Germany: Transfer Of Business And Insolvency

Last Updated: 26 February 2013
Article by Georg Mikes

The Target Conflict Between Employee Protection and Continuation of a Business by Sale

The purpose of Section 613a of the German Civil Code (Bürgerliches Gesetzbuch; BGB) is to protect employment relationships when a business or part of a business is acquired by a new owner, by transferring the employees by operation of law directly from the former owner to the acquirer. Established practice has made clear that this section applies to the acquisition of an insolvent business as well. If the insolvency administrator concludes that the business cannot be continued, he/she will look for a purchaser. However, there will be fewer potential purchasers if the administrator determines that the employees belonging to the business have employment contracts which are "too advantageous"—a situation that might well have contributed to the insolvency. Therefore, it is not surprising that insolvency administrators, together with potential purchasers, often look for ways to sell insolvent businesses without applying Section 613a BGB. Sometimes this is the only way to save at least part of the business and the corresponding jobs.

The Legal Limbo of Circumventing Section 613a BGB

Attempts to simply offer cancellation agreements to employees of an acquired company in exchange for new but less favorable employment contracts with the acquirer seem straightforward but are actually questionable. The logic of such an approach is obvious—there would be no transferable employment due to the cancellation agreement, and the employee would "start anew" on the basis of the newly concluded employment contract. However, the German Federal Labor Court (Bundesarbeitsgericht; BAG) deemed this approach to be an inadmissible circumvention of the law several decades ago—and applied Section 613a BGB despite the conclusion of such contracts. The result is that in these cases, the employees in question were deemed to have been transferred, thus maintaining their former favorable employment conditions and seniority. But this had the effect of discouraging potential purchasers, and consequently many struggling businesses did not survive— to the detriment of their employees.

New Approaches

In the past, more "subtle" approaches were taken with the same objective, e.g., by means of a "job creation and qualification company" (or, as it is called when the focus is on other aspects, a "transitional company"; see the article herein by Dr. Markus Kappenhagen). In a recently decided case (BAG judgment dated August 18, 2011, 8 AZR 312/10, press release 67/11), the insolvency administrator offered trilateral contracts to the employees. These provided for withdrawal from the insolvent company and entry into a job creation company. In fall 2005, several trilateral forms were signed by each employee, which in each instance contained different dates in the year 2006 for their transfer to the job creation company. However, only one such date was intended to be decisive, which the job creation company was to determine later by countersigning one of the contracts.

In May 2006, two more trilateral contracts of this type followed, this time with reference to potential subsequent employment with the planned acquirer of the business, who intended to retain a majority of the company's 452 employees. On May 29, 2006, the job creation company signed the contract providing for the withdrawal from the insolvent company, as of May 31, 2006, of the employee who lodged the claim; the contract also provided for his entry into the job creation company as of June 1, 2006. On June 1, the claimant attended an employees' meeting in which the 352 employees to be retained by the acquirer were chosen by lot; the claimant was among them. Because the business was intended to be continued as of June 2, the claimant's employment with the job creation company was canceled as of the end of June 1, 2006.

Not surprisingly, the BAG considered this approach too to be a circumvention of Section 613a BGB. The parties involved had avoided explicit confirmation of further employment with the acquirer in consideration for withdrawal from the insolvent company and had involved a job creation company. Ultimately, however, despite considerable contractual efforts, the claimant's formal employment with the job creation company lasted only one day—and this had been planned. The BAG assessed these facts to mean that the acquirer may not use the one-day interruption of the employment to argue that Section 613a BGB does not apply. According to the BAG, despite the decision by lot, there was no arrangement aimed at final withdrawal from the company to be acquired; i.e., the lottery was merely window dressing for an in-fact promise of employment to the vast majority of the employees.

The BAG made a similar decision in another case (judgment dated October 25, 2012, 8 AZR 572/11; press release 76/12). In that case, the acquirer concluded a collective bargaining agreement with the German labor union IG Metall in March 2008. It intended to further employ 1,100 of the 1,600 employees of the insolvent company indefinitely and another 400 at least for a limited period of time. Subsequently, the acquirer purchased the tangible current assets. In April 2008, the insolvency administrator agreed on a conciliation of interests and a social plan with the works council and the labor union for a transferring restructuring. Finally, at the beginning of May, the claimant signed a trilateral contract by which he would terminate employment with the current company effective May 31, 2008, and immediately thereafter—i.e., as of 12 a.m. on June 1, 2008— change over to a job creation company. Simultaneously, he signed several contracts presented to him that provided partly for limited and partly for unlimited employment with the acquirer as of 12:30 a.m. on June 1, 2008; the contract that would apply was to be determined by the acquirer. On May 30, 2008, the acquirer opted for a contract limited to 20 months. The employee filed a complaint for a declaratory judgment that the limitation was ineffective, and his claim was successful.

In this case as well, the BAG arrived at the conclusion that this constituted an inadmissible circumvention of Section 613a BGB. In its view, the maze of diverse agreements caused the employee to believe that he would soon be employed by the acquirer of the business.


These decisions, whether welcome or regretted, are nevertheless consistent. The BAG has continued the path it has taken so far with regard to circumventions, showing that only measures referring to a "real" withdrawal from the business to be transferred fall outside the scope of Section 613a BGB. The involvement of job creation companies in which the employee is formally "parked" for 30 minutes or a single day does not offer any advantage. Rather, this is seen as a disadvantage, since the employee's contractual freedom is ignored. Employees who initially indicated that they would rather work under worse conditions than risk losing their jobs completely may later refer to the ineffectiveness of the contracts they themselves signed, and this will not count as an act against good faith and loyalty. However, potential acquirers will consider this and possibly refrain from engaging in takeovers that would have saved jobs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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