The so-called Covid-19 Insolvency Suspension Act (COVInsAG) entered into force retroactively as of 1 March 2020 and limits the liability of corporate bodies, managing directors and board members in the event of insolvency caused by the Covid-19 pandemic. This initially applies until 30 September 2020 and may, if necessary, be extended by statutory instrument without the consent of the Bundesrat until 31 March 2021 at the latest. This remains to be seen (as of April 2020).<\/p>\n
What Does It Apply To \u2014 and What Does It Not Apply To?<\/p>\n
The legislature thereby temporarily intends to generously limit the insolvency-law risk of misjudging business development and the associated personal liability of managing directors or board members under Section 64 GmbHG as well as liability under Sections 823 BGB and 15a InsO.<\/p>\n
But caution is required: this legislative amendment is not intended to protect managing directors or board members from the consequences of, for example, order-related fraud under Section 263 of the German Criminal Code. This means that if a managing director or board member carelessly places orders during the coronavirus crisis which, because of the company\u2019s crisis, they foreseeably cannot pay for when the service rendered becomes due, they remain criminally liable if the elements of order-related fraud are fulfilled and, in addition, remain liable without limitation with their personal assets. In particular, conditional intent is sufficient in this respect if the managing director or board member merely accepted the possibility of being unable to pay at the time the order was placed.<\/p>\n
The Covid crisis poses enormous challenges for the managing director or board of a company or association not only economically. In addition, managing-director liability or board-member liability requires the corporate body to pay particular attention: on the one hand, during the Covid crisis the managing director or board member often has to juggle the available \u2014 and short-term expected \u2014 finances in a particularly careful manner. On the other hand, according to the current position (May 2020), the suspension of the obligation to file for insolvency ends on 30 September 2020, although it could potentially be extended until 31 March 2021 at the latest, which is also to be expected.<\/p>\n
Re-entry into the Atmosphere<\/p>\n
In plain terms, this also means that either on 30 September 2020 or, depending on any extension, at the latest on 31 March 2021, upon expiry of the suspension of the obligation to file for insolvency, the managing director or board member must very carefully examine from a legal perspective whether an insolvency filing must be made immediately once the Covid-related insolvency relief measures have been lifted. In other words, they must determine whether, at the end of the relevant cut-off date \u2014 30 September 2020 or, if COVInsAG is extended, 31 March 2021 at the latest \u2014 the company is still solvent and not over-indebted under the strict insolvency-law standards that will then again apply.<\/p>\n
This question, which the managing director or board member must consider and answer at the \u201cmagical\u201d end of the insolvency-law Covid relief measures, can hardly be answered reliably in practice without sound knowledge of insolvency law.<\/p>\n
From an insolvency-law perspective, there are two grounds for insolvency: first, inability to pay, which according to the most recent case law of the Federal Court of Justice must be assumed whenever the company is unable to settle more than 10% of its due and payable liabilities within one month. This is an insolvency ground that managing directors and board members can still handle with a reasonable degree of clarity.<\/p>\n
Over-Indebtedness \u2013 The Devil Hidden in the Balance Sheet<\/p>\n
The other insolvency ground, over-indebtedness, is far less straightforward. It is the much more insidious ground for insolvency, because in practice it frequently takes effect while lying dormant in the background and is much more difficult for the managing director or board member to recognise or determine than, for example, inability to pay.<\/p>\n
The greatest danger for managing directors and board members is that they may closely monitor the maintenance of the company\u2019s liquidity, while at the same time overlooking or disregarding existing or newly arisen over-indebtedness.<\/p>\n
Personal Liability of the Managing Director or Board Member<\/p>\n
If insolvency proceedings are subsequently opened, whether on the basis of an application by the company itself or by a third party, the insolvency administrator appointed later will often calculate for the managing director precisely when the company became insolvent for insolvency-law purposes, then simply add together all payments that the managing director or board member arranged or permitted, and claim the total amount personally from the managing director or board member under Section 64 GmbHG.<\/p>\n
The insolvency administrator does not merely reclaim payments made during this period, for example as salary or similar remuneration to the managing director or board member, but in fact all payments made, regardless of who received them or what gave rise to the payment. The only exception concerns payments to social security institutions relating to the employee\u2019s share of contributions.<\/p>\n
From the moment insolvency maturity occurs, managing directors or board members may therefore be personally liable with their private assets for reimbursement of the full amount of payments made, for example wages, deliveries of goods, rent payments, leasing payments and similar expenses. In other words, with the exception of the employee\u2019s share of social security contributions, managing directors and board members are personally liable without distinction for everything that flows out of the company to third parties after insolvency maturity has occurred.<\/p>\n
This legal consequence may also affect managing directors or board members after Covid where, although they are able to meet all current liabilities of the company, the company is nevertheless to be regarded as over-indebted on its balance sheet in an abstract sense.<\/p>\n
How Can a New Risk of Over-Indebtedness Be Identified?<\/p>\n
Over-indebtedness exists whenever the company\u2019s liabilities exceed its assets. When this occurs for insolvency-law purposes also depends, among other things, on the ongoing valuation of fixed assets and hidden reserves. This is where things begin to become difficult for managing directors and board members, namely when certain events in the course of business require a correction of valuations. For example, if an important customer defaults due to insolvency, the receivable shown in the balance sheet must also be corrected or written off, which reduces assets and pushes the company towards over-indebtedness.
\nAnother example, which is occurring more and more frequently during the Covid crisis, is where the financier of a start-up or restructuring project that is financially entirely dependent on the lender terminates the financing and calls the loan due.<\/p>\n
Even if a financier does not immediately call in an existing loan, the mere discontinuation of financing will often push the start-up or restructuring company into over-indebtedness at the same moment, unless there are concrete indications that a replacement financier is likely to be found. In the case of a start-up or restructuring project, the insolvency-law position is typically characterised from the outset by the fact that the company is over-indebted on the balance sheet and that an insolvency filing is not required only because, and for as long as, the financier provides the necessary positive going-concern forecast for the company.<\/p>\n
If the financier no longer does so, for example by terminating the financing, the positive going-concern forecast created by that financing ceases to exist for insolvency-law purposes, unless the start-up promptly finds a replacement financier.<\/p>\n
If the terminated loan is not specifically start-up, business-formation or restructuring financing \u2014 where the purpose of the loan may preclude early repayment \u2014 the managing director of the financed company must, from the time the loan is terminated, recognise the full repayment amount as a liability on the balance sheet. This may mean that the balance sheet slips into over-indebtedness in the middle of the year as a result of the loan termination.<\/p>\n
Managing directors and board members must therefore continuously reassess such potential effects of loan terminations and other balance-sheet-relevant events in the course of business and weigh them in relation to any possible over-indebtedness.<\/p>\n
An Important Word on D&O Insurance (Directors & Officers)<\/p>\n
To date, there has been no final decision by the highest court (as of May 2020) as to whether D&O insurance is required to cover payments made by managing directors or board members after insolvency maturity has occurred. In practice, however, this liability risk of managing directors under Section 64 GmbHG is by far the most serious liability risk.<\/p>\n
In many D&O insurance policies this liability risk is either excluded or not expressly regulated. Although this practically important issue had already been submitted to the Federal Court of Justice for a decision, a landmark ruling was prevented because the insurer sued in that case ultimately relented and the appeal was withdrawn. Case law is currently still inconsistent, although the trend is towards coverage of risks under Section 64 GmbHG as well.<\/p>\n
An important recommendation in the case of existing D&O insurance policies is therefore to ensure, urgently and in good time, that an express endorsement is added to the insurance contract covering the risk under Section 64 GmbHG as well. When concluding a new policy, express coverage should be agreed from the outset.<\/p>\n","protected":false},"excerpt":{"rendered":"
The so-called Covid-19 Insolvency Suspension Act (COVInsAG) entered into force retroactively as of 1 March 2020 and limits the liability of corporate bodies, managing directors and board members in the event of insolvency caused by the Covid-19 pandemic. This initially applies until 30 September 2020 and may, if necessary, be extended by statutory instrument without […]<\/p>\n","protected":false},"author":29,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[139],"tags":[],"class_list":["post-55384","post","type-post","status-publish","format-standard","hentry","category-news-en"],"acf":[],"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\t