Insolvency law aspects
The importance of the obligations of company bodies under insolvency law (such as managing directors of private limited companies (GmbH), management boards of public limited companies (AG)) has increased significantly as a result of the corona pandemic. Procedures and planning from times before the corona crisis may have lost their validity. In order to ensure that the members of a company’s bodies do not expose themselves to criminal risks and considerable civil liability risks, it is vital to identify on a case-by-case basis the specific measures needed in order to adapt to the structures that have been changed by the crisis.
The following presentation is not comprehensive and merely highlights some essential aspects.
Obligation to file for insolvency
When a crisis which has hit a specific company worsens, the interests of creditors become the focus of the duties of the responsible body. One consequence of this obligation towards the interests of creditors is, in particular, the obligation to file for insolvency proceedings pursuant to sec. 15a of the German Insolvency Statute (InsO, Insolvenzordnung).
The obligation to file for insolvency proceedings may not only apply to the company bodies appointed to represent the company, but also to the shareholders themselves in exceptional cases where the company is without management.
If there is a reason for insolvency (inability to pay or over-indebtedness), the managing director of a GmbH, for example, is obliged to file for insolvency proceedings with the competent insolvency court. If there was a reasonable prospect of successful restructuring when the reason for insolvency arose, the managing director is granted a three-week application period. However, if there is no reasonable prospect of restructuring in the individual case, the managing director must submit an application without delay.
If the managing director fails to comply with this obligation, or if it turns out after expiry of the three-week period that the company has already been insolvent or overindebted for three weeks (or longer) and if insolvency proceedings are opened despite the initially justified prospects of success, there is a considerable risk of liability under civil law in accordance with sec. 64 of the Limited Liability Companies Act (GmbHG, Gesetz betreffend die Gesellschaften mit beschränkter Haftung) [or sec. 92 (2) of the Stock Corporation Act (AktG, Aktiengesetz)]. This liability risk affects the managing director personally and without limitation. Within the scope of liability for any decrease in the value of assets, the managing director is liable for any payments that were made after the occurrence of the preconditions for filing for insolvency.
Risky gaps in coverage under D&O insurance
According to a landmark ruling by the Düsseldorf Higher Regional Court (OLG, Oberlandesgericht), insurance companies are not obliged to pay compensation under so-called D&O insurance policies for, among others, management board members and managing directors if a managing director is held liable for payments made after the preconditions for filing for insolvency were fulfilled. This is because the policy typically serves to protect the interests of the insolvent company itself and not the interests of its creditors. A different situation may exist in exceptional cases if such claims are expressly listed in the insurance terms.
Mitigation of liability risks through the corona crisis?
In view of the dynamic developments in the context of the corona crisis and the risk that a large number of companies will soon face insolvency, the aforementioned three-week period under criminal law is too short.
This is why the Federal Ministry of Justice and Consumer Protection is currently drafting a law to suspend the obligation to file for insolvency for companies hit by the corona pandemic.
According to this draft law, the obligation to file for insolvency is to be suspended until 30 September 2020 if a company can be proven to have gotten into financial difficulties as a result of the corona pandemic.
Pursuant to sec. 1 sentence 3 of the draft Corona Insolvency Suspension Act (CorInsAG‑E, Entwurf zum Corona-Insolvenz-Aussetzungsgesetz), it is assumed that the preconditions for filing for insolvency are based on the impact of the COVID‑19 pandemic and that there are prospects of eliminating an existing insolvency if the debtor was not insolvent on 31 December 2019.
However, suspension will not be granted if
- the preconditions for filing for insolvency are not due to the impact of the spread of coronavirus or
- there is no prospect of curing existing insolvency.
The language chosen in the draft law suggests that the legislator deliberately does not want to include in the law the company’s restructuring ability as a precondition for the extended suspension period. This could significantly ease the burden of proof for the debtor when it comes to the question as to whether a debtor benefits from the extended suspension period. It would no longer be necessary to draw up a fully comprehensive restructuring concept in accordance with IDW S6, but only to carry out an insolvency check.
If the insolvency administrator is convinced in subsequent insolvency proceedings that the presumption rule of sec. 1 sentence 3 CorInsAG must be refuted, the burden of proof will then rest with the insolvency administrator. According to the explanatory memorandum, the requirements which the future insolvency administrator must meet in this respect must be high.
Bodies of companies that were already in acute crisis at the beginning of the corona pandemic are, however, well-advised to document their own proof of causality between the crisis and their insolvency. The concrete impact of the corona pandemic can and should be documented, for example, by appropriate planning and liquidity calculations.
The draft law on the CorInsAG also provides that within the scope of liability for any decrease in the value of assets (sec. 64 GmbHG; sec. 92 (2) AktG; sec. 130a in conjunction with sec. 177a HGB; sec. 99 (2) of the Act Concerning Commercial and Industrial Cooperatives (GenG, Gesetz betreffend die Erwerbs‑ und Wirtschaftsgenossenschaften)) payments which are made in the ordinary course of business are deemed to be made with the diligence of a prudent and conscientious manager in the sense of corresponding liability standards. This fiction considerably reduces the liability risk for the corporate bodies of companies in crisis.
However, there is also the risk of a ‘liability trap’. This is because relief from liability for any decrease in the value of assets only applies to the extent to which the obligation to file for insolvency is suspended under sec. 1 CorInsAG‑E. In plain language, this means that if the preconditions for filing for insolvency are not based on the impact of the spread of coronavirus or if there is no prospect of recovering from insolvency, liability relief does not apply and there is a considerable personal civil liability risk for the company bodies.
At present, company bodies can only minimise this liability risk by appropriate documentation of the impact of the corona pandemic on the company or by filing for insolvency.
Companies with a positive forecast for continued existence to date
If, prior to the corona crisis, company bodies had assumed a positive prognosis for the continued existence of their own company as part of the examination of the preconditions for filing for insolvency in the event of balance sheet overindebtedness, there is now a need for action depending on the respective sector and company. Due to the crisis-related upside-down situation in procurement, sales and personnel, the initial data used to make the survival prognosis may no longer be sustainable. If, on the basis of current and adjusted data, it becomes apparent that the company can no longer be expected to continue as a going concern from now on, the preconditions for the company to file for insolvency are fulfilled if restructuring is not possible.
Reduction of liability through division of responsibilities
A reduction in liability can be achieved in individual cases by dividing responsibilities between the managing directors of a GmbH. For example, one managing director is responsible for the entire commercial area, another for the technical area. However, the requirements for an effective division of responsibilities are high.
In principle, it is not possible to comprehensively eliminate potential liability risks by splitting up responsibilities. All that can be achieved is that the duties of the managing directors are transformed from duties to act into duties to control and monitor. Ultimately, however, liability remains. However, liability is then conditional upon proof of a different breach of duty (control and monitoring of the other departments).
However, if it becomes apparent that the tasks of the department responsible for monitoring liquidity and overindebtedness are not adequately fulfilled, the managing director who is actually not a member of the department is also obliged to take action. If the managing director from outside the department becomes aware of indications of insolvency or overindebtedness, his areas of responsibility, which were cut off by the division of responsibilities, come into existence again to a certain extent. In general, in a financial crisis there are also increased auditing obligations for the managing director from outside the department.
Pre-insolvency liability risks
For the sake of completeness, it should be mentioned that the company bodies must also observe various duties of care in the pre-insolvency phase (sec. 43 GmbHG; sec. 93 AktG). The criterion here is the diligence of a prudent and conscientious businessman/manager. If the company bodies violate these obligations, they are obliged to compensate the company for the resulting damage. The abundance of conceivable breaches of duty to be considered under this aspect – especially in view of the aspect of the corona pandemic – covers all areas of law, consider, for instance, keywords like: duty of care towards employees, use of various assistance measures, etc. Although these claims for compensation by the company against its executive bodies are asserted by the insolvency administrator in insolvency proceedings (which are possible at a later point in time), these claims are specifically rooted in company law. A separate presentation in the context of this discussion under insolvency law is therefore not provided.
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