Repayment obligation for received fictitious profits or dividends

In the event of insolvency, fictitious profits or fictitious dividends that a company had paid out previously to its shareholders, must be repaid to the company. According to the Federal Court of Justice ("BGH"), this applies regardless of whether the company was aware at the time of payment that only fictitious profits existed or not.

Background

The ruling of the BGH is based on the following facts: The defendant subscribed to profit participation rights with a stock corporation that subsequently became insolvent (hereinafter also referred to as the "debtor"). The profit participation rights stipulated that the annual dividend and profit entitlement depended on the annual net profit generated. Since the debtor's approved and audited annual financial statements each showed a net profit, the defendant received payments totalling approximately 13,500.00 Euros in the years 2010 to 2013.

On April 1, 2014, insolvency proceedings were opened against the stock corporation and the insolvency administrator demanded repayment from the defendant of the dividend and profit payments received. As grounds, the plaintiff argued that the company had at no time generated any profits, as the income had been generated solely via a snowball system. Thus, there was also no claim for the payments received. The defendant refused to pay but issued a waiver of the statute of limitations for "repayment claims based on insolvency contestation due to distributions" as of November 02, 2017. As no agreement could be reached between the parties, the insolvency administrator filed a lawsuit.

The judgment of the BGH of July 22, 2021, Case No. IX ZR 81/20

The lower courts had rejected the claim. The BGH ultimately upheld the insolvency administrator's claim and ruled that, to the extent that fictitious profits and fictitious dividends had been paid out, these had to be repaid by the defendant. The insolvency administrator's claim was either based on the provisions of the law on enrichment or had to be reimbursed in accordance with the provisions of the law on insolvency contestation. If the claim was to be based on the provisions of the law on enrichment, it was also not time-barred. Although the declaration of waiver of the statute of limitations expressly referred only to "repayment claims based on insolvency contestation due to distributions", claims that economically replace them were also to be included in the waiver of the stature of limitations in case of doubt.

Since these matters were unresolved, the BGH referred the case back to the lower court for a decision.

Comment

With this ruling, the BGH clarifies that fictitious profits or fictitious dividends received must be repaid in the event of the company's insolvency, irrespective of whether the company was aware at the time of payment that these were only fictitious profits or not.

Legally, the claim can be based on two different standards: In the event that the company was not aware that no profits were being made, the claim for repayment is based on the general so-called enrichment law provisions, which also apply outside of insolvency proceedings. However, if the company was aware that it was not making any profits and nevertheless makes the alleged profit payments, the law assumes that the paying company is not worthy of protection and a claim for repayment should not exist. In the event of insolvency, however, this legal assessment would be to the detriment of all other creditors. Therefore, in such cases, the right of insolvency contestation intervenes in order to ensure equal satisfaction of all creditors. The received fictitious profits must be repaid because the recipient ultimately obtained them "free of charge"; after all, the recipient would only have a claim in the event that profits were actually made.

The BGH also did not accept that the claims under the law of enrichment could be time-barred in this case. Although, it is possible to make a waiver of the statute of limitations limited to a specific legal claim. The interests of both parties, however, must always be taken into account. A waiver of the statute of limitations is usually issued in order to reach an out-of-court settlement without "running out of time". But if an agreement cannot be reached, the parties usually wish to have the possibility to clarify the matter in court. This means, however, that a waiver of the statute of limitations is usually not only issued for a claim on a specific legal basis, but ultimately it is the "economic claim" that is at issue and not the legal reasoning behind it. Therefore, in case a legally limited waiver of the statute of limitations is to be made, the parties must expressly state this. After all, in case of doubt, this is precisely not what the parties may expect, taking into account the interests of both sides.