Is a non-payment or reduced payment of a Limited Liability Company to the Sole Shareholder compensable damage for the Sole Shareholder?

In the event that the sole shareholder of a limited liability company ("GmbH") receives no or reduced payments from the GmbH, the sole shareholder can only claim damages against third parties if the GmbH itself has suffered a financial loss in this connection. This was recently clarified by the Berlin Upper Regional Court (judgment of January 11, 2021, Case No. 8 U 32/19).

Brief summary of the facts

The judgment of the Berlin Upper Regional Court (Kammergericht, "Court") is based on the following facts: A GmbH (the "parent company") is the sole shareholder of a non-profit GmbH (the "subsidiary"). The public employment service commissioned the subsidiary to perform several training courses for which the subsidiary would receive a corresponding remuneration. Thereupon, the subsidiary commissioned the parent company to perform these training courses in premises rented by the parent company. However, due to a heating breakdown in the building, parts of the training courses could not be performed. Due to this, the parent company received only reduced payments from the subsidiary for the training services.

The parent company asserts claims for damages against the landlord, in particular for loss of profit.

The judgment of the Kammergericht of January 11, 2021, Case No. 8 U 32/19

The Court dismissed the claim, because the parent company, as the sole shareholder of the subsidiary, did not suffer any damage effectively. It is not sufficient that it had received reduced payments from its subsidiary due to the cancelation of training courses. In fact, with regard to the occurrence of the damage it is decisive whether the subsidiary also received no payment or a correspondingly reduced payment from the public employment service. According to the Court, the case law of the Federal Court of Justice (Bundesgerichtshof, "BGH") ruling that a single-shareholder company is deemed to be a "special asset" of the sole shareholder in assessing whether there is a damage or not, also applies to the present case in which the sole shareholder of the GmbH is a legal entity itself. Therefore, the sole shareholder is only entitled to compensation for the disadvantages to such assets, i.e. to the share in the GmbH. Only if the GmbH itself would have suffered a loss, the sole shareholder would be economically affected. This was not the case here, since it was not proven that the subsidiary also received reduced remuneration for the training courses and the damage had thus actually materialized in the "special assets" of the parent company.

Comment

The result and the reasoning of the judgment of the Court are convincing.  With regard to the transfer of the above-mentioned case law of the BGH to the present case, it is not decisive whether the sole shareholder is an individual or legal entity, but whether the control of the company is exercised by its sole shareholder and a potential loss affects the assets of the subsidiary. In other words: the loss suffered by the sole shareholder is not sufficient in these constellations – the sole shareholder is only entitled to damages if the (subsidiary) company also suffers a financial loss.

The application of these standards of the BGH is not limited to cases like the present case. In general, these standards apply to any case in which it is relevant whether the sole shareholder has suffered a loss or not.

On the other hand, a sole shareholder must ensure a clear separation between privately owned assets and the "special assets" of the GmbH, because the shareholder risks a piercing of the corporate veil, i.e. that the (sole) shareholder will be liable to the company's creditors if the two asset pools are mixed.