers a perceived benefit to its nationals over non-nationals^[30] and not when nationals must follow specific company laws, such as paying up the minimum share capital at the time of formation. The ECJ creates what some commentators call reverse discrimination^[31].

So what are the particular consequences of these decisions for the creditors of these pseudo-foreign companies formed without any share capital? Are creditors of an insolvent Limited company worse off then creditors of an insolvent German GmbH or is this just an illusory problem?

Germany, like many European Member States relies on minimum capital requirements^[32] at the time of formation of a company with limited liability and capital maintenance rules for companies with limited liabilities as a method of creditor protection. UK and Ireland are among the very few EU Member States not requiring a minimum share capital to be paid up at the time of formation^[33]. While the ECJ has acknowledged that the need for creditor protection in view of public policy potentially justifies restrictions^[34] the Court has ruled out that companies incorporated in a Member State requiring no minimum capital are obliged to pay up at the time of moving into another Member State^[35] where minimum share capital is required for limited companies. Such a requirement would make it less attractive for the company to establish itself in the second Member State.

The ECJ has concluded that the fact a company holds itself out as being governed by the law of England and Wales is sufficient for a potential creditor to decide if he wants to proceed with his business dealings^[36]. That puts the obligation onto the potential creditor to research the foreign company and be knowledgeable not only in German company and insolvency laws but also in those of other European countries. How easy is it for the German businessman to obtain reliable information about this foreign company quickly and without significant cost in order to assist himself in his decision?

Has, as a result of the ECJ rulings, the number of Limited companies in Germany now grown to worrying levels and will they replace the GmbH ? A number of authors predicted this would happen^[37]. To facilitate the process of incorporating a company in England a whole new industry has emerged^[38] to “sell” the Limited to those individuals who would like to operate a business with limited liability but without the minimum capital requirement of €25.000^[39] required in Germany to form a GmbH. The advancement in technology, such as the Internet has greatly assisted this process and most of these agencies operate virtually via the Internet^[40]. These service companies receive their revenue stream from, among other services, providing the legally required registered office in England/Wales and the company secretary. In addition to these originally UK based companies have now come a number of German consultants (lawyers, accountants, tax specialists) assisting their clientele to form a company in England.

To bring clarity into the discussion the German Government^[41] is tracking since January 2005 the registration of Private Companies Limited by Shares in the same fashion as GmbH incorporations, changes and dissolutions are tracked. Now that the data for the first six months of 2005 is available, one can see that previous estimates circulating^[42] in the press have been highly overestimated^[43] - namely that since the end of 2002 around 20.000 Limited companies^[44] have started business in Germany.

Does the increase of Limited companies in Germany go hand in hand with a high number of insolvencies? Considering the short time frame since the Inspire Art ruling it would be unrealistic to expect huge volumes of insolvent English Limited companies but is there already a trend to be spotted? No official data yet exists regarding the number of insolvency cases initiated in Germany for companies incorporated in the UK. The Bundesamt für Statistik (Federal Office for Statistics) expects to report the number of Limited insolvencies as of January 2006.

Companies with limited liability in financial difficulties and assets consumed by operating losses are interested in staying in business as long as possible. Investors and their dependent director(s) will take every opportunity to manoeuvre the business into safer waters and rescue their investment, as they don’t want to lose anything additional at this stage. Any additional risk lies now with the unaware creditor^[45].

In the absence of minimum share capital and capital maintenance requirements the creditor of a pseudo-foreign company has to rely on regulatory protection. This protection is not straight forward or easy to comprehend as company law and insolvency laws are not harmonized within the EU and in most Member States the two sets of laws are closely linked and interrelated. What happens if the company law of one country applies (that of the country of incorporation) and the insolvency law of another (that of the country of operation)? This creates very specific problems as to the applicable law, protection of creditors and third parties^[46]. In addition to the capital maintenance requirements §64 GmbHG^[47], part of German company law, is key to creditor protection in Germany.

The applicability, yes or no, of §64 GmbHG for pseudo-foreign companies in the light of Articles 43 and 48 has been at the centre of many discussions of academic writers. While Germany could follow the unrestricted applicability of the real seat theory §64 GmbHG providing the required creditor protection for all companies with limited liability in Germany, foreign or national alike. However this is no longer possible after the ECJ rulings outlined above. §64 GmbHG^[48] demands that the managing director (Geschäftsführer) files insolvency proceedings as soon as the company is illiquid or if the company debts exceed the assets. If the director fails to initiate these proceedings in time he is liable to imprisonment or a fine in accordance with §84(1)^[49] GmbHG^[50]. Also, failure to comply with §64 GmbHG can result in applicability of §823(2) BGB^[51] providing the creditor with the opportunity to claim damages from the managing director^[52]. This possibility is especially important for “new” creditors providing goods or services after the GmbH was already technically bankrupt. New creditors can potentially demand full compensation for their losses, while “old” creditors could claim compensation for a lower pay out.

If applied would §64 GmbHG restrict the freedom of establishment? If yes, is it a justified restriction as a matter of public policy and meeting the four conditions^[53] stipulated by the ECJ to justify creditor protection? What protection measures can the creditor of a private limited company expect from the English company law or alternatively from English insolvency laws? Will wrongful, fraudulent trading or lifting the corporate veil be an adequate protection similar to §64GmbH and §823(2) BGB? The various protective methods will be analysed and compared as to their usefulness for the German creditor. Are these protection measures a realistic solution or only theoretical?

The European Insolvency Regulation^[54], effective May 31 2002, has been introduced to bridge some of the gaps in the various conflict of law rules and to bring clarity as to the jurisdiction, recognition and applicable law for cross-border insolvencies^[55]. The Regulation stipulates that the insolvency law of the country where the insolvency proceedings are opened^[56] has to be applied and that the Member State^[57] where the debtor has its main centre of interests has jurisdiction. In the case of pseudo-foreign companies German insolvency law would be applied. However, the interdependence of insolvency law and company law does not necessarily produce the same result for the creditor of a foreign company. Furthermore, insolvency proceedings must be opened in order for the European Insolvency Regulation to apply. If case proceedings are not progressed, due to insufficient funds for example, the creditor seems to gain nothing through this instrument.

In the many articles about Centros, Überseering and Inspire Art the subject of creditor protection has received little attention outside of Germany. Understandably, for a UK academic or law professional it is of little interest how a German creditor deals with an insolvent Limited operating solely in Germany. Most of the published German articles indulge in theoretical academic arguments on how company law, insolvency law and potentially tort law can be applied without falling foul of Articles 48 and 43. Not a single journal article has taken the viewpoint of an impacted unsecured creditor, outlined the practical implications and then taken a judgement on how big a problem this really is. This thesis will review academic and professional opinions voiced on this subject after Centros, Überseering and Inspire Art and compare it to the real situation of creditors of insolvent Limited companies operating in Germany since 2002.

This thesis can only address a very limited section of these legal issues and therefore has to ignore many aspects of important differences in the comparison of the operation of a pseudo-foreign Limited and a German GmbH. This paper concentrates on the risks for unprotected creditors who would normally supply small to medium size companies and while they can accept or reject a contract they are normally not able to influence the terms of their contracts. Protection of minority shareholders is not covered.

Chapter 2

Literature Review

Freedom of Establishment – Articles 43 and 48 EC

The freedom of establishment for nationals as well as companies of the European Member States is provided for in Articles 43 and 48 EC. The European Court of Justice has used the principle of freedom of establishment as a yardstick in various fields of company and enterprise law to decide the applicability of national laws^[58]. Starting with Centros a never-ending number of articles appeared in the appropriate professional journals commenting on the significance of the ECJ interpretation of Articles 43 and 48 EC on the national laws of the of the various Member States. Most of the commentators focused on specific consequences of the ECJ decisions such as conflict of laws, company law and here particularly on the seat theory. Hardly anyone critically commented on the ECJ interpretations of the Freedom of Establishment as such, one of the exceptions being Ingo Saenger^[59].

Saenger^[60] states that the ECJ seems to assume that the formal definition in Article 43 EC does not exclusively determine a definition of the freedom of establishment but instead provides a basis for an interpretation and enhancement of the definition in Article 43. The ECJ has also defined the freedom of establishment as “the actual pursuit of an economic activity through a fixed establishment in another Member State for an indefinite period^[61] ”. Saenger notes that ECJ has failed to notice how this definition is to be interpreted in the context of the formal definition in Articles 43 and 48. Saenger points out that one has to be aware of the fact that fundamental freedoms have undergone a development from just being a discriminatory ban to being a ban on restrictions. Fundamental freedoms attain a much broader scope of protection if they are understood as being a ban on restrictions as they not only apply to regulations discriminating against foreigners but to all kind of restrictions ^[62]. If there is a substantial burden or restriction it will only matter whether the restriction passes the proportionality test or can be justified by opposing interests. Saenger draws similarities to the landmark case Dassonville ^[63] in which the ECJ produced the so-called Dassonville formula applying to Article 28 EC^[64]: “all trading rules enacted by Member States which are capable of hindering, directly or indirectly, actually or potentially, intra-community trade” and to other cases explaining how the ECJ has continuously expanded the scope of protection of the freedom of trade. Saenger observes a similar process as far as the freedom to provide services is concerned. Saenger however notes that the strict formulation of Article 43(1) “within the framework of the provisions set out below” is absolutely non-ambiguous and only provides the right of equality and should not be ignored by the ECJ. Saenger expects the ECJ to synchronise its adjudication to the individual fundamental freedoms soon and is consequently expected to interpret the freedom of establishment as an extensive ban on restrictions.

One of the major consequences of the ECJ decisions is the legal uncertainty now surrounding the legal framework governing the day-to-day operation of companies incorporated in other Member States. Omar^[65] suggests that Centros and Überseering have promoted an expansion of the freedom-of-establishment provisions to a level that even mandatory rules in company law cannot be defended against the Community legal order. In this situation, competition may be opened up amongst regulators for incorporations where hitherto no such market existed because of the strictures of domestic law and the need for compliance before carrying out business within the jurisdiction.

Germany is particularly impacted as its conflicts of law rules have so far ensured that the law of the state where the company has its principal place of administration governs the company. This so-called “seat theory” contrasts with the “incorporation theory” which provides that the law of the incorporation country governs the company irrespective where the company has its principal seat of administration. Many authors see in the ECJ rulings in Centros, Überseering and Inspire Art the end of the seat theory^[66] while some others^[67] only see the seat theory curtailed in certain areas (so-called modified seat theory^[68] ). Ebke states that even before Centros there has been a long-standing and highly controversial debate over whether Germany’s version of the real seat (siege reel) doctrine is in compliance with Articles 43 and 48 EC^[69]. He notes that the abolition of the seat theory would possibly revitalize the process of company law harmonisation within the EU which has come to a virtual standstill. Ebke points out that in Daily Mail and Centros the ECJ never intended to create an opportunity for companies to transfer their real seat from one Member State to another through the backdoor of setting up a branch without dissolution. He states that Daily Mail was a question of primary establishment whereas in Centros a question of secondary establishment. Full freedom of primary establishment requires the existence of functionally equivalent company law within the EU; freedom of secondary establishment however does not. In his opinion the EC Treaty does not guarantee the full freedom of primary establishment. Kieninger^[70] who notes that the change of the statutory seat within Europe is neither possible under the incorporation theory nor under the real seat theory shares this particular opinion. Ebke concludes that Centros did not abolish the real seat theory. Roth^[71] demands that companies should be free to change their legal clothes by way of conversion thereby upholding their legal capacity. Restrictions to this right should be justified on grounds of general interests. In Roth’s opinion Articles 43 and 48 don’t differentiate between moving in and moving out.

As a consequence of the death of the seat theory some writers also expect the demise of the German codetermination rules. Sandrock is very vocal in his statements saying that the seat theory as well as ‘ the state of paradise for German trade unions’ has come under attack by Article 43 EC^[72]. He further states that the spirit of the Inspire Art judgment makes it clear that the German regime of codetermination would restrict the freedom of establishment and such a restriction could hardly be justified by any pursuit of the common good. Germany therefore cannot enforce its own law on companies incorporated in another Member State. Brand is less articulate but also voices concerns about the applicability of German codetermination rules for foreign companies^[73], an opinion shared by others^[74].

Many commentators have expressed their concerns about regulatory competition amongst the Member States resulting in a “race to the bottom”^[75] or the arrival of the “Delaware” phenomena^[76] in Europe. This concern is rejected by Kieninger^[77] who points out that Delaware generates 20% of its state budget from franchise taxes, taxes that are not allowed in Europe^[78] and furthermore Delaware is focused on reincorporating companies again something not (yet) being possible in Europe. Similarly Micheler^[79] considers “Delaware” unlikely to occur in Europe.

A further and very important consequence of either the end of or even a modified seat theory is the potential non-applicability of German creditor protection instruments in case of the insolvency of a pseudo-foreign company.

German Creditor Protection and Articles 43 and 48 EC

In Germany the rulings of the European Court of Justice in Centros, Überseering and Inspire Art with their perceived impact on German company laws and especially on creditor protection instruments have resulted in an extraordinary volume of legal views and arguments^[80]. These judgements have led to an unbearable level of legal uncertainty regarding the applicable law for capital companies^[81]. It has been argued that in the wake of the ECJ rulings Germany will see a substantial part of its legal entities replaced by foreign companies, mainly English companies, with the consequence that these foreign companies will no longer be subject to German law^[82]. A number of publications^[83] have discussed to what extent – if at all - foreign corporations, and particularly the private companies limited by shares incorporated in England (Limited), can be made subject to German company law. The ECJ decisions could in their extreme consequence mean that German lawyers, and for that matter, lawyers and judges in every other European Member State, be required to study the workings of 25 different legal systems regulating companies in the European Union^[84].

Non-German academics and law professionals have mostly ignored the matter^[85]. Immediately following the judgements in Centros, Überseering and Inspire Art a significant number of writers seem to have only been interested in the “must happen” (desired?) abolition of the German seat theory^[86] and, in its wake, the demise of the employee co-determination rules^[87]. After the initial flurry of articles on these subjects and when it became obvious that the seat theory as such wasn’t going to be abolished in the short term the debates outside Germany died down. Non-German writers and law experts did not cover practical day-to-day issues such as the impact of the differing norms on creditor protection. This is understandable as to company exporting countries, such as the United Kingdom, it is of little interest if the German creditor protection principles continue to apply or not. The British economy and the public at large are not impacted at all.

The many writers who have commented on the applicability of the German creditor protection instruments for foreign companies headquartered in Germany are, in my opinion, largely divided into three camps. Those of the opinion that

(1) the entirety of German company law is applicable (with the exclusion of defining legal capacity) because the principles of the seat theory prevail and therefore all creditor protection instruments remain valid
(2) certain or most concepts of German law apply either by way of so-called “special connection” (Sonderanknüpfung) or by way of restricting the definition of company law and this applies particularly to those areas where insolvency laws are tightly coupled to provisions of company law^[88]
(3) German creditor protection instruments are mostly not applicable as foreign companies are governed by the company law of its incorporation country and the German creditor protection instruments would restrict freedom of establishment and movement as provided by Articles 43 and 48 EC.

Altmeppen^[89] leads the camp of those very few^[90] concluding that the seat theory continues to apply to pseudo-foreign companies and therefore German company law continues to govern foreign limited companies having their seat in Germany. The only exception being the rules for formation, changes to and ultimately the dissolution of the company which are to be governed by law of the country of incorporation. In his opinion Articles 43 and 48 state the right of a company to move to another Member State without being forced to comply with additional incorporation procedures. In Altmeppen’s view the laws governing the on going business operation in the host country are quite separate from the rules governing the formation. In his judgment applying national company law does not impact the freedom of establishment or movement as outlined by Articles 43 and 48. He compares this to the laws governing the driving of a British motorist in Germany. The motorist has to drive on the right side of the street even if it is exactly the opposite in his home country^[91]. By continuing to apply the principles of the seat theory all of the instruments designed to protect creditors of insolvent companies can therefore find relevance for insolvent pseudo-foreign companies.

Altmeppen believes it would be absolutely ridiculous to assume that the ECJ expects the legal community of a given Member State to be familiar with the legal system governing companies in all 25 Member States^[92].

Altmeppen’s views on the continued, nearly unrestricted, applicability of the seat theory while widely referenced are not widely shared. Ulmer ^[93] takes specific issue and contradicts Altmeppen’s opinion that Articles 43 and 48 are limited to securing the unrestricted recognition of the foreign company in another Member State^[94]. In Ulmer’s view the ECJ rulings are designed to ensure that a company continues to be treated according to the laws of the incorporation country thus the incorporation theory prevails^[95]. He agrees with Altmeppen that this would lead to extraordinary problems for the courts. Nevertheless, Ulmer sees very little room for the continued unrestricted application of German creditor protection instruments. In his opinion liabilities attached to the director and/or shareholder when violating specific German company rules can only apply if they meet the conditions specified by the Gebhard test^[96].

While Ulmer seems to have the exact opposite opinion from Altmeppen, the majority of German legal profession, among them Huber^[97], is somewhere in the middle coming to the conclusion that the German creditor instruments continue to be valid although they reach this conclusion via different legal interpretations. The more detailed arguments reflecting the views for the most important German creditor protection instruments are outlined below.

The German principles for the protection of creditors of insolvent companies centre around three key areas of extended or even unlimited liabilities for the director(s) and/or shareholder(s) in cases of:

I. Delayed Insolvency Filing
II. Non-compliance with Capital Maintenance and Capital Replacement Regulations
III. Destroying a company’s existence

A fair number of writers have provided extensive legal theories pleading for the applicability^[98] of the German creditor protection instruments in line with German company and insolvency laws and there is more or less an equal amount of writers expressing the view that the German instruments, as they stand today, can only be applied under a very limited set of circumstances or not at all^[99].

I. Duty to file insolvency proceedings

The statutory duty to file insolvency proceedings in a timely manner (latest within three weeks after the company becomes insolvent) is part of the German company law^[100] and not part of the insolvency law. Failure to comply with this statute results in the tortious act of Insolvenzverschleppung^[101]. This duty coupled with the legal consequences for non-compliance is one of the most important pieces in the toolbox of creditor protection. The regulation intends to protect new creditors from contracting with an already insolvent company and old (existing) creditors from incurring even higher damages due to a further reduction of the remaining company assets^[102] (Quotenschaden). Failure to comply can result in unlimited liability for the company director and potentially criminal proceedings^[103]. The director becomes liable towards the company^[104] and creditors^[105].

The question being discussed by the various authors: ‘is §64 GmbHG compatible with Articles 43 and 48 EC or does this statute constitute a hindrance to free establishment within the EU’. Can a German court sentence the director of a Limited to compensate the company and creditors for damages resulting from non-compliance of §64(1) when such a duty is not part of the company law in the incorporation state?

Huber^[106] is of the opinion that the ECJ rulings in Centros, Überseering and Inspire Art include nothing preventing German law requiring foreign companies to file insolvency proceedings should the company run out of cash or become over indebted and consequently hold the director liable for damages resulting from non-compliance of this statute. In his opinion the freedom of movement guaranteed by Articles 43 and 48 EC are not impacted at all assuming that the company is not already insolvent and over indebted at the time of moving in^[107]. Huber justifies his view by referring to the European Insolvency Regulation^[108] Article 4.2 reading: ‘ the law of the State opening the proceedings shall determine the conditions for the opening of those proceedings… ’ therefore German courts are entitled to initiate proceedings at the time of insolvency and over indebtedness. If the courts are entitled to initiate insolvency proceedings as outlined then it can also not be against Articles 43 and 48 EC to require the director to file insolvency proceedings and not wait for a creditor to do so. If the company has no right continuing to trade once insolvent and over indebted the statutory requirement to file insolvency proceedings can’t be seen as hindering the right of establishment. The question of §64 GmbHG is only relevant at the time insolvency proceedings are opened, even though with delay, or proceedings are refused due to insufficient funds. Only in the case of bankruptcy and consequently the withdrawal of the company from economic activities does the possibility to hold the director liable for damages caused as a result of the delayed insolvency filing arise. Huber doesn’t see why a company director who failed in his duties should escape his liability because of the guaranteed freedom of establishment^[109]. In Huber’s opinion liability in case of non-compliance and the freedom of establishment are not related otherwise pseudo-foreign companies would enjoy an unacceptable level of freedom: the instruments of the home country don’t bite because the company has no activity there and the instruments of the host country can’t be applied, as they constitute a hindrance^[110].

Ulmer is at the opposite spectrum of opinions regarding §64 GmbHG. For Ulmer^[111] §64 GmbHG is unquestionably company statute therefore without relevance for the directors of a foreign company being governed by the law of their home country.

Many of the law professionals who have voiced their opinions believe that §64 GmbHG has to be regarded as part of insolvency law^[112] and also as a consequence of the European Insolvency Regulation^[113] being applicable should insolvency proceedings be opened in Germany^[114]. Riedemann^[115] justifies that conclusion by the close link of the ‘right to file insolvency proceedings^[116] ’ with the ‘duty to file insolvency proceedings’ even though the latter is a statute of the German company law. Mock/Schildt^[117] are of the opinion that there is no link between the right to file insolvency proceedings and the duty to file proceedings. They qualify the former as part of the national insolvency law and the latter as part of company law and thus not applicable to foreign companies. In Mock/Schildt’s view the freedom of establishment would be restricted if a director were forced to file for insolvency when the incorporation country doesn’t require such a duty in the same situation^[118]. Consequently Mock/Schildt would expect that the continued operation of an insolvent Limited be dealt with as the offence of “wrongful trading^[119] ” - a provision of the English Insolvency Act^[120] - which they however qualify as part of company law and therefore applicable.

A number of writers^[121] believe the Limited director’s liability towards creditors for non-compliance of the duty to file insolvency proceedings when the company becomes illiquid can be justified by the German tort law, namely §823(2) BGB in connection with §64(1) GmbHG. This group sees justification for this view as being provided by Article 40(1) EGBGB^[122] which is applicable if the act has been committed in Germany or the resulting damage of the act is in Germany^[123]. Burg^[124] suggests that the combination of the English offence of wrongful trading being combined with § 823(2) BGB will be applicable in Germany when dealing with insolvent Limiteds. He sees wrongful trading as a protective law, similar to the duty to file insolvency proceedings in a timely manner, and therefore §823(2) can be applied in case of non-compliance.

II. Equity Capital Maintenance and Replacement

After the ruling in Inspire Art it has been generally accepted that foreign companies are not subject to minimum share capital in the same fashion as German companies^[125]. What about the maintenance of company equity capital? In Germany §30^[126] and §31^[127] GmbHG govern the capital maintenance for limited companies and the non-compliance can result in liability of the shareholders towards the unpaid creditors. This potential piercing of the corporate veil is discussed controversially. In the main however the commentators seem to reject the applicability of this particular creditor protection instrument for pseudo-foreign companies albeit with different views as to why^[128].

Altmeppen^[129] would like to see an analogous application of these statutes for foreign companies in respect to company capital required to satisfy its creditors and applicable to all dividend payments reducing the company assets necessary to cover foreign capital. Such an interpretation exceeds the meaning of §30 and §31 GmbHG as these statutes only cover the protection of the minimum share capital but do not guarantee assets covering all its debts at time of insolvency^[130]. Schmidt/Bierly^[131] consider the application of §§30 and 31 justified by the Gebhard test^[132] and they don’t consider the non-existence of a minimum share capital as a hindrance. However it is generally agreed amongst the commentators that §30 and §31 cannot be invoked for foreign companies as they control the maintenance of the statutory equity capital that doesn’t exist for a Limited ^[133].

In Schumann’s^[134] opinion all questions related to company capital are to be considered company law and therefore English company law prevails when judging company capital related issues for the Limited operating in Germany. Schumann states that the only way to apply German law over English law would be through ordre public^[135]. This would however mean that the application of English law would lead to a result being completely incompatible with the fundamentals of German law. The fact that English company legislation provides creditor protection in a different fashion isn’t enough justification to assume a violation of the German ordre public.^[136]

Some writers discuss the potential liability of the shareholder based on §129^[137] of the German Insolvency Act. This provision allows the insolvency administrator to challenge acts prior the opening of the insolvency proceedings which left creditors disadvantaged particularly in cases of repayment of capital replacing debt^[138]. What constitutes a capital replacing debt is specified in the German company act^[139]. A number of writers would also like to apply this company statute to foreign limited companies^[140] by qualifying §32 GmbHG as part of insolvency law in combination with §§39 (1) and 135 of the German Insolvency Act^[141]. Others dispute this viewpoint^[142] as they see the question of capital replacing debt closely linked to the minimum capital requirements of the company, namely that they are both issues which can be addressed by the statutes governing the company.

Wienberg/Sommer^[143] qualify the German rules relating to equity capital replacement as belonging to the insolvency statutes even though they are encoded in company law^[144], and therefore applicable to pseudo-foreign companies justified by the European Insolvency Regulation Article 4.2. (g), (i) and (m). Article 4.2.(g) specifies that the law of the state opening the proceedings decides ‘ the claims which are to be lodged against the debtor’s estate and the treatment of claims arising after the opening of insolvency proceedings. In their opinion this leads back to German insolvency law qualifying creditor compensation sequence^[145] ; equity capital provided by a shareholder replacing debts having a lower rank. Applying solely the laws of the incorporation state to all capitalization questions of a pseudo-foreign company would deny a Germany insolvency administrator the legal right to rescission of bankruptcy if the incorporation state doesn’t have equivalent statutes. In the interest of creditor protection and legal certainty this can’t be justified^[146]. In Wienberg/Sommer’s view this is a question of an orderly market exit and not a question of unhindered market entry. The interests of the creditors should at that point take priority over those of the shareholders.

III. Destroying a company’s existence

Piercing the corporate veil in case of destroying a company’s existence has found application in a number of prominent lawsuits in recent years^[147]. Shareholders of an insolvent GmbH can become liable towards the company creditors if they have withdrawn company assets with the purpose of making them unavailable to company creditors or indulge in other acts leading to the demise of the company and leaving creditors deliberately unpaid. If insolvency proceedings are opened the right to sue the shareholder(s) lies with the insolvency administrator; and if proceedings are rejected due to insufficient funds the creditor can sue directly^[148].

Discussions again centre on the question how compatible this German regulation is with the provisions of Articles 43 and 48 EC - is this a punishable act based on insolvency laws, a tortious act falling under civil law or should it be dealt with under company law? Accepting the fact that shareholder liability is governed by the laws of the incorporation country^[149] and to satisfy the conflict of law rules commentators who consider this area uncovered in English company law suggest (1) a correction of the foreign company law via the ordre public or a special connection to German statutes^[150], (2) connection via the tort provision and (3) a connection via the European Insolvency Regulation to the German Insolvency laws^[151].

Burg^[152] is of the opinion that liability for acts destroying a company’s existence falls in the realms of company law together with the inadequate capitalization and therefore cannot be applied to foreign companies. His view is shared by others^[153] who see this instrument as a form of veil piercing connected to the misuse of a company and therefore unambiguously part of the company law. Burg^[154] also doesn’t see a possibility to connect this offence to the German insolvency statutes, which then could be applied via the European Insolvency Regulation. The statutory pre-requisite for the applicability of this offence is the bankruptcy of the company but not the opening of the insolvency proceedings; therefore there can be no connection to the insolvency norms. Zimmer shares Burg’s opinion ^[155].

Bayer^[156] considers liability for acts destroying a company’s existence a tortuous act subject to the tort law of the country where the offence took place and therefore equally valid to foreign companies through the conflict of laws rules. In Germany such an offence will invoke §823 (2) BGB^[157] in connection with §263 StGB^[158].

Borges^[159] is part of the group^[160] who sees the application of §826 BGB^[161] as a safe harbor method to hold shareholders liable when they operate a company with completely inadequate equity capital and/or perform acts destroying the company’s existence. §826 BGB being part of the German tort law does not have to be compatible with Articles 43 and 48 EC and therefore applicable to foreign companies. The application of §826 BGB in cases of intentional misuse of the company and damage to company creditors should also be compatible with the Gebhard test^[162] specified by the European Court of Justice even though this compatibility should not be required as Articles 43 and 48 are not impacted. Schall^[163] categorically rejects any piercing of the veil as in his opinion only English law applies with no exceptions. In his opinion the English principles of creditor protection are sufficient and comparable.

As the above short summary has demonstrated that there is a high degree of legal uncertainty for the German creditor when dealing with a pseudo-foreign Limited in Germany. It is quite extraordinary to see how many different variants and often completely opposite conclusions can be drawn out of the same sets of legal provisions. The literature review shows that nearly all possibilities of mixing and matching German and English laws have been discussed over the past few years. For every position one can find at least one legal academic sharing one’s view. The majority of writers would like to see more clarity and suggest transferring certain provisions currently contained in the company statutes to the insolvency statutes^[164]. The commentators have also come to the conclusion that a number of creditor protection instruments normally applicable in the incorporation state become meaningless as English governance doesn’t extend abroad. To compensate for these gaps in creditor protection further suggestions include the creation of additional legislation allowing piercing of the corporate veil for companies operating with inadequate financial means^[165] and a more strict liability of the director in case of non-compliance with the statutes regulating the company registration in Germany^[166].

The literature review has resulted in a very mixed and partially controversial picture regarding the continued applicability of German company law and consequently the continued applicability of German creditor protection instruments for Limiteds operating in Germany claiming rights provided by Articles 43 and 48 EC; rights which have been confirmed by the European Court of Justice. Also no conclusions can be drawn on the questions every potential German creditor to a Limited faces -: does a Limited present a higher credit risk then a German GmbH and if yes are Limiteds really invading Germany and replacing the GmbH form?

How compatible are the principles of freedom of establishment with the principles of creditor protection in Germany? The German government has submitted that the need for creditor protection justifies certain restrictions on foreign companies. Is this risk to creditors real or illusory? This dissertation attempts to find answers to these questions and identify those areas requiring further focused research in order to establish the real impact of foreign companies to creditor protection in Germany.

Chapter 3

Methods and Methodologies

The ECJ judgments relating to the right of free establishment for European companies have left the German creditors potentially in a disadvantages position. Is the principle of free establishment compatible with the cherished principle of creditor protection in Germany? If there is a clash between the two principles what is the impact on a German creditor? The purpose of this dissertation is to explore the position of unsecured creditors of insolvent pseudo-foreign companies following the rulings of the European Court of Justice in Segers, Centros, Überseering and Inspire Art^[167]. Does the German creditor take on a higher risk when extending credit to a Limited ? Can a German creditor continue to rely on the German creditor protection instruments available to him in GmbH insolvency cases? Do these protective instruments extend to insolvent Limiteds in Germany?

Research can be conducted using a variety of approaches and data collection methods. Each research method has its strength and weaknesses and the selection very much depends on the particular context^[168]. The nature of the problem to be investigated has led me to choose a qualitative research method. Given that the very short time period passed since the ECJ rulings one can not expect to find sufficient data to produce statistically signifcant results. As the focus will be on the analyses and interpretation of documentary evidence the theoritcal orientation of Hermeneutics has been chosen. The research style will be predominantly historical with ad hoc interviews to supplement the information. Documents to be researched will be publications covering the subject of Limited s in Germany as well as European and German case law ruling. Secondary sources will be used for quantification of the problem such as statistics published by the German government or other non-governmental agencies such as the DTI. The documents will be analysed and grouped in order to uncover facts and trends. The available research methods and theoretical orientations are briefly outlined below.

I. Research Methods

Quantitative research ^[169] uses a deductive or “top down” scientific method and requires standardized data to be collected and analysed. In quantitative research the objective is to test or verify a theory, rather than to develop it^[170]. This research style is used for description, explanation and prediction. The results are statistical and a goal is to generalize the results. Quantitative research would require a population of two more or less equally sized and fairly large groups of creditors of insolvent Limited companies and insolvent GmbH companies in order to analyse and compare the groups. The variables to be analysed would have to be researched first. A number of variables can probably be extracted from the results of this thesis.

A quantitative research style would need the two groups to be a fair representation of both GmbH companies and Limited companies operating in Germany covering a broad cross-section of industries. The definition and identification of such groups would take considerable time and could not be achieved in the available time frame and additionally as outlined above there might not yet be a sufficient number of impacted parties available. Furthermore, it would be highly improbably for me, a single student, working without the support infrastructure of a German university to find sufficient comparable candidates willing to participate in such a research project. Missing specific variables and dependencies to be researched, lack of time and missing infrastructure will therefore disqualify quantitative research methods for this dissertation. While this dissertation’s purpose it to confirm or reject problems of creditor protection the next stage of research could possibly quantify the situation using a range of variables and testing potential dependencies. Quantitative research will be most probably a suitable methodology during the next stage of researching the subject of the protection of creditors to pseudo-foreign companies in particular the protection of creditors to Limiteds. Nevertheless, quantitative data will be collected in regard of the number of Limiteds operating in Germany and the number of insolvencies of pseudo-foreign German Limiteds.

[...]

^[1] Article 48 (ex 58)
Companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Community shall, for the purpose of this Chapter, be treated in the same way as natural persons who are nationals of Member States.
‘Companies or firms’ mean companies or firms constituted under civil or commercial law, including cooperative societies, and other legal persons governed by public or private law, save for those which are non-profit-making.

^[2] Article 43 EC (ex 52)
Within the framework of the provisions set out below, restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting up of agencies, branches, or subsidiaries by nationals of any Member State established in the territory of any Member State.
Freedom of establishment shall include the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies or firms within the meaning of the second paragraph of Article 48 (ex Article 58), under the conditions laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions of the chapter relating to capital.

^[3] Inspire Art Case C-167/01[2003] – para 133; Kraus Case C-19/92[1993] – para 32; Gebhard Case I-4165[1995] – para 37; Centros Case C-212/97[1999]: De Laysterie Case C-9/02 [2004]

^[4] Segers v. Bedriifsvereiniging voor Bank- en Verzekeringswezen en vrije Beroepen C-79/85[1986]

^[5] Centros Ltd v Erhversog Selskabsstyreisen C-212/97[1999]

^[6] Überseering BV v Nordic Construction Company Baumanagement C-208/00 [2002]

^[7] Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd Case C-167/01 [2003]

^[8] Inspire Art Case C-167/01 [2003] – para 138 ; Centros Case C-212/97 [1999] – para 27

^[9] The “real seat theory” determines a corporation’s nationality based on the location of its managerial and administrative decisions. A company incorporated in The Netherlands but managed completely out of Germany would have to be regarded as a German company and therefore subject to German company law. In contrast is the “incorporation theory” which determines a corporation’s nationality by its place of incorporation, i.e. the place where it is registered as a corporate entity. A company incorporated in The Netherlands would be therefore be a Dutch company. See Kieninger, E-M (2003) and Kersting, Chr (2002).

^[10] A pseudo-foreign company is a company that is incorporated in another jurisdiction but has no or no significant contacts with that other jurisdiction.

^[11] Dierksmeier, Dr. Jochen. (2005). Betriebs-Berater 28/29, 1516

^[12] German equivalent to English private company limited by shares (Ltd.)

^[13] Throughout this document the term “Limited” will be used to denote a private company limited by shares formed in accordance with the laws of England and Wales.

^[14] Borges, Georg. (2004). ZIP 16/2004, 734

^[15] Commission of the European Communities v French Republic Case C-270/83 [1986]

^[16] Segers Case C-79/85 [1986] – para 14

^[17] on-line research into Segers on Westlaw, Lexis/Nexis and Lawtel has not resulted in a single document referring solely to Segers. Segers was referenced in many in articles starting 1989 covering ECJ judgments relating to the freedom of establishment/movement and/or freedom of providing services. Segers was either referenced by the Court or by the authors of the respective articles.

^[18] Centros Case C-212/97[1999]

^[19] The main reason was the perceived impact of Centros on the “real seat theory” and not concerns about German creditor protection.

^[20] Centros Case C-212/97 [1999] – para 39

^[21] Überseering Case C-208/00 [2002]

^[22] see footnote 10

^[23] Überseering Case C-208/00 [2002] – para 81

^[24] Inspire Art Case C-167/01 [2003]

^[25] Segers Case C-79/85 [1986] – para 16

^[26] Centros Case C-121/97 [1999] – para 18

^[27] Überseering Case C-208/00 [2002]

^[28] Trimidas, T. (1993). Yearbook of European Law, 1993 13

^[29] Segers Case 79/85 [1986] – para 11

^[30] Commission of the European Communities v French Republic Case C-270/83 [1986]; Commerzbank Case C-330/91

^[31] Tridimas, T. (1993). The Case-Law of the European Court of Justice on Corporate Entities. 13 YEL 1993. Tridimas cites Case 22/77 FNROM v Mura [1977] and Case 126/82 Smit v Commissie Grensoverschrijdend Beroepsgoederenvervoer [1983]; see also Case 44/84 Hurd v Jones [1986] and Case 37/82 Morson and Jhanjan v Netherlands [1982] described in Greenwood, Ch: Nationality and the Limits of Free Movement of Persons in Community Law [1988]

^[32] Share capital subscription under §5 GmbHG must be at least € 25.000 of which at least 25% subject to an overriding minimum of €12.500 must be paid up before registration. In the case of one-man companies, the single member must give a security for the balance. Contributions in kind must be substantiated and will be checked by the registering court. As of January 1, 2006 the minimum capital requirement was expected to be reduced to € 10.000 (Neuregelung des Mindestkapitals der GmbH (MindestkapG) Geschäftszeichen III A 2- 3510/8 – 32 437/2005). This proposed reduction of the minimum capital was rejected by the German parliament on 23 Sep 2005 as it would lead to a reduction in creditor protection and as a result the number of under capitalized companies would increase.

^[33] Borges, Georg. (2004). ZIP 16/2004, 733; Inspire Art Case C-167/01[2003] – para 116

^[34] Überseering Case C-208/00 [2002] – para 92

^[35] Inspire Art Case C-167/01[2003] – para 135

^[36] Centros Case C-212/97 [1999] – para 36

^[37] Daily Telegraph Oct 9. 2004 p 18 Germans see ‘Ltd’ as quick route to riches; Uhl, Alexander (2004) ‘Limited statt GmbH’ press release 06/04 available www.tax-munich.de ; Burg, Michael GmbHR 21/2004 1379

^[38] Borges, Georg. (2004). ZIP 16/2004, 734

^[39] see footnote 33

^[40] www.golimited.co.uk. www.incorporate-uk-company.co.uk www.24limited.co.uk www.go-limited.de www.eurolimited.de www.limited4you.de

^[41] Bundesamt für Statistik www.destatis.de

^[42] Dr. Jochen Dierksmeier (2005). Die englische Ltd. In Deutschland – Haftungsrisiko für Berater. Betriebs-Berater (BB 28/29 11. Juli 2005) referring to an article published by Priester in Frankfurter Allgemeine Zeitung June 2, 2005 – page 11

^[43] Up until the end of 2004 registrations for Limited companies starting business in Germany were recorded in a section “Others”. The total for this section for the year 2003 and 2004 was only 8.965 therefore 20.000 new Limited companies are simply not possible.

^[44] Schall, Dr. Alexander. (2004). Warum Deutschland eine neue Kapitalgesellschaft braucht. GmbHR 18_04. available www.gbmhr.de/heft/18_04/ ; Scheytt, Stefan in Boom der Beschränkten, available www.brandeins.de , referring to Prof. Heribert Hirte estimating 15.000 to 25.000 pseudo-foreign Limited companies operating in Germany already in 2004.

^[45] Hirt, H.C. (2004) ECFR 1/2004

^[46] Kersting, Christian (2002). Brooklyn Journal of International Law (28 Brook.J.Int’l L. 1)

^[47] GmbH Gesetz (German company law for private limited companies)

^[48] §64 GmbHG Obligation to petition for bankruptcy proceedings. (1) If the company becomes insolvent, the managing director shall without undue delay, but not later than three weeks after the insolvency occurs, petition for the commencement of bankruptcy proceedings. The same applies if the assets of the company no longer cover the liabilities. The petition is not culpably delayed if the managing director strive to open court proceedings with the due care of a prudent businessman.

(2) The managing directors are liable to compensate the company for any payments made after the insolvency has occurred or the overindebtedness is discovered. This does not apply to payments made after this point in time where consistent with the due care of a prudent businessman. The provisions of §43, paragraphs (3) and (4) apply analogously to the compensation claim.

^[49] § 84 GmbHG Breach of duty in case of losses, overindebtedness or insolvency. The following persons are punishable by prison sentences of up to three years or by fine: 1. a managing director who fails to report to the shareholders a loss of half of the share capital, or 2. a managing director who, in contravention of §64 paragraph 1, or liquidator who, in contravention of §71 paragraph 2, fails to petition for the initiation of bankruptcy proceedings or court composition proceedings where the company is insolvent or overindebted. If the person acts negligently the penalty shall be imprisonment for up to one year or a fine..

^[50] Bundesgerichtshof (Sixth Civil Senate) 16 December 1958 BGHZ 29,100

^[51] Bürgerliches Gesetzbuch (German Civil Code)

^[52] Huber, Ulrich. (2005) Page 361 Europäische Auslandsgesellschaften in Deutschland

^[53] Inspire Art Case 167/01 – para 133 – (non discriminatory, must be justified by imperative requirements of the public interest, suitable for securing the attainment of the objective they pursue and not go beyond what is necessary)

^[54] Council Regulation EC 1346/2000 (not applicable in Denmark)

^[55] EC Regulation 1346/2000 Preamble 8

^[56] EC Regulation 1346/2000 Article 3

^[57] EC Regulation 1346/2000 Article 4

^[58] Saenger, Ingo. (2004). Deakin Law Review 2005 10(1) 299

^[59] Saenger, Ingo. (2004). Deakin Law Review 2005 (1) 297, 318

^[60] Saenger, Ingo. (2004). Deakin Law Review 2005 10(1) 300

^[61] Factortame II Case C-221/89 [1991] – para 20

^[62] Saenger, Ingo. (2004). Deakin Law Review 2005 10(1) 300

^[63] Dassonville v Kingdom of Belgium Case C-8/74 [1974]

^[64] Article 28 EC: Quantitative restrictions on imports and all measures having equivalent effect shall be prohibited between Member States.

^[65] Omar, Paul J. (2005). I.C.C.L.R. 2005 16(1) 18,27

^[66] Kersting, Christian & Schindler, Clemens. (2003). German Law Journal 12/2003 1277-1291

^[67] Brand, Dr. Oliver. (2004). JR 3/2004 89-96

^[68] Brand, Dr. Oliver. (2004). JR 3/2004 91; Müller ZIP 1997 1049; Roth ZIP 2000, 1597; Zimmer BB 2000 1361, Paefgen, Dr. Walter G. (2003). DZWIR Nov 2003

^[69] Ebke, Prof. Werner. (2000). 48 Am.J.Comp. L. 623

^[70] Kieninger, Prof. Eva-Maria (2005). 6 German Law Journal 4/2005 741-770

^[71] Roth, Wulf-Henning. (2003). ICLQ 52.1 (177)

^[72] Sandrock, Otto & du Plessis, Jean. (2005). Comp.Law. 2005 26(3) 88-89

^[73] Brand, Dr. Oliver. (2004). JR 3/2004 94

^[74] Kieninger, Prof. Eva-Maria (2005). 6 German Law Journal 4/2004 741-770; Kersting, Ch. & Schindler, C. (2003). German Law Journal 12/2003

^[75] Micheler, Eva. (2000). Comp.Law. 2000 21(6) 179-182

^[76] In the United States corporate law is largely regulated by the states and consequently entities incorporate in states whose corporate laws best serve their needs. Delaware, the leader in the corporate charter market, has attracted the majority of the US publicly traded Fortune 500 companies (at the time of re-incorporation) due to its flexible corporate code, the responsiveness of its legislature and the wealth of legal precedent. The corporate market with its franchise taxes contributes approximately 20% to the yearly state budget. Franchise taxes are not allowed in Europe (EU Directive 69/335 EEC) therefore a Member State will not be able to turn liberal incorporation laws into an income stream similar to Delaware. (see Kieninger footnote 76)

^[77] Kieninger, Prof. Eva-Maria. (2005). German Law Journal 4/2005

^[78] EU Directive 69/335/EEC

^[79] Micheler, Eva. (2000). Comp. Law. 2000 21(6) 179-182

^[80] as of August 2004 60+ articles on Inspire Art; 100+ each for Centros and Überseering Schmidt in ZHR 168 (2004) 493-502

^[81] Altmeppen, H. (2004). NJW 2004 97,104

^[82] Kallmeyer, DB 2002, 2521

^[83] Kallmeyer, DB 2002, 2521; Altmeppen, NJW 2004, 97; Bayer, BB 2003, 2357; Horn, NJW 2004, 893; Riedemann, GmbHR 2004, 345; Ulmer, NJW 2004, 1201; Schumann, DB 2004, 743; Borges, ZIP 2004, 733

^[84] Altmeppen, H. (2004) NJW 97,104

^[85] Micheler, Eva. (2000). Comp. Law. 2000 21(6) 179,182

^[86] Robertson, D.E. (2003). Überseering : Nailing the coffin on Sitztheorie. Comp. Law. 2003 24(6) 184,185

^[87] Kieninger, E-M. (2005). Page 756; Sandrock, O. (2005). The German Corporate Governance Model in the Wake of Company Law Harmonistion in the European Union. Comp.Law. 2005 26(3); Kersting, Ch. & Schindler, Ph. (2003). German Law Journal 12/2003 1277,1291

^[88] Ulmer KTS 2/2004 293

^[89] Altmeppen, H. (2004) NJW 97, 104; Altmeppen, H. (2004) DB 1083, 1089

^[90] opinion shared by Kindler NZG 2003, 1089

^[91] Altmeppen, H. NJW 2004 101 footnote 43

^[92] Altmeppen, H. NJW 2004 97, 104

^[93] Ulmer,H. NJW 2004 1201,1210

^[94] Ulmer, H. NLW 2004 1209

^[95] Ulmer, H. NJW 2004 1209

^[96] Reinhard Gebhard v Coniglio dell’Ordine degli Avvocati e Procuratori di Milano Case C-55/94 [1995] [37]… national measures liable to hinder or make less attractive the exercise of fundamental freedoms guaranteed by the Treaty must fulfil four conditions: they must be applied in a non-discriminatory manner; they must be justified by imperative requirements in the general interest; they must be suitable for securing the attainment of the objective which they pursue; and they must not go beyond what is necessary in order to attain it….

^[97] Huber, Prof. Dr. in Lutter Europäische Auslandsgesellschaften in Deutschland

^[98] Altmeppen, H. NJW 2004 97, 104; Müller NZG 2003 414, 416; Paulus ZIP 2002 729,734; Zimmer NJW 2003, 3589

^[99] Ulmer, P. NJW 1201, 1210; Ulmer, P. KTS 2004 291,304; Kieninger, EM Internationales Gesellschaftsrecht ZeuP 2004 685, 704

^[100] § 64 GmbHG Obligation to petition for bankruptcy proceedings. (1) If the company becomes insolvent, the managing director shall without undue delay, but not later than three weeks after the insolvency occurs, petition for the commencement of bankruptcy proceedings. The same applies if the assets of the company no longer cover the liabilities. The petition is not culpably delayed if the managing director strive to open court proceedings with the due care of a prudent businessman. (2) The managing directors are liable to compensate the company for any payments made after the insolvency has occurred or the overindebtedness is discovered. This does not apply to payments made after this point in time where consistent with the due care of a prudent businessman. The provisions of §43, paragraphs (3) and (4) apply analogously to the compensation claim. §64 GmbHG Insolvenzantragspflicht (1) Wird die Gesellschaft zahlungsunfähig, so haben die Geschäftsführer ohne schuldhaftes Zögern, spätestens aber drei Wochen nach Eintritt der Zahlungsunfähigkeit, die Eröffnung des Insolvenzverfahrens zu beantragen. Dies gilt sinngemäß, wenn sich eine Überschuldung der Gesellschaft ergibt.

^[101] §64(2) GmbHG in combination with § 823(2) BGB

^[102] Altmeppen, H. (2004) NJW 2004, 97, 104

^[103] §84 GmbHG

^[104] §64(2) GmbHG

^[105] §823(2) in combination with §64(1) GmbHG

^[106] Huber, Ulrich.(2005). Die Insolvenzantragspflicht der Geschäftsführer in Lutter, M. (2005). Europäische Auslandsgesellschaften in Deutschland.

^[107] Huber, Ulrich. (2005). page 348

^[108] Council Regulation (EC) No 1346/2000 of 29 May 2000 on Insolvency Proceedings

^[109] Huber, Ulrich. (2005). page 349

^[110] Huber, Ulrich. (2005). page 350

^[111] Ulmer KTS 2/2004 301

^[112] Altmeppen NJW 2004 97,100; Borges RIW 2000, 167, 178; Müller NZG 2003, 414,416

^[113] EC Regulation 1346/2000

^[114] Riedemann, Susanne GmbHR 6/2004 348; Paulus, Christoph ZIP 17/2002 734

^[115] Riedemann, Susanne GmbHR 6/2004 348

^[116] §15 German Insolvency Regulation

^[117] Mock/Schildt ZinsO 9/2003 396, 400

^[118] Mock/Schildt ZinsO 9/2003 400

^[119] §214 Insolvency Act 1986

^[120] Mock/Schildt ZinsO 9/2003 400

^[121] Bayer BB 2003 2357, 2365; Kindler NZG 2003 1086,1090; Schanze/Jüttner AG 2003 665,670; partially Zimmer NJW 2003 3585,3590

^[122] §40 EGBGB specifies that demands resulting from illegal actions are subject to the law of the state in which the actions were executed. The injured party can demand that the law of the country is applied in which the results of the illegal action were sustained.

^[123] Zimmer NJW 2003, 3585; Sondler/Berner RJW 2004, 11

^[124] Burg, Michael. (2004). GmbHR 21/2004 1383

^[125] Fleischer, Holger. (2005). Kapitalschutz und Durchgriffshaftung bei Auslandsgesellschaften in Lutter (Ed.) Europäische Auslandsgesellschaften in Deutschland. Schmidt:Köln

^[126] §30 GmbHG. Company assets required to preserve the share capital may not be distributed to the shareholders. Paid in additional capital contributions may be paid back to shareholders unless required to cover a loss of share capital. The repayment is not to be made until after three months have elapsed from the date of publication of the repayment resolution in the public gazettes designated in the articles of association for company notices and in the absence of such a provision in the public gazettes designated for commercial register notices. In the case of §28 paragraph 2 the repayment of additional capital contributions is not permitted until the share capital is fully paid up. Repaid additional capital contributions are deemed not to have been called.

^[127] §31 GmbHG. Reimbursement of prohibited payments. (1) Payments which are effected contrary to the provisions of §30 shall be reimbursed to the company. (2) In the case of a bona fide recipient reimbursement can only be demanded to the extent that it is required to satisfy the company’s creditors. (3) If reimbursement cannot be recovered from the recipient, the remaining shareholders are liable for the amount to be reimbursed in proportion to their share to the extent that the amount is required to satisfy the company’s creditors. Contributions which cannot be obtained from individual shareholders shall be allotted to the others in the proportions described above. (4) Those liable to pay cannot be exempted from the payments required under the foregoing provisions. (5) The claims of the company become statute barred in five years; the period of limitations begins with expiry of the day when the payment was made for which reimbursement is claimed. The provision does not apply if the liable person has acted in bad faith. (6) Managing directors who have acted culpably with respect to the payment effected are jointly and severally liable to the shareholders for reimbursement of a payment made pursuant to paragraph 3.

^[128] Fleischer, Holger. (2005). Kapitalschutz und Durchgriffshaftung bei Auslandsgesellschaften in Lutter (Ed.) Europäische Auslandsgesellschaften in Deutschland. Schmidt:Köln

^[129] Altmeppen NJW 2004 97,104

^[130] Schumann DB 2004 743, 749

^[131] Schmidt/Bierly NJW 17/2004 1201, 1210

^[132] Reinhard Gebhard v Coniglio dell’Ordine degli Avvocati e Procuratori di Milano Case C-55/94 [1995] [37]… national measures liable to hinder or make less attractive the exercise of fundamental freedoms guaranteed by the Treaty must fulfil four conditions: they must be applied in a non-discriminatory manner; they must be justified by imperative requirements in the general interest; they must be suitable for securing the attainment of the objective which they pursue; and they must not go beyond what is necessary in order to attain it….

^[133] Fischer ZIP 2004 1477, 1486

^[134] Schumann DB 2004 742, 749

^[135] Article 6 EGBGB Öffentliche Ordnung (ordre public). A legal norm of another state is not applicable if its application leads to an incompatibility with the fundamental rules of German law.

^[136] Schumann DB 14/2004 745

^[137] §129 InsO. The insolvency administrator may move pursuant to §§130 through 146 to void transactions to the detriment of the insolvency creditors effected prior to the commencement of the insolvency proceedings. A failure to act shall be deemed to be equivalent to a transaction.

^[138] §135 InsO. Loans in Lieu of Capital Contributions A transaction is voidable if, with respect to the claim of a shareholder for repayment of a loan in lieu of a capital contribution or an equivalent claim (1) if it provided security, if the transaction was effected in the last ten years prior to the petition for commencement of the insolvency proceeding or following such petition; (2) resulted in satisfaction, if the transaction was effected in the last year prior to the petition for commencement or following such petition.

^[139] §32 GmbHG (a) Shareholder’s loan substituting equity capital. (1) If at a time when shareholders acting as prudent businessmen would have increased a company’s equity capital a shareholder instead grants a loan to the company, he cannot claim repayment of the loan during bankruptcy proceedings or in court composition proceedings to avoid bankruptcy. A compulsory composition or a settlement brought about in court composition proceedings is effective for and against the claim of the shareholder. (2) If at a time when shareholders acting as prudent businessmen would have increased a company’s equity capital a third party instead grants a loan to the company and if a shareholder has provided security or assumed a guarantee for repayment of the loan, the third party can only lodge a claim in bankruptcy or court composition proceedings to avoid bankruptcy to the extent that he has not been satisfied after calling the security or guarantee. (3) These provisions apply as appropriate to other legal acts of a shareholder or third party which in economic terms correspond to the granting of a loan in accordance with paragraphs 1 and 2. (b) Repayment of loans before bankruptcy proceedings commence. If in the case of §32a paragraph 2 the company repaid the loan in the year preceding the commencement of bankruptcy proceedings the shareholder providing the security or liable as guarantor must reimburse to the company the amount to repaid. This liability is limited to the amount of the shareholder’s guarantee or to the value of the security provided when the loan was repaid. The shareholder can exempt himself from the liability by placing the items which served as the creditor’s security at the disposal of the company. These provisions apply as appropriate to other legal acts which in economic terms correspond to the granting of a loan

^[140] Paulus ZIP 2002 729; Kindler NZG 2003 1086

^[141] Ulmer KTS 2/2004 298

^[142] Schumann DB 2004 743, 749; Fischer ZIP 2004 1477, 1486; Borges ZIP 16/2004 744

^[143] Wienberg/Sommer NZI 7/2005 353, 357; Paulus, Christoph ZIP 17/2002 734

^[144] §32 GmbHG

^[145] German Insolvency Act §§38, 39

^[146] Wienberg/Sommer NZI 7/2005 357

^[147] Bremer Vulkan BGHZ 149 10,16; KBV BGHZ 151 181,186

^[148] Noreisch, Dr. Bernhard. GmbH Recht: Haftung des GmbH-Gesellschafters bei existenzvernichtendem Eingriff. www.klsal.de/ger/recht-aktuell-11.htm 12.09.2005; Ulmer KTS 2/2004 302

^[149] Ulmer KTS 2/2004 303; Fischer ZIP 32/2004 1480

^[150] Paefgen ZIP 48/2004 2260

^[151] Fleischer, Holger. (2005). Kapitalschutz und Durchgriffshaftung bei Auslandsgesellschaften in Lutter (Ed.) Europäische Auslandsgesellschaften in Deutschland. Schmidt:Köln; also Fischer ZIP 32/2004 1481 with further references

^[152] Burg GmbHR 2004 1379

^[153] Schmidt NJW 2001 3577; Schumann DB 2004 743

^[154] Burg GmbHR 2004 1379

^[155] Zimmer NJW 2003 3585

^[156] Bayer BB 2003 2357

^[157] §823 BGB. Duty to compensate for damage. (1) A person who, willfully or negligently, unlawfully injures the life, body health, freedom, property or any other right of another is bound to compensate him for any damage arising there from. (2) A person who infringes a statutory provision intended for the protection of others incurs the same obligation. If, according to the purview of the statute, infringement is possible even without any fault on the part of the wrongdoer, the duty to make compensation arises only if some fault can be imputed to him.

^[158] §263 StGB Fraud. A person who willfully causes damage to another in a manner contra bonos mores is bound to compensate the other for the damage.

^[159] Borges ZIP 16/2004 733, 744

^[160] also Fleischer, Holger. (2005). Kapitalschutz und Durchgriffshaftung bei Auslandsgesellschaften in Lutter (Ed.) Europäische Auslandsgesellschaften in Deutschland. Schmidt:Köln: Paefgen ZIP 47/2004 2260;

^[161] §826 BGB Sittenwidrige vorsätzliche Schädigung. Wer in einer gegen die guten Sitten verstoßenden Weise einem anderen vorsätzlich Schaden zufügt, ist dem anderen zum Ersatz des Schadens verpflichtet.

^[162] See footnote 133

^[163] Schall ZIP 22/2005

^[164] Borges ZIP 16/2004 744

^[165] Borges ZIP 16/2004 744

^[166] Borges ZIP 16/2004 744

^[167] see footnotes 5,6,7,8

^[168] Bell, Judith. (1999). Doing your research project. Open University Press . Maidenhead.

^[169] Descriptions obtained at www.soutalabama.edu/coe/bset/johnson/dr_johnson/2studyq.htm

^[170] Cresswell, John. W. (1994). Research Design Qualitative & Quantitative Approaches. London:Sage Publications