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Transferring a business following insolvency in Germany: who pays the pensions bill?

Written by
Kliemt.HR Lawyers, the first port of call in employment law for top-class and future-proof advice.
Authors
Jochen Saal
Partner - Germany
Kliemt.HR Lawyers
Germany
09.07.21
5
Acquiring a business on insolvency can have pitfalls, especially if it involves an employee occupational pension scheme. Will the German Federal Labour Court’s case law, which is favourable to acquirers, continue to apply following a recent European Court of Justice decision?

The promise of a company pension makes companies an attractive employer for (potential) employees. However, if a company is to be sold at some point, the pension obligations can become a dealbreaker from the buyer’s point of view. Particularly when it comes to the takeover of a business (or part of a business) from insolvency, the prospect of taking on extensive, long-term burdens from pension obligations as an acquirer does not seem very enticing. The case law of the German Federal Labour Court, according to which the liability of the acquirer of an insolvent business (or part of an insolvent business) for occupational pension benefits is clearly limited, has so far eased this to a great extent. But can the German Federal Labour Court stick to this approach in view of new impulses from the European Court of Justice? 

The acquirer's liability for occupational pension benefits 

The rights and obligations arising from employment relationships which pass to the acquirer of the business pursuant to s613a (1) of the German Civil Code also include the pension commitments made by the transferor. If an employee who has been taken over retires after the transfer of the business, s/he can therefore in principle claim the full amount of the promised occupational pension from the acquirer, even if s/he earned the majority of his pension entitlements during his employment with the transferor. That is the basic principle. 

However, in the event that the business is acquired after insolvency proceedings have been opened, case law has developed an exception and reduced the acquirer’s liability under s613a (1) of the Civil Code. Accordingly, the liability of the business acquirer in insolvency is limited to the part of the occupational pension claims that has been earned through service in the business after the insolvency proceedings were opened. The case law here gave preference to the insolvency law provisions that provide for equal satisfaction of all creditors. It would not be compatible with the principle of equal treatment of creditors if the employees taken over could assert their claims against a new, solvent, debtor. This would ultimately be to the detriment of the other creditors, as the liability taken on would be reflected in a lower purchase price. Moreover, the relief from liability would also facilitate the (socio-politically) desired takeover of companies in insolvency and thus the preservation of jobs (settled case-law since the German Federal Labour Court judgement of 17 January 1980, 3 AZR 160/79). 

The PSV’s liability

Despite this limited liability of the acquirer of the business, employees do not lose the vested rights earned until the opening of the insolvency proceedings. In this respect, the Pensions-Sicherungs-Verein (PSV)generally steps in as the legally determined provider of insolvency insurance for occupational pension schemes. 

In individual cases, however, an employee may receive no benefits or only lower benefits from the PSV than would have been the case if the employer had not become insolvent. If, for example, the employee’s pension rights were not yet legally vested at the time the insolvency proceedings are opened, the PSV has no obligation to pay benefits at all (under national law). 

Is the existing case law of the German Federal Labour Court also justified in these cases, or must the acquirer then step in? The German Federal Labour Court had to deal with this question several times recently and took the opportunity to refer the matter to the European Court of Justice. After the European Court of Justice essentially approved limited acquirer liability (judgment of 9 September 2020, C-674/18 and C-675/18), the German Federal Labour Court confirmed its previous case law in a decision of 26 January 2021 (3 AZR 878/16). 

What was at issue? 

The plaintiff had received a promise of occupational pension benefits from his employer. Insolvency proceedings were opened in 2009. Shortly afterwards, the defendant took over the establishment in which the plaintiff was employed under s613a of the Civil Code. 

At the time the insolvency proceedings were opened, the requirements for the statutory vesting of the plaintiff’s pension rights had not yet been met. Under German law, he therefore had no claim against the PSV. The plaintiff claimed that in this case, the acquirer should have to pay for the entire pension that would result in the event of a benefit payment in accordance with the relevant pension scheme for him. 

Decision following a ‘green light’ from the European Court of Justice 

In the appeal proceedings, the plaintiff was unsuccessful. 

However, the German Federal Labour Court had previously suspended the appeal proceedings in order to ensure compatibility of its case law on limited purchaser liability with EU law, as clarified by the European Court of Justice (decision of 18 October 2018, 3 AZR 878/16 [A]). 

In its judgment of 9 September 2020 (C-674/18 and C-675/18), the European Court of Justice had essentially given the ‘green light’ to the earlier interpretation of s613a of the Civil Code by the German labour courts. Accordingly, the limited acquirer’s liability is compatible with EU law if minimum protection of employees is guaranteed. This requires that 

 

  • In the event of a pension claim, the employee receives at least 50% of the pension benefits to which s/he was entitled under the occupational pension scheme; and 
  • the pension benefits reduced as a result of the limitation of liability are not so low that the employee would be living or would have to live below the risk-of-poverty threshold in the future. 

 

This protection derived from Article 8 of Directive 2008/94/EC on protection of employees in the event of insolvency applies to all pension entitlements. In particular, it also covers pension rights that were not yet vested under national law at the time insolvency proceedings were opened. 

In its subsequent decision, the German Federal Labour Court found that this minimum protection required under EU law is guaranteed in Germany in any case. If the limited purchaser liability leads to the pension benefits falling below the minimum level required by the European Court of Justice, the German Federal Labour Court held that the employees concerned have a claim under EU law against the PSV to increase the benefits accordingly. In this respect, the PSV is directly obliged under Article 8 of Directive 2008/94/EC. This applies even if under national law the PSV had no obligation at all (for example, because the employee’s pension rights were not yet legally vested at the time the insolvency proceedings were opened). In this respect, Article 8 of Directive 2008/94/EC, which is directly applicable here, takes precedence over the conflicting national provisions.  

Conclusion

Acquirers of businesses can breathe a sigh of relief in view of the confirmation of the German Federal Labour Court’s previous case law. These current decisions are also an important signal in terms of legal policy. A departure from the principle of limited acquirer liability would have made the continuation of businesses from insolvency considerably more difficult. Moreover, it would have made occupational pension schemes, which urgently need to be strengthened in view of the barely fundable state pension, much less attractive for employers. 

The buck now stops with the PSV, which, due to EU law requirements, may in future be obliged to pay even in cases where it would not have to do so under the provisions of the Company Pension Scheme Act (BetrAVG). However, the PSV can only be called upon if the minimum level of protection required under EU law is not actually met. Whether this is the case can usually only be established when the insured event (insolvency) occurs.