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A partner’s financial settlement claim in the event of insolvency

In the event that a partner leaves a company, the outgoing party is generally entitled to a financial settlement that corresponds to the fair market value of his/her stake. In a recent judgement, the Federal Court of Justice (Bundesgerichtshof, BGH) had to decide how to deal with an as yet unpaid financial settlement claim in the event of insolvency.

Principle of the payment deadline for financial settlements

A financial settlement claim generally becomes due and payable when the departure takes effect. However, company agreements normally provide for restrictions not only on the amount of the entitlement but also the payment modalities in order to keep the drain on the company’s liquidity small. Arrangements for instalment payments and deferrals are, in principle, permissible as long as the settlement interests of the outgoing party are not unduly compromised. Under current case law, payment periods of up to five years are unproblematic, however, periods of ten or more years, as a general rule, are unenforceable. For time periods that lie in between, what matters are the circumstances in each individual case.

What would apply if the company subsequently became insolvent?

Up to now, how an as yet unpaid financial settlement claim should be classified in the event that the company becomes insolvent has been a matter of dispute. The BGH, in its ruling of 28.1.2020 (case reference: IX ZR 10/19) redressed this lack of clarity to the disadvantage of the former partner. The partner’s claim can neither be listed as an insolvency claim nor does it constitute a subordinated loan receivable within the meaning of Section 39(1) no. 5 of the German Insolvency Code (partner loans). It could thus only be paid out on a pro rata basis in the case of any final distribution – once all the insolvency creditors have been satisfied – and, as a rule, would therefore be of no value.

The Court argued that the rules on liability and capital maintenance that constituted an obstacle to the payment of the settlement continued to remain in force, at all events, in the case of a GmbH [a limited company] and a GmbH & Co. KG [German limited partnership with a limited liability company as a general partner] (as in the case in question). This would also apply even if, on the departure date and even one year later, it would have been possible to pay for the financial settlement out of the company’s free net assets.

Recourse against the remaining partners?

According to the BGH ruling, in principle, the personal liability of the company’s remaining partners for the payment of the settlement claim of the outgoing party could be considered. However, this would presuppose that the conduct of the remaining partners had constituted a breach of trust. The mere deterioration in the financial situation including the subsequent opening of insolvency proceedings would not be sufficient for that. The outgoing party would thus get nothing unless, in exceptional circumstances, there has been an unreasonable delay in filing for insolvency proceedings.

Recommendation: Partners who are ready to resign should therefore think carefully about whether or not the sale of their stakes to the remaining partners should also be considered. No capital maintenance rules apply to the relationship between partners and ensuring that the claim is satisfied would possibly be more readily feasible.

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