International jurisdiction in insolvency proceedings

28 October 2013

Roland Falder

Can a foreign administrator lawfully terminate employment contracts in Germany?

I)     Introduction

When international consortia are faced with a dire economic situation, so that individual companies do not have any other alternative but to open insolvency proceedings, significant reductions in the workforce in the context of restructuring measures usually ensue. For employees who want to take action against a dismissal resulting from that situation, it is important to know which laws apply and, in particular, if a reconciliation of interests concluded by the administrator a appointed in accordance with foreign law is valid or if it will only become effective through a German insolvency administrator.

This question was also dealt with by the German Federal Labor Court in a recent judgment.

II)    Facts of the case

The Parties are in dispute regarding the effectiveness of a dismissal due to operational reasons. Plaintiff had been employed as "Manager Business Finance" with Defendant, which belongs to a globally operating consortium, for 18 years. At the beginning of 2009 several companies of the consortium filed insolvency proceedings in different countries. In mid-January the UK High Court of Justice subsequently opened the administrative procedure as main insolvency proceedings within the meaning of the European Insolvency Regulation and commissioned three "Joint Administrators". The administrators are supposed to act individually or jointly, act as representatives of the companies and have the power to hold off court proceedings for and on behalf of the company, commission a representative as well as dismiss employees. They are also allowed to conclude an arrangement or a settlement of debts on behalf of the company.

 

The restructuring measures included, among others, the elimination of almost 200 jobs, for the implementation of which a reconciliation of interests was negotiated and concluded with the Works Council in which Defendant was represented by one of the three administrators.

The list of names also included the name of Plaintiff, who was dismissed on November 30, 2009. Thereupon, Plaintiff filed an action against unfair dismissal. He argued that according to German law only an insolvency administrator within the meaning of the Insolvency Code could conclude a reconciliation of interests pursuant to sec. 125 German Insolvency Code (InsO), but not an administrator.

III)  The decision

The German Federal Labor Court confirmed the preceding decisions in favor of the administrators.

1)    Applicable law

In cases concerning cross-border insolvencies within the European Union, the European Insolvency Regulation applies. The European Insolvency Regulation stipulates that the main insolvency proceedings may be opened in the member state in which the debtor has its Center of Main Interest (COMI). Pursuant to sec. 16 (I) of the European Insolvency Regulation, the opening of insolvency proceedings by a competent member state court is in principle also acknowledged by all other member states.

Art. 10 of the European Insolvency Regulation represents - however an exception to the principle of application of the European Insolvency Regulation. Said article stipulates that the law of the member state applicable to the employment contract applies for the effects of the insolvency proceedings on a contract of employment and on the employment.

The second instance solved said conflict of law in accordance with the rules on conflict of law of private international law and constituted that German labor law was decisive for the parties' employment relationship.

 

2)    Legal status of administrators

The German Federal Labor Court clarifies that the administrators can, regarding their legal status, not be put on a level with a German insolvency administrator, since the German insolvency administrator enters into the position of the employer and becomes the debtor's legal successor, while administrators represent the company but do not become legal successors.

The court points out that in cross-border insolvencies within the meaning of the European Insolvency Regulation, in which German law is applicable due to the regulation in art. 10 of the European Insolvency Regulation, sec. 125 of the German Insolvency Code (InsO) is to be construed in line with Union law to the extent that an administrator acting for the debtor in the manner provided for by insolvency law is also to be regarded as an insolvency administrator within the meaning of sec. 125 of the German Insolvency Code and therefore has authority to conclude a reconciliation of interests comprising a list of names. The reconciliation of interests therefore also ensues the principle of presumption of sec. 125 of the German Insolvency Code.

The line of argument in this regard is that it is the purpose of the European Insolvency Regulation to ensure that cross-border insolvency proceedings can be carried out effectively. The above purpose would be undermined if an administrator was effectively unable to conclude any reconciliation of interests with the workers council. In that case, he/she could not even announce any notices of termination since he/she would not have the legal status of a manager of a German limited liability company. The above would in actual fact render the administrator incapable of acting and would therefore be an impediment for the swift and effective settlement of cross-border insolvency proceedings.

IV)       Practical Meaning

The German Federal Labor Court has created more legal clarity and cleared the way for settling the necessary restructuring measures in cross-border insolvencies within the European Union to be carried out by an administrator who is to be regarded as an insolvency administrator within the meaning of sec. 125 of the German Insolvency Code due to the interpretation of sec. 125 in line with Union law.

In relation to third countries, however, the desired clarity still fails to be achieved. Since the European Insolvency Regulation is not applicable for third countries and no global regulatory framework exists to date, the international law of the respective state applies in a global context.

For insolvency proceedings affecting associated companies in Germany as well, the strategic question can thus arise as to which state will take the lead in carrying out the proceedings. In this context, choosing a location within the EU (as far as legally possible) can provide labor-law advantages.

This article is part of the Asia Employment Law Newsletter for November 2013