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1. The facts of the case

The defendant and appellor, a partner of a private limited company, Gesellschaft mit beschränkter Haftung, GmbH, established in 1995, was obliged to contribute 45,000 DM of the share capital. He paid half the amount in 1995. The remainder, another 22,500 DM, he paid in the year 2000, only days before the company filed for bankruptcy. The account of the company, he paid his contribution into, was heavily overdrawn at the time of his second payment and therefore blocked. The debit balance was more than 560,000 DM. The bank offset the 22,500 DM deposit against the debit balance. Further debit entries or withdrawals had not been accepted until the bankruptcy proceedings started.

The administrator in bankruptcy successfully challenged the set-off in court, so that the bank transferred the 22,500 DM to the bankruptcy property.

Nevertheless, the administrator sued the partner for the payment of another 22,500 DM. The partner, as to his argumentation, had not paid his contribution to the company. Under section 19 Limited Liability Companies Act, GmbHG, the company had had to be able to dispose of the contribution. Yet, the bank had denied any further disposition after the payment. Thus, the money paid in by the partner, had never been at the disposal of the company. The company had never received the contribution in the sense of section 19 GmbHG, so that the partner had not discharged his duty.

2. The legal arguments [top]

a) The general principle

In fact, though the administrator at first glance seems a little greedy, his legal point of view is basically correct. The share capital of then minimum 50,000 DM (today 25,000 Euros), section 5 paragraph 1 GmbHG, is meant to protect the creditors of the limited company.

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Table of content:

1. The facts of the case

2. The legal arguments

a) The general principle

b) The peculiar facts of the case

c) Commentary

d) Summary

3. The core ideas of the decision

iQ:share or basic capital is the answer of the German company law to the dangers occurring from the lack of personal liability of the partners (backed by their entire personal fortune). Only the company, an independent legal entity, is "personally" liable to the creditors. Other than e.g. the British company law, imposing detailed obligations upon the managers how to govern the company, the German law establishes an earmarked fund for the creditors, the share capital.

For contributions in kind in the form of contractually established claims vide here.

Since the company had been lacking 22,500 of the mandatory 50,000 DM, the creditors had never been protected as governed by statutory law. When the payment eventually came in, it could not retroactively protect anyone.

b) The peculiar facts of the case [top]

However, there is one peculiarity about the case. Actually, the belated contribution was of advantage to the creditors, because the administrator successfully contested the clearing (vide above), so that the 22,500 DM added to the bankruptcy property. That is to say, the creditors actually received "their" 22,500 DM. Thus, the goal of the obligation to effectively contribute to the share capital, i.e. to protect the creditors, had been achieved – vice versa: if the partner would have been obliged to pay another 22,500 DM, the bankruptcy property, i.e. the creditors, had benefited twice.

The court based its decision, not to let the partner pay twice, on the general bona fide-clause, section 242 Civil Code, Bürgerliches Gesetzbuch, BGB.

c) Commentary [top]

The obligation to make the contribution would have been overstretched, if the partner had owed another 22,500 DM, despite actually having paid this amount and despite the money, again, found its way into the wallets of the creditors. In case the creditors actually receive the contribution, their legitimate interest is satisfied. They are not entitled to double payment on the basis of company law formalities.

One could, however, think of the following arguments: in fact, the partner did neglect a duty. He waited five long years until he contributed the 22,500 DM at last. This delay could be deemed showing that he neglected not only the duty to make his contribution, but also other obligations imposed upon him as a partner. Furthermore, it could be considered probable, that, had he paid his contribution timely, the company might not have ended in bankruptcy. Thus, one could argue, it was only just if he had to pay another 22,500 DM.

Nevertheless, this argumentation could not lead to a further entitlement of the bankruptcy property or the creditors, respectively. First, the argument was highly theoretical because there is no proof that the belated payment resulted in bankruptcy. It might have contributed. But it was surely not the only reason that ruined the firm – bearing in mind the relation between half a million DM in debt and the outstanding 22,500 DM contribution. The latter relation makes it implausible from a reasonable ex post view that the non-payment had had a discernible influence at all. An ex ante view, not bearing in mind the 560,000 DM in debt, but theorising on the possible development with 45,000 instead of 22,500 DM share capital, was even farther-fetched because no one could tell what had happened with 22,500 DM timely contributed. There is no reliable evidence or knowledge how much better the company would have done with the additional money or whether it would have been more successful at all.

iQ:had the partner paid timely, the 22,500 DM had most probably trickled away between 1995 and 2000. Due to the belated deposit, ending up in the bankruptcy property, the creditors could share at least the 22,500 DM – in fact, not a windfall, but a stroke of luck for the creditors.

Secondly, the fact that the contribution had been made belatedly does neither certainly indicate a possible negligence of other duties, nor would such an indication, in case it existed, lead to an obligation to pay another 22,500 DM.

The entitlement of the bankruptcy property to the not yet made contribution is based on the contractual obligation established by the founders of the limited company and enforced by the GmbHG. The partner has to make his contribution because he has entered into a corresponding contract (establishing the company), not because he acted negligently. If he has not furnished the company with the money before the bankruptcy, the bankruptcy property will be entitled to it. The primary duty to make the contribution (mirror image: the entitlement of the bankruptcy property) is itself independent of fault. Thus, there is no indication of fault.

Furthermore, even if there was such an indication, one could only argue with a considerable amount of fantasy replacing sober legal arguments, that the partner had to pay another 22,500 DM. The basis for such a claim was that the partner violated certain "other" duties. The neglected duties would neither be specified, nor was it established that they were related to the share capital, thus protecting the creditors and thus meant to justify a claim of the latter on the partner.

Even if it is deemed negligent not to pay the contribution, no other result can be justified. It is a very general and basic principle, something like a common understanding, that one has to pay ones debts (at maturity). Not to abide by this principle will in most cases mean a certain degree of negligence. However, it is impossible to draw reliable conclusions with respect to other duties because the general principle is much too broad to allow for that. The result was no conclusion, but a mere allegation, tantamount to derive the intent of a driver to kill someone in a car crash from the fact that the driver had been caught speeding: he does not abide by the law, so there is reason to assume his intent to kill.

d) Summary [top]

Summarising, one has to say that the decision is correct. One has, however, to avoid jumping to conclusions. The obligation to make ones contribution to the share capital better be met. The mentioned case is rather peculiar. Had the administrator not drawn the contribution from the bank, i.e. had the payment not contributed to the bankruptcy property and thus to satisfy the creditors, the partner would have been obliged to pay another 22,500 DM. And, by the way, there is probably no obligation on behalf of the bankruptcy administrator to sue the bank. Thus, the partner can not rely on being released from double payment.

iQ:a claim for damages of the partner on the administrator for not sueing the bank and contesting the transaction is but plausible. The partner himself is responsible for the delay as well as for the "mislead" deposit. Thus, in case the administrator does not sue the bank, but only the partner, the latter will have to pay once more.

3. The core ideas of the decision: [top]

a) The share capital contribution is only made, the partner does only fulfil his corresponding obligation, if the company can actually dispose of the money.

b) Monies being paid into a blocked company account, do not establish this precondition (a). However, if and insofar as the deposit finds its way (from the blocked account) into the bankruptcy property, the partner does not have to pay his contribution again.

CLM