Our last Wirecard update was some time ago.[1] For those who have erased Wirecard from their memories: Wirecard AG is the former German “stock market miracle” from Aschheim, a small community in Bavaria with around 10,000 inhabitants. Wirecard went bankrupt in June 2020 after it had turned out that EUR 1.9 billion in supposed funds in the Philippines were non-existent. It is one of the biggest financial scandals in post-war German history.
There is a lot going on in the Wirecard complex, both in terms of civil and criminal proceedings. In this article, we discuss a recent ruling by the Munich Regional Court I that is also of great significance for our own legal advisory practice.
The Munich Regional Court ordered former Wirecard board members to pay a total of EUR 140 million in damages plus interest (Judgment of September 5, 2024, Case No.: 5 HK O 17452/21). The case centers on former CEO Markus Braun, who by now has been in custody for four and a half years, and former CFO Jan Marsalek, who is currently in hiding, as well as other former members of the management board and the supervisory board.
The insolvency administrator of the bankrupt Wirecard AG, Michael Jaffé, accused the former board members and two former supervisory board members of breaches of duty in granting an unsecured loan of EUR 100 million and in subscribing to a bond of EUR 100 Mio.
We will first address the liability of the members of the management board (1.) and then the liability of the members of the supervisory board (2.). Finally, we will explain what the ruling means for the insolvency administrator (3.).
- Former board members of Wirecard are liable for breach of fiduciary duties
The Munich Regional Court found that three former Management Board members, namely Markus Braun (the “boss” or CEO at the time), the former Chief Product Officer (CPO) and the former Chief Financial Officer (CFO) are liable for breaches of their fiduciary duties. As to Jan Marsalek, the Munich Regional Court had already issued a partial default judgment against him before, also ordering him to pay damages in the amount of EUR 140 million.
Granting of unsecured loan
The Munich Regional Court found that all three board members committed a negligent breach of duty by granting a EUR 100 million loan intended for the establishment of a merchant cash advance (MCA) business in Asia. In an MCA business, the merchant receives a type of working capital loan, which is repaid by withholding portions of future credit card payments.
The Munich Regional Court saw the breach of duty in the fact that the loan was not secured. For the court, the granting of an unsecured loan of EUR 100 million already constituted a breach of the duty of care. In the specific case, there were additional circumstances: (i) the borrower already had arrears of EUR 2.375 million from a previous loan and (ii) a special audit by KPMG casted doubt on the actual existence of the financed Asian business.
An interesting question was which board member would be liable for the breach of duty. In principle, under German law board members are primarily responsible for the tasks that fall within their areas of responsibility. However, this does not exclude the possibility that they are also jointly liable for the breaches of duty of other board members. The Munich Regional Court concluded that the granting of the loan fell under the direct responsibility of Markus Braun (CEO) and the CFO. The granting of the loan was not the responsibility of the CPO. The Munich Regional Court nevertheless affirmed her liability because the court concluded that she could not rely on the actions of her fellow board members. According to the Munich Regional Court, the CPO had indications of improper management by another former board member (the former CFO Jan Marsalek), who had disbursed a loan without prior approval from the supervisory board.
Since EUR 60 million of the loan had been repaid through the subscription of a bond, Wirecard AG suffered a loss of EUR 40 million, as the borrower is insolvent, and no payments are expected.
Subscription to bond without due diligence
The Regional Court Munich further found that all three board members had committed a negligent breach of duty by deciding to subscribe to bonds worth over EUR 100 million from a company called Ocap. For the court, the subscription constituted a negligent breach of duty because the board members did not conduct a financial due diligence to verify the value and existence of the securitized claims and the solvency of the guarantor, contrary to legal advice.
The Munich Regional Court held that a financial due diligence would have been necessary to meet industry standards. The breach of duty could not be denied by arguing that the mandated lawyer had stated there were no “dealbreakers,” as this did not concern the verification of the existence and value of the claims or the solvency of the guarantor.
Since there was no return from these bonds to Wirecard and the issuer of the bond is insolvent, Wirecard suffered a full loss of EUR 100 million.
Business Judgment Rule
In none of the liability complexes were the former members of the management board able to invoke the so-called business judgment rule in their defense. This rule is codified in Section 93 (1)(2) Stock Corporation Act (AktG) which states that a member of the management board does not breach the duty of care if, when making a business decision, he/she could reasonably assume to act for the benefit of the company on the basis of appropriate information. Although in principle, the business judgment rule was applicable because both the granting of the loan and the subscription to the bonds were entrepreneurial decisions, for the reasons outlined above, the Munich Regional Court concluded that the former board members did not act on the basis of adequate information.
- Partially unsuccessful: Supervisory Board Members are not liable
As to the liability of the supervisory board members, the lawsuit was unsuccessful. Although the Munich Regional Court also found a breach of supervisory duties, this did not lead to a liability of the supervisory board members. Since the management board had not adhered to the supervisory board’s guidelines in the past, the Munich Regional Court found it was uncertain whether any measures taken by the supervisory board with respect to the granting of the loan and the subscription of the bonds would have avoided the transactions. Thus, the Munich Regional Court dismissed the claim for lack of causality.
- Prospects
Even after the ruling, it is uncertain how much money the insolvency administrator can ultimately recover for the creditors. Although the managers are liable with their private assets, it is highly doubtful that these assets will be sufficient to cover their debts. Wirecard had also taken out manager liability insurance for the management board and the supervisory board members, which could cover the demanded sum. However, manager liability insurance does not pay in cases of intentional criminal acts by managers. Since criminal proceedings are pending against (some) members of the management board, it remains to be seen whether and to what extent the D&O insurance will cover the damages.
All in all, the judgment does not break new legal ground under German law. Still, – as one German scholar has summarized quite fittingly (Bachmann, NZG 2024, 1598) – the judgment serves as a wake-up call for board members: colleagues should be approached with professional scepticism, and in potentially existentially threatening transactions, meticulous attention must be paid to adhering to the prescribed processes, even if they seem to be mere formalities and the risk of default appears low.
[1] Wirecard-Litigation Update – Bad News For Investors, Global Litigation News of March 21, 2023.
