Liability During Crisis and Bankruptcy of the Company

The period when a company is in a liquidity crunch that may lead to the company’s insolvency is the most problematic time for a managing director! The CEO has the highest duties and obligations. His or her civil law and criminal law risks go hand in hand. The following Q&A will give you a basic idea and guidelines for what to consider.

 Gee, it seems as if the company is about to sink. The turnover seems to be in constant decline. I have no clue if we are heading towards bankruptcy or not. What am I to do?

What an awful situation! The first thing to do is to get the financial statements from your tax consultant, then call an urgent shareholders meeting to discuss and analyze this liquidity crunch. Explicitly label the invitation “Discussion of Liquidity Crunch”. The clear labeling is to prevent any liability or criminal prosecution on your end. This is your statutory duty, see §49 III GmbHG.

What should be discussed during this meeting on the liquidity crisis?

The shareholders are to determine whether or not more funds are to be provided or to file for bankruptcy. This is in general a requirement when a severe illiquidity crisis exists and it is not just a large drop in turnover (which was expected and intentionally spent); if the annual report shows the loss of half of the capital stock, you must call a shareholders meeting! Failure to do so leads to civil liability pursuant to §43 II GmbHG as well as criminal liability following §84 GmbHG.

Gee, our company has really been hit badly! We are waiting for this one project to come through and we will be saved for another half year. We are virtually broke. But what am I to do if the project fails?

Be careful with whatever you do! You must make the correct decision quickly! If you are going to apply for bankruptcy, you only have three weeks’ time after illiquidity of the company to request the opening of insolvency proceedings. If you fail to do so, you can be held liable pursuant to §823 II BGB i.c.w. §15a I 1 InsO with all your personal assets – even if you have to go bankrupt. The only way to prevent your liability is to apply for bankruptcy. If you err, well, you can always withdraw an application.

Phew! Although our company is insolvent, we have several CEOs. I am glad that I don’t have to lose face among the shareholders. Maybe one of my colleagues will apply for insolvency.

Wait a minute! This duty applies to all managing directors – regardless of how many there are. It also doesn’t matter if you only have certain responsibilities or specific directions from the shareholders. You can’t avoid responsibility. The three weeks’ time is maximum! However, this time limitation does not count for concrete efforts for recapitalization with realistic expectations.

When is a company insolvent?

Excess indebtedness exists if the company is not able to meet due payments (§17 II InsO). Suspending payment constitutes the legal assumption of inability to pay! A debt overload is legally assumed if the currently existing assets cannot match the outstanding debts, unless, based on current facts, continued operation will predominantly show the opposite.

Wow! That sure sounds strict! How often and when do I have to test the financial situation of the company?

Pursuant to §15 I InsO, you have to continuously monitor the situation.

Okay, what I am to do now? I applied for insolvency but our creditors still demand payment and the tax office is sending its reminders. Now whom do I pay what and when?

You do not pay anyone anything anymore! Nothing – unless you want to be held liable pursuant to §64 cl. 1 GmbHG. Payment, if at all, is actually only something for the bankruptcy manager. However, the law provides that a prudent businessman may still make necessary payments. Nevertheless, resist that temptation! Just declare bankruptcy and that’s that. The legal situation is much too complicated to dare do something like that on your own!

I’ve got an idea how to work around this liability issue. I just resign shortly before the company is officially bankrupt.

Nice try, but that won’t work!

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