OASIS

                        ORGANIZATION OF ADVOCATES SPECIALISING IN INTERNATIONAL SERVICES

GERMANY 2010/2011

GERMAN DEVELOPMENTS 2010/2011 

 Dr. Michael Fingerhut, FINGERHUT RECHTSANWÄLTE

We would like to report on three topics that are noteworthy for Germany in the year 2011: 

1.      Company law: development of the English limited company / the German so-called "Entrepreneur Company" (UG)

2.      Insolvency law: amendment of the rules on discharge from residual debt

3.      European law: Directive 2006/42 EC

All these three issues have had substantial effects in Germany, but they also have cross-border significance, and therefore should be of particular interest for my report and the discussion during this year's OASIS Meeting. 

1.      Company law: Development of the English limited company / the German entrepreneur company 

As we already reported, the law on modernisation of the old limited liability company law ("GmbH") came into force on January 1, 2008. One of the most important features of this law is the possibility to form, in addition to the traditional GmbH with a minimum capital of € 25,000, a so-called "Entrepreneur Company" requiring a minimum capital of only € 1.00.

This Entrepreneur Company is the answer of the German legislator to the English limited company, which has been imported from Great Britain to Germany within the framework of freedom of establishment in the European Economic Space and developed into a serious competitor of the traditional German GmbH.

In this context, it is important to mention that the German legislator, by introducing said Entrepreneur Company in Germany, has obviously attained its goal: In the year 2007, a total of roughly 35,000 English limited companies were operating in Germany, all of which obviously had to be registered in England, which bothered German authorities. Since introduction of the Entrepreneur Company in 2008, the number of Ltds has continuously decreased, while the number of Entrepreneur Companies has steadily grown:  

-        Before enactment of the reform, about 35,000 English limited companies operated in Germany.

-        Today, about 30,000 Entrepreneur Companies are registered, while the number of English limited companies operating in Germany declines steadily. You don't find advertisements for Ltds in the German business press any more; formation of new Ltds has become very rare. In a way, the English limited company thus is "out of business" in Germany. 

This means that in company law, Germany has caught up with France and England: as in these two countries, a corporate company form has now firmly established itself in Germany which can be formed with a minimal starting capital (€ 1.00 or more) and in which nonetheless the liability of the founders is limited to the assets of the company. The only difference between Germany, on the one hand, and England and France on the other hand, is that in Germany the law provides for two types of limited company:  

·           the traditional GmbH with a capital of at least € 25,000

·           the so-called Entrepreneur Company, which can be founded with a capital of only € 1.00. 

However, the two types of limited company differ by their designation: the traditional limited company is called GmbH (limited liability company) as before, the new company is called Entrepreneur Company (UG), with limited liability. However, the designation "with limited liability" must be expressly mentioned on all documents with which the company identifies itself in business transactions. 

Finally, it should be mentioned that the Entrepreneur Company may be converted into a GmbH, if its equity capital amounts to at least € 25,000: in such a case, the designation of "Entrepreneur Company, with limited liability" may be changed to GmbH by virtue of a resolution of the shareholders and entry of the resolution into the Commercial Register.

2.      Insolvency law: Amendment of the rules on discharge from residual debt 

In the area of insolvency law the German legislator currently faces a similar situation as at the time regarding English limited companies. Debtors in Germany who have lost their assets and are no longer able to repay their debts presently have the possibility to submit to so-called personal insolvency proceedings under the German Insolvency Code. Such proceedings must be applied for and begin with appointment by the insolvency court of an insolvency trustee to whom the debtor must assign all his current income from his occupational activity for a period of six years. Within this six-year term, the insolvency trustee assumes satisfaction of the debtor's creditors from the debtor's assets still existing at opening of the proceedings and the income the debtor earns from his occupational activity in the following six years. After six years, the insolvency court, by decree, declares the proceedings terminated and the debtor is granted a so-called discharge from residual debt, which means that he is discharged from any and all debts to creditors that remain after expiry of the six-year term. Such possibility of filing for personal insolvency was introduced into German insolvency law in 1999. In the following years, personal insolvency established itself in Germany as a possibility for debtors to get rid of their debts through so-called good conduct and thus not to remain liable to their creditors until death, as this was the case before. The debtor assigns all earnings from his occupational activity to the trustee for six years, lives on a subsistence level of generally about € 1,500 left to him by the trustee, and after six years is free and cleared from all his debts. Since 1999, debtors have increasingly used this possibility of applying for personal insolvency, after some difficulties in the beginning.  

However, the legal instrument of personal insolvency involving discharge from residual debt also exists in other countries, e.g. in France (especially: Alsace-Lorraine) and England. The difference is that in these countries the period in which the debtor has to deliver his occupational earnings to the insolvency trustee is far shorter: the so-called discharge from residual debt takes place after one year in the due course of proceedings. In the beginning, this substantial difference in time between Germany and the neighbouring countries had no effect. This was changed by a judgment of the European Court of Justice in the year 2007 in which the court ruled that German nationals who established their domicile for instance in Strasbourg or London and initiated proper insolvency proceedings there, did not only become debt-free after only one year, but could also oppose such discharge to creditors in Germany. This triggered a real "insolvency tourism" from Germany to these countries: German debtors who wanted to get rid of their debts established a domicile for example in Strasbourg or in London and filed for personal insolvency there, while taking various measures in order to make people believe that they actually lived there, although, de facto, they continued to live in Germany. As long as they can refer to regular insolvency proceedings in France or England vis-à-vis their German creditors, those debtors are currently protected against execution measures of their German creditors. 

It was quite clear that German creditors would not accept this kind of insolvency tourism without resistance. They began investigating the alleged domiciles of their debtors for instance in Strasbourg or London and tried to evidence that such domiciles were actually fictitious. This resulted in such foreign insolvency proceedings becoming invalid in the debtors' relationship to their German creditors. The number of suits before German courts is increasing in which creditors challenge the legal basis of insolvency proceedings of German debtors in foreign countries by arguing that the debtor actually does not live in London or Strasbourg but is still living in Germany and has established his foreign domicile only pro forma. To establish such evidence is difficult, however, if the debtor has actually registered a domicile in a neighbouring country, can evidence a lease, rent payments and current expenditures for power consumption and similar expenses. In such a case, German creditors frequently rely on private detectives to prove that such leases and current expenses are fictitious transactions and the debtor actually continues to live in Germany and not in the foreign country. In all that cases the reproace is that the insolvency proceedings for example in Strasbourg/France or London/GB are ineffective because of fraud.  

Of course, the German legislator in Berlin also noticed this development, which led to discussions on alignment of the German statutory provisions to those of other European countries. The consequence now is that the German legislator seeks to modify the rules of personal insolvency by amending the provisions of the Insolvency Code. According to this plan, a discharge from the debtor's residual debt would no longer be granted after six years, but after three years already. The lawmakers in Berlin argue that the term of three years, although being longer than in the neighbouring countries, would not neglect the interests of the creditors. They believe that the three-year term, even as compared with the one-year term in the neighbouring countries, would be appropriate to put an end to insolvency tourism. They expect debtors to accept the regular three-year term for a discharge from their residual debt and refrain from attempting to establish fictitious residences in foreign countries, because such measure always involves substantial costs and the three-year term in Germany would be acceptable as compared with one year abroad.  

According to information from the Federal Ministry of Justice, the amendment of the provisions of the Insolvency Code will be prepared in the course of 2011 and become effective at the beginning of 2012.

3.      European law: Directive 2006/42 EC (Machinery directive) 

            In this report, I would like to mention the experience I made while advising our clients in Germany on application of the Directive 2006/42 EC dated May 17, 2006. This Directive came into force on December 29, 2009 and is directly applicable in all member states of the European Economic Space (EES), provided it has been incorporated into national law by virtue of a corresponding implementing law. In Germany, this was done by the so-called 9^th Machinery Ordinance and, as far as I know, also in Austria by the Machinery Safety Ordinance. In such a case, the Directive 2006/42 EC applies to all companies that construct or modify, sell or purchase machinery.   

The definition of machinery in Article 2 of this Directive is very extensive and actually includes machinery of any kind, except motor vehicles. The Directive contains very detailed and far-reaching provisions on the duties of manufacturers of machinery, in particular concerning safety requirements, technical descriptions as well as operating manuals and affixing CE markings pursuant to Article 16 of the Directive.  

According to my experience in advising companies, the German companies only slowly acknowledged in the course of 2010 that this Directive is directly applicable in Germany, which means for a German company that it must fulfil the requirements of this Directive in the same manner as a German law. However, businesses are also becoming aware of the fact that compliance with this Directive, for instance by affixing the letters CE, is seen as an evidence of quality for a machine when selling it, in particular to a foreign country (export). And they know that pursuant to Article 5, 1. f) the CE marking must be affixed to any machine to which the Directive applies! 

I would like to know from my OASIS colleagues from the European Economic Space whether Directive 2006/42 EC was incorporated into their national law and, if so, which kind of experience they have made when applying this Directive in their daily consulting practice, as far as they work for companies to which the rules of the Directive apply. And I would like to stress that this Directive actually applies to any company that manufactures and sells machinery   – but also to any company that orders, modifies and uses such machinery to manufacture its own products! This means that the scope of application of the Directive is very large – a fact that according to my experience is still widely unknown.

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