It had to be anticipated that Brexit would have detrimental consequences for private litigants. Some have nurtured the hope, however, that the UK-EU Trade and Cooperation Agreement would mitigate some of the damage. This idea was dealt a blow by a recent judgment by the Higher Regional Court (Court of Appeal) of Munich. The court dismissed a suit brought by a British Private Limited Company (Ltd.) for the company’s supposed lack of legal personality.
Facts, Procedure and Holding
A UK Ltd. based in Berlin sought injunctive relief for alleged price fixing against a German competitor before the courts of Munich. While the Munich Regional Court (LG München I), as the lower court, in its decision (LG München I, 37 O 3787/21) ruled on the merits of the case, the Munich Higher Regional Court (OLG München), in a non-appealable ruling at second instance (OLG München, 29 U 2411/21 Kart), squarely denied the capacity of the Ltd. to be a party of the proceedings.
German International Company Law Applied Strictly
The Court of Appeal argued as follows: Since the UK Ltd. as the claimant was not incorporated in an EU Member State, its legal capacity was to be assessed under German international company law using the real seat theory, according to which a company is subject to the law of the place of its headquarters. This was German law since the Ltd. had its basis in Berlin according to the court’s assessment.
After the Munich court had clarified the applicability of German substantive company law to non-EU companies based in Germany, it further ruled that the UK Ltd. would be legally non-existent as such since it does not fulfill the conditions of any of the corporate forms provided by German law. These corporate forms are exhaustive because of the principle of numerus clausus, and they do not include a Ltd.
The court admitted that a Ltd. based in Germany may have to be considered as a partnership under German law (Gesellschaft bürgerlichen Rechts or offene Handelsgesellschaft), or in the case of a single shareholder, as a merchant. Nevertheless, it rejected the action brought by the Ltd. as inadmissible because of its non-existence as a Ltd.
And the UK-EU Trade and Cooperation Agreement?
Some German authors had opined that the Trade and Cooperation Agreement between the EU and the UK would call for a different conclusion. Particularly the clauses on national and most-favoured-nation treatment therein would require the recognition of companies incorporated under English law.
Not so, said the Munich court. It stressed that Articles 128(b), 129 and 130 of the Trade and Cooperation Agreement merely guarantee the free movement of trade goods and services, capital and investment, but not the freedom of establishment. It also pointed to Annex 20 Headnotes No. 9 of the Agreement, according to which the obligation of national treatment does not extend to legal persons incorporated in the UK and having their seat in the EU (paras. 21-22).
The judgment seems particularly stern, rigid, and ultimately misguided. Already the indiscriminate application of the real seat theory to all third countries is debatable: Some German authors rightly question whether the non-recognition of companies incorporated in such evolved legal systems as the Swiss or the British is indeed justified.
But it is even more wrong to reject such recognition under the EU-UK Trade and Cooperation Agreement. The freedom to provide goods and services explicitly guaranteed in this Agreement is hardly worth anything if the provider will not be legally recognised and cannot assert its rights in court. How should it bring a claim e.g. for an unpaid service?
The fact that the principle of national treatment does not apply to companies based in the EU does not suggest otherwise. It may justify a different treatment for companies incorporated in the UK and based in the EU with regard to the applicable corporate law rules. For example, the liability of shareholders or the rights of management could be subject to the law of the member state in which the company has its seat. But the principle of national treatment certainly does not permit the outright rejection of actions brought by UK companies based in the EU.
The decision of the Munich Higher Regional Court shows the unforeseeable consequences that Brexit may have, even for persons situated within the European Union. The model of operating as a Ltd., which was popular for a while in Germany, especially among small companies, harbours far-reaching dangers and can become a boomerang for many of the companies incorporated in this way, which were supposed to shield the shareholders from personal liability.
It would have been desirable if the Munich Higher Regional Court had removed further uncertainties by departing from the seat theory for British companies and granted these companies legal capacity. At least the Court should have given the Ltd. the chance to correct its corporate denomination in the action and bring the claim as a partnership or merchant. Under German procedural law, the Court is obliged to inform the party about this possibility, and it is unclear whether it has done so. Outrightly rejecting the claim amounts to barring access to court. Such practice could be questioned under Article 6 of the ECHR.
Dear Matthias, thank you very much for this interesting decision. Again, it seems the Brexit makes our courts quite severe in their interpretation of the divorce.
I am not familiar with German law on this, but I actually wonder whether the line of reasoning itself should not be reviewed. Please correct me if I’m wrong, but I suppose properly registered UK Ltd. companies are recognized as having legal capacity in Germany. I would tend to think this mere rule should have sufficed to justify the opposite solution. The fact that this UK Ltd company had been created for a Munich-based business is primarily an issue of formation of the legal person, and as such, should probably be governed by the law applicable at that time : the EU freedom of establishment. Wouldn’t it be more satisfactory in terms of analysis and solution?
Dear François, many thanks for your stimulating comment. German courts apply the real seat theory to current situations in real time, with the effect that a Ltd. that is now based in Germany must now be incorporated under German law. This makes international corporate mobility virtually impossible if you do not want to go all the way down to re-incorporation. You are of course right that one could have preserved the status of UK Ltd.s by emphasising that they were validly created at a time when the UK was still a part of the EU. Such a “vested rights” theory was in fact suggested in the German literature. Unfortunately, this proposal has not been echoed by the courts, as the Munich decision illustrates.
One might qualify the judgment stern and rigid etc., but this is the legal consequence of the hard Brexit in private international law. The freedom of establishment does no longer apply between the United Kingdom and the European Union as it has not been maintained in the EU-UK Trade and Cooperation Agreement of 2020. It cannot be brought back through the backdoor of the freedom of services etc.
I would not blame the Munich Court of Appeal: the decision comprehensively addresses the legal personality of the plaintiff as a Ltd. Obviously and unsuccessfully, the plaintiff tried to prove her factual seat in the United Kingdom. A (potential) change of the party in the proceedings (in the 2nd instance) is not easy under German procedural law. Obviously, the plaintiff was badly advised (and this might even amount to professional negligence). However, I do not see any infringement of article 6 ECHR – the plaintiff may bring the claim again under her own name.
Dear Burkhard, many thanks for this insightful comment. I agree that the EU-UK TCA does not cover freedom of establishment, but it does not seem to me that this would force a German court to outrightly deny a Ltd. legal personality in civil proceedings. This is a very hardcore version of the real seat theory, which is even in Germany a minority position. I also wonder whether other Member States would come to a similarly drastic conclusion. Given the uncertain effect of the EU-UK TCA in this regard, the Munich Court could at least have submitted a reference to the CJEU.
In my humble view, the change of the corporate denomination from Ltd. to a German corporate form during the court proceedings does not amount to a change of party. This has been ruled before by other courts (e.g. the Court of Appeal of Hamburg, 30 March 2007, 11 U 231/04). Admittedly, the situation here seems a bit more complex because the (from the point of view of the Munich court) inexistent Ltd. is identical to a natural person, i.e. its sole shareholder. Yet substituting a natural person for a company is also possible through a merely formal correction of the claim (see Court of Appeal of Hamm, 24 November 2011, 28 U 196/10).
There were thus ways available under German law to come to an alternative solution.