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Latest news on the liability of limited partners in the event of insolvency

Two recent rulings by the Federal Court of Justice (Bundesgerichtshof, BGH) have significantly weakened the position under liability law of limited partners in the event of their company becoming insolvent. In both cases, the insolvency administrator for a ship fund management company was ultimately successful in holding the limited partners liable for trade tax liabilities.

Starting situation – Repayment of capital contribution

The liability of limited partners of a KG [German limited partnership] or a GmbH & Co. KG [German limited partnership with a limited liability company as a general partner] vis à vis the company’s creditors is restricted to the amount of their limited partnership contribution or liability capital contribution as recorded in the commercial register. Once this amount has been paid then, generally, further liability can no longer be considered. However, this would not apply if the capital contribution has been repaid to the limited partners. In this respect, the liability to third parties is then restored once more. This is also frequently the situation in the case of investments in ship funds where distributions are regularly paid out to an investor although the profits that have actually been generated are insufficient to cover these. In this sense, this would then be deemed to constitute the repayment of a capital con-
tribution that would result in liability being restored.

The extent of liability in the event of insolvency

In the cases in question,(BGH from 15.12.2020, case reference: II ZR 108/19, and from 28.1.2021, case reference: IX ZR 54/20), insolvency proceedings pertaining to the assets of the fund management company were opened each time and, in the course of these, the ships were sold. Switching to the so-called tonnage tax method of determining taxable income, prior to the crisis already, had ultimately resulted in a trade tax liability for the company (add-back of the hidden reserves determined during the switch to this method of determining taxable income). In each case, the insolvency administrator held the limited liability partners liable for the tax payment. 

The BGH judges ultimately accepted that the limited partners could be held liable and essentially based their decision on the fact that the tax liability was established prior to the opening of insolvency proceedings. The basis for the trade tax liability was created, prior to the insolvency, by switching the method of determining taxable income so that the trade tax, which was triggered as a consequence, was covered by the partners’ liability. 

Practical advice

Even though these new rulings will be of little comfort to limited partners who are affected, nevertheless, they do at least provide considerably more legal certainty in the area of the liability of limited partners in the event of insolvency. From now on, the exclusion of liability can only be considered for those obligations that arise as genuine preferential liabilities incurred as a result of legal acts by the insolvency administrator. By contrast, if the liability was already established prior to the insolvency – which is frequently the case not only for tax liabilities but also, e.g., in the case of continuous obligations – then the limited partner would not be able to claim any limitation of liability.

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