Concept and Fundamentals of Loss Coverage Liability
Die Loss Coverage Liability is a term used in German company law referring to the obligation of shareholders to make additional contributions to cover losses incurred by a company. The liability for loss coverage is particularly significant in the legal forms of the general partnership (OHG), limited partnership (KG), civil law partnership (GbR), and the partnership limited by shares (KGaA). Loss coverage may also play a role in the limited liability company (GmbH) and the stock corporation (AG) in specific situations. The legal requirements and consequences of loss coverage liability vary depending on the company form and the contractual arrangements agreed upon between the partners.
Legal Classification
Statutory Framework
The primary statutory provisions regarding loss coverage liability are found in the German Civil Code (BGB), the German Commercial Code (HGB), and specialized statutes such as the GmbH Act (GmbHG) and the Stock Corporation Act (AktG):
- §§ 709 para. 1, 735 BGB (GbR)
- §§ 105 ff., especially 128, 167 HGB (OHG and KG)
- § 13 GmbHG (GmbH)
- § 271 AktG (AG)
- § 223 AktG (Loss Coverage in a KGaA)
Basic Principle of Loss Coverage
Loss coverage liability describes the obligation of shareholders to assume losses of the company proportionately if the company’s assets are no longer sufficient to cover them. This liability can range from a genuine statutory obligation to one expanded by the articles of association.
- Primary Loss Coverage Liability: Obligation of shareholders to compensate for company losses by means of additional contributions or supplementary payments.
- Secondary Loss Coverage Liability: Obligation to cover company debts towards creditors after the company’s assets have been exhausted.
Loss Coverage Liability in Different Company Forms
Civil Law Partnership (GbR)
The GbR is an association of several persons to achieve a common purpose. According to § 709 para. 1 BGB, §§ 723 ff. BGB, the partners are obliged to maintain the company assets and cover losses in accordance with the articles of association or, if not otherwise stipulated, per capita (§ 722 BGB). If the company assets are insufficient to meet liabilities, the partners are liable with their personal assets.
Internal Relationship and External Relationship
- Internal relationship: Shareholders are obligated to offset any losses according to the agreed or statutory allocation key.
- External relationship: Creditors may directly access the shareholders’ personal assets once the company’s assets are exhausted (§ 128 HGB analogously).
General Partnership (OHG)
In the OHG, according to § 128 HGB, there is unlimited, joint and several liability of the partners for company debts, including losses. Liability extends to both company assets and the personal assets of the partners. Supplementary contribution obligations in the internal relationship are governed by § 121 HGB and can be structured contractually.
Limited Partnership (KG)
The liability for loss coverage distinguishes between general partners and limited partners:
- General partners: Are liable without limitation, like partners in an OHG, for both losses and liabilities.
- Limited partners: Are generally liable only up to the amount of their contributed capital, whereby the obligation for supplementary payments may be stipulated in the partnership agreement (§ 167 HGB).
Limited Liability Company (GmbH)
For the GmbH, the liability of partners is generally limited to the contributed share capital (§ 13 GmbHG). Further loss coverage is only required in case of contractually agreed supplementary contribution obligations (§ 26 GmbHG). By law, partners are not required to contribute additional capital to cover losses unless expressly provided for in the articles of association.
Stock Corporation (AG)
Shareholders are only liable with their capital investment; there is no obligation to make supplementary contributions to cover losses (§ 271 AktG). Losses in a stock corporation are covered by reducing reserves or the share capital (§§ 222, 229 AktG).
Partnership Limited by Shares (KGaA)
The KGaA combines elements of the KG and the AG. While limited shareholders, analogous to shareholders in an AG, have no obligation for supplementary contributions, the personally liable partners (general partners) are liable without limitation.
Loss Coverage Liability in the Event of Insolvency
In the event of a company’s insolvency, the obligation to provide loss coverage can be of significant importance, both in relation to creditors and among the shareholders. In partnerships, the shareholders are obligated to make supplementary payments to settle existing claims, provided this is stipulated in the articles of association or required by law. In insolvency proceedings for a corporation, an obligation for supplementary payments is generally excluded unless the articles expressly provide for this.
Contractual Supplementary Payment Obligations for Loss Coverage
Many articles of association contain individual supplementary payment obligations that go beyond statutory requirements. Such obligations may require shareholders to make additional payments to offset company losses if certain circumstances arise (e.g., balance sheet loss, insolvency).
The validity and scope of such provisions depend on the specific company form and the applicable statutory requirements. A contractual regulation deviating from statutory provisions is only effective within the legally permissible framework.
Practical Significance
Loss coverage liability represents a key risk and liability factor, especially for founders and shareholders, to be considered when choosing the company form and drafting the articles of association. The individual configuration of loss coverage liability can have legal, economic, and tax consequences. Clear regulation of supplementary payment obligations in the articles provides planning security and can help prevent disputes in the event of losses.
Summary
Loss coverage liability is a fundamental term under German company law, governing the liability of shareholders for a company’s losses. The extent of liability varies significantly depending on the company form and contractual arrangements. In partnerships such as OHG, GbR, and for general partners of a KG, shareholders are broadly liable for losses; in MBH and AG, liability is generally limited to the amount contributed. Contractual supplementary payment obligations can modify this principle. Precise knowledge of the legal situation is crucial for all parties, both when founding a company and during its ongoing operation.
Frequently Asked Questions
Who is liable under loss coverage liability?
In the legal context of loss coverage liability, in corporations—especially in the GmbH—shareholders are liable for losses in certain circumstances. Loss coverage liability essentially applies to shareholders whose contributions have not yet been fully made. In practice, liability especially arises when the share capital has been depleted by losses and further outstanding contributions remain to be paid. Shareholders are then obliged to pay the outstanding contributions, regardless of whether the company is already insolvent or not. The claim arises directly from company law provisions (in particular §§ 13, 19 GmbHG), whereby the company as a legal entity can assert this claim against the respective shareholder. In insolvency, this collection right is transferred by law to the insolvency administrator under § 17 para. 1 no. 2 InsO.
Does loss coverage liability have to be expressly stipulated in the articles of association?
The obligation for loss coverage liability does not generally require an express provision in the articles of association, but arises directly from the law, provided it concerns outstanding contributions to the share capital. The so-called supplementary contribution obligation, i.e., the obligation to make further payments beyond the agreed contributions, must, however, be expressly stipulated in the articles of association. The statutory obligation only relates to the share capital or mandatory contributions and serves to maintain the share capital registered in the commercial register. Any remaining outstanding contributions must be paid for loss coverage, without the need for a separate contractual basis.
What role does the company’s insolvency play in enforcing loss coverage liability?
If insolvency occurs and insolvency proceedings are opened, enforcement of loss coverage liability falls within the responsibility of the insolvency administrator. The administrator asserts the outstanding contribution claims on behalf of the insolvency estate (§ 171 para. 2 InsO). This applies even if the company has not previously exercised its right to collect. In this scenario, the shareholders are required to pay any unpaid contributions needed to cover existing losses. The Insolvency Code thus ensures equal treatment of the company’s creditors, as the paid-in contributions are added to the insolvency estate from which all creditors are satisfied pro rata.
Can the obligation arising from loss coverage liability be contractually excluded or limited?
Any restriction or exclusion of the statutory contribution obligation towards the share capital is legally inadmissible. According to established case law, articles of association clauses aiming to limit or exclude loss coverage liability are invalid within the framework of capital maintenance provisions (§§ 30, 31 GmbHG). The legislature considers this core area of company law to be mandatory in order to ensure creditor protection through share capital. Only the supplementary contribution obligation beyond this may be contractually stipulated and also limited.
Is there a difference between loss coverage liability and the supplementary contribution obligation?
Legally, loss coverage liability and the supplementary contribution obligation must be clearly distinguished. Loss coverage liability refers exclusively to the obligation to pay contractually agreed—but as yet unpaid—contributions even when the company has already suffered losses that have reduced its capital. This is a mandatory legal liability. The supplementary contribution obligation, on the other hand, is a further contractual agreement by which shareholders can be obliged to pay additional amounts to the company for loss coverage beyond their original share contribution.
How does loss coverage liability relate to claims by third parties against the company?
Loss coverage liability of shareholders does not grant creditors direct rights against the shareholders; rather, it is a claim of the company against its own shareholders. In the event of the company’s insolvency, however, this claim passes pursuant to § 171 para. 2 InsO to the insolvency administrator representing all creditors collectively, meaning that, in effect, funds are supplied to satisfy company creditors. Originally, though, the sole purpose of the loss coverage liability is to secure the company’s capital and thus the pool of assets available for all priority creditors. Creditors have no direct claim against the shareholders.
