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

Masterarbeit von Renate Eichin

Abstract:

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.

Table of Contents:

Text Sample:

Chapter ‘European Court of Justice’: Starting in 1986 with Segers the ECJ established that a Member State has to accept and recognize within its borders companies validly formed according to the laws of another Member State irrespective if the country follows the real seat or incorporation theory.

A Member State cannot demand re-incorporation, paying up of minimum share capital according to the company laws in the host country or demand anything else in order to bring these companies on an equal footing with national companies. The fact that the incoming company undertakes all its business in the host country has no economic activity in the country of incorporation and that the sole purpose for the foreign incorporation was to circumvent national formation rules is totally immaterial.

Segers in 1986 was pretty much ignored by the professional and academic world alike. Only when Centros in 1999 hit the headlines did the formation of pseudo-foreign companies begin to spread. The ECJ has taken little notice of the fact that company law in Europe has not been harmonized at the time of the first decision and still is not harmonized.

In Segers the Court noted that allowing a Member State to apply a different treatment to a company ‘solely by reason of the fact that its registered office is situated in another Member State would deprive Article 58 (now 48) of all meaning’. Discrimination against nationals of other Member States is contrary to the EU Treaty and therefore the Segers judgment cannot be criticised.

In the subsequent cases dealing with similar issues however, the ECJ seem to have moved from non-discrimination to positive discrimination as it consistently refused to condone national regulations trying to bring these companies in line with the same footing as companies formed within the Member State. The Court dismissed individual Member States’ submissions for the need to protect, among others, national creditors and consistently re-iterated the fundament right of EU nationals and companies to freely establish them anywhere within the European Union and forced Member States to remove all barriers and factors which could make such an establishment or move less attractive to the individual.

While the „import” of companies has to be unhindered by a Member State the „export” or moving out of a company from a Member State is not that clear cut as the contrasting cases of Daily Mail and Hughes de Laysterie demonstrate. From the viewpoint of creditor protection the impact of moving out is different and these two cases are therefore not included in the section below even though they are quite often cited together with Centros, Überseering and Inspire Art.