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From the beginning of the new year, the new German Partnership Law Modernization Act (“MoPeG”) will entail far-reaching changes for withdrawing partners in connection with liabilities for damages. The following must be taken into account.
With the entry into force of the MoPeG on January 1, 2024, the case law on the subsequent liability of retiring partners will undergo a radical change. In the MoPeG-related Articles 728b BGB (German Civil Code) and 137 HGB (German Commercial Code), the legislator will in future regulate the withdrawn partners’ personal liability for liabilities for damages. These sections stipulate that a withdrawing partner is only liable for a corporate creditor’s claims for damages if the breach of duty occurred prior to the partner’s retirement. The new provision on the commencement of the period of subsequent liability may also have an effect in favor of withdrawing partners. This article explains the main changes.
What was the previous legal situation under the MoPeG?
Previously, the German Federal Court of Justice (“BGH”) affirmed the liability for damages of a German general partnership’s (“OHG”) retired partner if the corresponding contractual obligation with the creditor was concluded before the withdrawal and the damaging event occurred within the five-year period after the withdrawal. Although the BGH also recognized that the retired partner no longer had any influence on events in the company and was therefore in a disadvantageous situation, the company creditor’s interest previously prevailed over the protection of the withdrawn partner. It was precisely the creditworthiness of the withdrawn partner that might have convinced the creditor to enter into a contractual relationship with the company. The security offered by personal partner liability could therefore only be achieved by a solution whereby the partner was also liable for breaches of duty after his retirement.
The Bonn Regional Court took a different view in its decision on a lawyer’s subsequent liability. The lawyer was not held liable for a breach of duty under the engagement letter with a client that occurred after his withdrawal, although the contract had already been concluded before his withdrawal. In this case, the lawyer’s interest in not being held liable for breaches of duty committed by the lawyer’s civil law partnership after his retirement took precedence over the protection of the creditor.
New MoPeG liability regulation
Essentially, there are two changes to be noted with regard to a partner’s liability for damages:
I. The start of the period for subsequent liability is decisive for the claim for damages. Pursuant to Art. 137 I 3 HGB, as amended, the five-year period begins as soon as the creditor has become aware of the partner’s withdrawal or the partner’s withdrawal has been entered in the commercial register. On the one hand, therefore, the five-year period of subsequent liability may commence at the end of the day on which the partner’s withdrawal is entered in the commercial register. In addition, however, it is still possible for the period to commence when the company creditor otherwise becomes aware of the partner’s withdrawal.
However, in the case of the civil-law partnership (“GbR”) in particular, no entry in a register is possible until the MoPeG comes into force. The planned GbR company register will not be available until January 1, 2024. For the time being, the majority of civil law partnerships will therefore continue to be subject to the condition that the period of subsequent liability will not commence until the creditor becomes aware of the GbR partner’s withdrawal.
For a GbR with legal capacity registered from January 1, 2024, on the other hand, the same applies as to the OHG and KG (German limited partnership): If a GbR continues to be unregistered, the time limit begins, as usual, only upon the creditor’s becoming aware of the withdrawal. In this case, it is recommended to explicitly inform the company creditors about the withdrawal.
II. Art. 728b I 2 BGB, as amended, and Art. 137 I 2 HGB, as amended, establish an approach contrary to previous case law. According to these sections, a retired partners is liable for damages only if the liability has already been established prior to his retirement and becomes due. A further requirement is that this contractual or statutory obligation to the company creditor must have been mandatorily breached prior to the partner’s retirement. Consequently, a partner is not liable for damages resulting from a breach of duty after his retirement. According to the resolution recommended by the Committee on Legal Affairs and Consumer Protection, such amendment is intended to provide for a clear and unambiguous limitation of the subsequent liability for partnerships.
Depending on the grounds on which the claim for damages is based, some details must be observed. If damages have to be paid because the company fails to perform an owed service even within a grace period granted by the creditor, the retired partner is liable if the service was already due before his retirement. Thus, the non-performance at the due date is decisive for the subsequent liability. The same applies in case of damages caused by delay. The initial impossibility establishes a subsequent liability if the contract was concluded prior to the retirement. In case of a subsequent frustration, however, it is decisive whether the impossibility of performance occurred at a time during which the partner was still part of the company. In the context of special statutory warranty provisions, the breach of duty is already established by the defective performance of the service and not only by the failed subsequent performance. In the case of tortious claims, the time of the infringement is taken into account.
Is there a transitional arrangement?
The question arises as to how subsequent liability will be handled before the MoPeG comes into force. In any case, there is no transitional provision. However, subsequent liability will be excluded if a partner retires from the company before January 1, 2024 and the breach of duty occurs in the new year. However, the previous law will apply in cases where both the partner’s withdrawal and the breach of duty occur before January 1, 2024. According to the current legal situation, the withdrawing partner is liable for such breach.