3.5.2  Piercing the Corporate Veil

The term ‘piercing the corporate veil’ relates to exceptions from the general rule that only the company may be held liable for its obligations vis-à-vis its creditors, i.e. cases in which the ‘corporate veil’ of the GmbH may be ‘pierced’ resulting in the shareholders being liable in person. Such personal liability is mainly relevant in cases where shareholders neglect their duties or abuse the limitation of liability offered by the statutory design of the GmbH.

Since there is no statutory provision which specifically provides for a ‘piercing of the corporate veil’, the relevant principles have been developed by the German courts on a case-by-case basis.

3.5.2.1  Substantial Undercapitalization (Qualifizierte Unterkapitalisierung)

The group of cases under the heading of ‘substantial undercapitalization’comprises fact patterns in which companies have been utterly under-resourced, i.e. inadequately capitalized, by the shareholders. Even though various regulations regarding capital protection already exist in order to secure a creditor against loss, there is still a need to extend this creditor protection because the current regulations are not deemed to be adequate.

As a general rule, the shareholders can freely determine the amount of share capital, provided it is not less than EUR 25,000 in the case of a GmbH (Sec. 5 GmbHG), and not less than EUR 50,000 in the case of an AG (Sec. 7 AktG). Beyond these minimum share capital requirements, neither the AktG nor the GmbHG prescribes that a company should have adequate equity capital in proportion to the business purpose of the company. Due to the general difficulties of determining the appropriate capital of a company, the risk of inadequate capitalization has to be accepted.

However, under exceptional circumstances, namely if the share capital a priori or at a time after the formation of the GmbH proves to be utterly inadequate for the business purpose of the company, its size, and economic activities—as set out in the articles of association—then shareholders may be held personally liable if the company later becomes insolvent. Such personal liability is considered to be justified from the point of view that the shareholders have created the false impression of a sufficiently resourced business entity. Any contractual partner should be able to assume that a company actively engaged in market activities is equipped with sufficient financial assets.

However, claims for damages based on a scenario of ‘substantial undercapitalization’ will usually not prove to be successful in legal practice because so far no legal rules nor reliable economic methods exist to verifiably define what ‘adequate capitalization’ means for an individual business entity. Furthermore, only those shareholders who have recognized (or at least who could have been reasonably be expected to recognize) such undercapitalization and its potential consequences could be held liable. Therefore, a liability resulting from ‘substantial undercapitalization’will be relevant only in exceptional, evident cases.

3.5.2.2  Commingling of Assets (Vermögensvermischung)

A so-called ‘commingling’ of the shareholders’ and the company’s assets may, under certain circumstances, also justify the personal liability of the shareholders.

The separation of corporate assets on the one hand and the assets of the shareholders on the other is an indispensable prerequisite for the limitation of liability. Thus, personal shareholder liability may be assumed if the two spheres of property cannot be separated from each other, for example, due to a false accounting practice. Besides that, opaque accounting or other tactics to manipulate the allocation of the assets may lead to the personal liability provided that such dubious tactics prevent the control of the compliance with regulations regarding capital protection. The ‘corporate veil’ is ‘pierced’ essentially only with regard to those shareholders who caused the confusion or at least had actual knowledge of it and only in cases where the satisfaction of creditors cannot be obtained by the company.

3.5.2.3  Abuse of the Corporate Form (Rechtsformmissbrauch)

Another (and probably the most important) factual pattern which has been considered by the courts to justify personal liability of the shareholders, is an abuse of the corporate form. It should be noted, however, that it is, in principle, legitimate for entrepreneurs to form a separate legal entity solely for the purpose of enjoying the benefit of limited liability. Therefore, further factual circumstances are required in order to pierce the corporate veil.

For instance, if companies are established only for the purpose of collecting debt in order to create a ‘shield’against creditors’claims, the courts might well disregard such a structure and hold the shareholders of such a company personally liable for any claims of the company’s creditors.

3.5.2.4  Destructive Interference (Existenzvernichtender Eingriff)

In some recent decisions, the German Federal Court of Justice has further elaborated the case law on ‘piercing the corporate veil’ by introducing a new group of cases dealing with a shareholder’s destructive interference with the company (existenzvernichtender Eingriff). Broadly speaking, this new concept is based on the idea that a shareholder may neither abuse the separate corporate personality of the GmbH, nor the limited liability of the GmbH’s shareholders.

While the German Federal Court of Justice had initially defined the liability on the grounds of destructive interference as a liability in and of itself, the Court recently explained the legal basis of this liability more precisely by stating that the liability would directly arise from an application of Sec. 826 BGB (conduct contra bonos mores).

Broadly speaking, such liability requires a wilful and harmful interference by the shareholder, i.e. any intentional conduct that results in the inability to pay off its debts. Under such circumstances, a shareholder may not claim the privilege of limited liability and, consequently may be held directly liable.

Examples of destructive interference include, for instance, (1) the transfer of material assets from the company to a shareholder, (2) allocating the risks or losses of a certain business operation to a certain group company while at the same time