In the current crisis caused by the Covid-19 virus, sole traders and company managing directors — despite the suspension of the obligation to file for insolvency — as well as persons responsible for the organisational liability of certain corporate bodies are not entirely out of danger, even in light of the limited measures introduced by the Act on the Suspension of Insolvency Filing Obligations (COVInsAG). In connection with losses suffered by suppliers due to lost revenue and the related trade credits, there is a very significant risk that entrepreneurs may even be held personally liable, extending to their private assets, if the company is unable to pay the consideration for services rendered by suppliers when payment falls due. (Section 826 of the German Civil Code; and Section 15a of the German Insolvency Code.)
The suspension of the obligation to file for insolvency, as well as the limitation of the organisational liability of legal entities under COVInsAG, exempt sole traders and managing directors from the obligation to submit an insolvency filing application and also create the legal fiction that the necessary conditions for restructuring are deemed to exist in such cases. If insolvency proceedings are nevertheless initiated later, organisational liability is limited to such an extent that, in exceptional cases, liability under Section 64(1) of the German Limited Liability Companies Act (GmbHG) may not arise either.
However, the previously recognised grounds for liability, which protect suppliers when goods are ordered or where they are required to perform in advance in the event that the customer is unable to pay after placing the order, continue to apply. These grounds for liability pose a particularly significant risk for entrepreneurs and managing directors, since in the current pandemic situation their liability may extend to their entire assets.
Dilemma: Legislative Encouragement of a Shift Towards Order-Related Fraud
Entrepreneurs and corporate bodies find themselves in a particularly difficult position due to the current pandemic situation: on the one hand, the newly adopted COVInsAG encourages them to continue operating despite circumstances that make their continued existence particularly difficult; on the other hand, if they disclose the company’s difficult financial situation to suppliers, it is unlikely that suppliers will readily grant trade credit with deferred payment options. Nevertheless, disclosure of the company’s true economic situation remains necessary in order to defend against any later damages claim or personal liability asserted by the supplier.
It would hardly be accepted before a court as an argument for an entrepreneur to claim that, in the current pandemic situation, suppliers should automatically assume that a customer will most likely cancel its order due to the pandemic significantly endangering its operations, and that the fulfilment of an order under present pandemic conditions would occur only exceptionally, namely where the customer is in fact able to pay when payment falls due. The supplier has a legitimate and protectable interest in deciding for itself what risk of lost revenue it is prepared to assume. In this respect, it must also remain within the supplier’s discretion whether to reject certain orders or to accept an order even where there is a possibility that the customer may simply conceal its insolvency from the supplier, thereby causing the supplier a loss of revenue.
If an entrepreneur, or the managing director of a GmbH acting as its authorised representative, breaches the GmbH’s obligation to disclose information about its financial situation under certain conditions, such unlawful conduct constitutes intentional damage contrary to good morals within the meaning of Section 826 of the German Civil Code (cf. Federal Court of Justice, 31 March 1971, VIII ZR 256/69, BGHZ 56, 73, 77 et seq.; Federal Court of Justice, 27 September 1965, VII ZR 210/63, BB 1966, 53; 14 May 1974, VI ZR 8/73, NJW 1974, 371; and Federal Court of Justice, 25 January 1984, VIII ZR 227/82, WM IV 1984, 475).
A GmbH’s mandatory obligation to disclose information concerning its own economic situation applies where, in connection with the contractual performance obligation, the other contracting party’s obligation to perform in advance has become substantially more difficult due to over-indebtedness (cf. Federal Court of Justice, 27 October 1982, VIII ZR 187/81, ZIP 1982, 1435; Federal Court of Justice, 25 January 1984, VIII ZR 227/82, WM IV 1984, 475; and Federal Court of Justice, 2 March 1988, VIII ZR 380/86, ZIP 1988, 505), and where this difficult economic situation is capable of frustrating the purpose of the contract, particularly where the use of monetary or trade credit is to be expected in view of the existing economic circumstances, i.e. where the company will be insolvent when performance of the obligation becomes due.
The obligation to disclose information concerning financial circumstances exists during negotiations leading to the conclusion of a contract and at the time of contract conclusion where there are circumstances unknown to the other party which, in light of the principle of good faith, ought to be known because they are capable of significantly influencing the contracting party’s conduct and decision (Federal Court of Justice, judgment of 25 January 1984 – VIII ZR 227/82, loc. cit.). This may also be assumed where the negotiating party knows or ought to know that performance of the obligations undertaken will be substantially impeded by possible insolvency (BGHZ 87, 27, 34; Federal Court of Justice, judgment of 25 January 1984 – VIII ZR 227/82, loc. cit.; judgment of 2 March 1988 – VIII ZR 380/86, loc. cit.). Where the contracting party is a GmbH, i.e. a corporation, it is sufficient if the performance of a contract under which the other party is obliged to perform in advance is substantially endangered by the company’s difficult economic situation (Federal Court of Justice, judgment of 27 October 1982 – VIII ZR 187/81, loc. cit.; judgment of 25 January 1984 – VIII ZR 227/82, loc. cit.; judgment of 2 March 1988 – VIII ZR 380/86, loc. cit.; Federal Court of Justice, judgment of 1 July 1991 – II ZR 180/90; Lutter/Hommelhoff, loc. cit., Section 43 para. 27; Scholz/U.H. Schneider, GmbHG, 7th ed., Section 43 para. 227; K. Schmidt, loc. cit., p. 817).
From the perspective of the other party, the poor economic situation must also be capable of frustrating the purpose of the contract, in particular where the use of monetary or trade credit is foreseeable in view of the existing state of over-indebtedness, as a result of which the company will become insolvent at a later point in time — essentially at the time performance is due (Ulmer in Hachenburg, loc. cit., Section 64 para. 66; idem, NJW 1983, 1577, 1579 et seq.; idem, GmbH-Rundschau 1984, 256, 264; Baumbach/Hueck/Schulze-Osterloh, loc. cit., Section 64 para. 24).
The disclosure obligation described above in relation to a GmbH is borne by the company’s managing director as its authorised representative. If the managing director fails to comply with this obligation, liability is based on intentional damage contrary to good morals under Section 826 of the German Civil Code (cf., among others: BGHZ 56, 73, 77 et seq.; Federal Court of Justice, judgment of 27 September 1965 – VII ZR 210/63, BB 1966, 53; judgment of 14 May 1974 – VI ZR 8/73, NJW 1974, 371, 372; judgment of 25 January 1984 – VIII ZR 227/82, loc. cit.; RGRK-Steffen, 12th ed., Section 826 para. 46, 48; Soergel/Hönn, 11th ed., Section 826 para. 80, 116; Erman/Schiemann, 8th ed., Section 826 para. 17).
Important Practical Recommendation
On the one hand, in the crisis caused by the pandemic, it is advisable to document liquidity planning in such a way that it remains possible later, for the purpose of avoiding liability, to prove the liquidity position at the time the order was placed — in other words, the financial situation of the company at the moment when contractual performance appeared likely as a possible course of action. On the other hand, at the time of placing the order it should be provable, at least in some form — preferably by means of a written contract — that the order was placed during the pandemic situation.
Keywords: conclusion of a new contract; crisis prevention; own economic interest; joint liability arising from negligence; liability arising from fault at the time of contract conclusion; liability due to failure to comply with disclosure obligations; liability under Section 826 BGB; liability for intentional damage contrary to good morals under Section 826 BGB; special relationship of trust; disclosure of financial circumstances; liability arising from personal conduct; good morals; obligation to perform in advance; bad-faith obstruction of insolvency proceedings; insolvency; fraud relating to contractual obligations; managing director liability; board liability.
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