Brexit Means … Liability Trap “Ltd.”

In its judgment of 05.08.2021, the Higher Regional Court (OLG) of Munich commented on the question of how a British limited company with its administrative seat in Germany is to be treated with regard to its legal capacity after Brexit.

In this context, the OLG Munich applied the prevailing “seat theory”, according to which questions of company law are assessed according to the law of the state in which the company has its actual seat. The seat is understood to be the actual administrative seat. This is located at the place where the fundamental decisions of the company management are effectively implemented in ongoing management acts (so-called Sandrock’s formula). According to the seat theory, this also applies if a company – such as the Limited in this case – was validly founded in another state.

According to the case law of the European Court of Justice (ECJ), the application of the seat theory leads to a collision with European primary law, with the consequence that the Federal Court of Justice (BGH) has adopted the so-called foundation theory for those foreign companies that were founded in a member state of the European Union or the EEA or in a state considered equivalent to them on the basis of a state treaty. In these cases, the company law of the founding state applies for the assessment under company law.

This particularity expired for the United Kingdom and corporations founded there due to Brexit, with the consequence that the legal capacity of a British limited company is now again assessed according to the seat theory. According to the numerus clausus of company forms applicable in German company law, according to which only legally standardised company forms are permissible, the OLG Munich, in consistent application of the seat theory, has judged the Limited with administrative seat in Germany as not having legal capacity, because the Limited as such is unknown to German company law.

However, this does not ultimately render the Limited a legal nullum. Rather, under German company law it is to be treated in the case of several shareholders as a civil law partnership or general partnership, or in the case of a single shareholder as a sole proprietorship, with the consequence that the shareholder(s) of the Limited with administrative seat in Germany do not benefit from the (supposed) limitations of liability but are personally liable with all their assets for the company’s liabilities.

Shareholders of a limited company with its administrative seat in Germany should therefore promptly take measures to achieve the ultimately desired limited company and shareholder liability.