Brexit and Its Effects on Dispute Resolution - A How-to Guide on Civil Disputes Post-Brexit (Vol.3): Possible Liability Trap for Shareholders of UK Corporations

In the last part of our "Brexit-Series" we highlighted the consequences of Brexit on the recognition and enforcement of foreign judgments as well as arbitral awards in the European Union and the United Kingdom (Blog). Building upon this, the third part of our "Brexit-Saga" focuses on a recent decision of the Regional Court of Berlin (Landgericht Berlin, 28.11.2022 - 101 O 57/22) regarding corporate law classification of a UK corporation with an administrative seat in Germany and the procedural acknowledgement of such post Brexit. We are aware that there may be differences regarding the corporate law within the three UK jurisdictions (England and Wales, Scotland and Northern Ireland), but as these do not impact the following sections, we will refer to UK corporations in the following to simplify the presentation.

According to the Regional Court of Berlin, a corporation in the UK, for instance. a private company limited by shares (Ltd.) or a public company limited by shares (PLC), which still has its administrative seat in Germany, is subject to the German "seat theory". Its substantive legal consequence is the classification as a private partnership company / sole trader and thus the personal liability of the shareholders. Therefore, the shareholders of the UK corporation may be sued directly or a judicial title (like a judgment) already obtained against the UK corporation can be transferred to the shareholder(s) of the UK cooperation without the need for further evidence to enforce the judicial title against the shareholder(s).

Application of the Seat Theory to UK companies

Under German international company law, the so-called "seat theory" applies: the applicable company law is determined by the actual administrative seat of a company. In Germany, an exception is made to the "seat theory" for reasons of European law. The European Court of Justice had ruled in several cases that the application of the seat theory to companies from EU member states that follow the incorporation theory violates the freedom of establishment. In the UK, the incorporation theory applies: Following the incorporation theory the applicable company law is solely determined by the law in which the company was incorporated. Therefore, during the UK's membership in the EU, the Limited and PLC were recognised in Germany as a corporation with the corresponding English law limitation of liability even if it had its registered office in Germany.

After the end of the transitional period on 31 December 2020, the legal form of the Limited. and PLC as such no longer exists in Germany. However, these company forms are not a legal nullity in Germany. Rather, they will be treated as a legally responsible company - depending on its form under German company law, for instance as a OHG, GbR (variants of private partnership companies with direct liability) or sole trader (if there is only one shareholder). The Limited or PLC therefore will carry on a "double life" as under UK law registered company and as a private partnership company or sole trader under German Law. In the case decided by the Regional Court of Berlin, the Limited consisted of only one shareholder, thus, from a German law perspective, it continued to exist as a sole trader company. This also results in the personal liability of the shareholder.

The Regional Court of Berlin came to this conclusion by applying and confirming the "seat theory". The aforementioned case law of the European Court of Justice on the application of the incorporation theory does not apply to third countries, which – post Brexit – also affects now the United Kingdom. The application of the incorporation theory is also not regulated under any state treaty. In particular, the Trade and Cooperation Agreement between the EU and the UK does not establish a freedom of establishment as granted in the EU. The protection of legitimate expectations does not hinder the application of the seat theory either, since a conversion of the Limited into a recognised legal form was possible during the transition period and since no confidence in the perpetual existence could arise anyway due to the withdrawal clause of Art. 50 TEU. Although there are isolated dissenting opinions in the literature on this issue, at present the aforementioned application of the seat theory in relation to UK corporations should be still applicable.

Material Legal Consequence of the Seat Theory

Consequently, a UK corporation that still holds its administrative seat in Germany, will now be treated as a sole trader or private partnership company (GbR or OHG) in Germany.

Therefore, a direct liability of the shareholders is possible in Germany.

There may be a considerable liability risk here that one may not have in mind. It is highly recommended to deal with this if the constellation of a UK corporation and an actual administrative seat in Germany exists. This is clearly illustrated by the example of the insolvency administrator of Air Berlin PLC who is suing Clearstream Banking AG as registered shareholder of Air Berlin PLC in the shareholders' register for approximately EUR 500 million in front of the Regional Court of Frankfurt. A decision in this matter has not yet been made, but this again clearly shows the explosive nature of this complex of issues.

Procedural Implications

Since the shareholders could be personally liable for the company's debts in Germany, they can also be sued directly before a German court for fulfilment of the respective debt.

If a title has already been obtained before the end of the transitional period, i.e. before 31 December 2020, as in the case of the Regional Court of Berlin, the conversion into a private partnership company/sole trader is not seen as a genuine legal succession pursuant to sec. 727 of the German Code of Civil Procedure. The foreign company is converted ex lege according to the modified "seat theory". As a consequence, a legal succession clause is issued for the enforcement order without further proof, which can then be enforced against the shareholder. The non-application of sec. 727 of the German Code of Civil Procedure thus simplifies the enforcement procedure against the shareholder, making the whole topic even more important.

To be continued.

Christina Weinzierl
Tobias Pörnbacher
Alexander Braun