Creditor Protection in the Corporate Group

Abstract

In the wake of the ECJ decisions in Centros, Uberseering and Inspire Art it is now possible to set up an English limited company which conducts its business solely elsewhere (pseudo-foreign company), without subjecting the company to the domestic company law of the Member State in which it intends to do business. This recent development also has an impact on cross-border groups: It provides a route to avoid domestic corporate group law, especially the highly restrictive German Konzernrecht (forum shopping). However, if English law proves to be deficient in that area, the domestic law of the Member State in which the English subsidiary conducts its business may be imposed (Gebhard-test). Therefore, this essay firstly analyses the effectiveness of English creditor protection law in the corporate group context. It will come to the conclusion that the current state of English law is largely unsatisfactory. Especially the English wrongful trading rule (s. 214 IA 1986) has failed to address the corporate group problem adequately. Although the provision is drafted broadly enough, too many conditions need to be fulfilled to regard a parent company as a shadow director. The major shortcoming of all statutory remedies (capital maintenance rules and insolvency claw back provisions) is that they appear to adopt a monotransactional approach. Thus, there is a good chance that the ECJ will accept that some German company law rules are imposed on English pseudo-foreign group companies to fill in the perceived gaps. In a second step it is analysed which domestic company law rules can be imposed in particular. It is argued that the German liability for cold liquidation (Existenzvernichtungshaftung) and the German insolvency rules on phantom equity are applicable.