The legislator has reformed the liability of managing directors and other executives from the time of insolvency. The new regulations came into force at the same time as the StaRUG on 1 January 2021.
1. When is it necessary to file for insolvency from 2021 onwards?
With a bill on the development of German restructuring and insolvency law (SanInsFoG) introduced at the turn of the year, the obligation to file an insolvency petition pursuant to section 15a German Insolvency Act (InsO) has been revised. Since 1 January 2021, the application must be filed within these periods:
Inability to pay debts
|No later than three weeks after the occurrence of insolvency|
|Over-indebtedness||No later than six weeks after the occurrence of over-indebtedness|
Associations (Vereine) and foundations (Stiftungen), for which special regulations apply, are exempt from this obligation.
The violation of this obligation is as before punishable. The offence is committed in the event of
- failure to comply with the obligation to apply,
- incorrect submission of the application, and
- failure to file an application in due time.
In addition, such violations entail civil liability for the bodies of the insolvent company that are obliged to file an application.
It is important to note that the aforementioned deadlines may only be exhausted as long as there is a reasonable prospect
- to reorganise the company within the time limit and
- to eliminate the reason for insolvency.
Materially, the legislator changes the forecast period to be taken as a basis for the assessment of over-indebtedness within the meaning of section 19 InsO and sets it at twelve months. Previously, the current and subsequent financial years were to be considered.
2. Special regulation for filing for insolvency during the Corona pandemic
With the SanInsFoG, the legislator has also decided on a renewed suspension of the obligation to file for insolvency due to inability to pay debts and over-indebtedness. The background to this is that there are often delays in the payment of the November and December aid decided in view of the second lockdown due to legal (state aid regulations) or actual problems (lack of IT infrastructure).
After the suspension initially applied only from 1 January 2021 to 31 January 2021, the suspension of the insolvency application obligation has been extended once again with effect from 1 February 2021 to 30 April 2021. However, it is linked to the fact that the company concerned
- has filed an application for state aid in the period from 1 November 2020 to 28 February 2021, or
- at least falls within the group of those entitled to apply if this was not possible for legal or factual reasons.
Companies that obviously have no prospect of receiving the assistance or for which the assistance is not sufficient to eliminate insolvency cannot make use of the extended exemption. Moreover, as before, the suspension of the obligation to file for insolvency only applies if the company's crisis is caused by the pandemic.
This must be examined carefully, as there are considerable liability risks for the management. If a company fails to file for insolvency even though the aforementioned conditions for a suspension do not apply, the management is acting in breach of duty, which can give rise to both personal liability and criminal liability for delaying insolvency.
Practical advice by Attorney at Law Dr. Robert Brahmstaedt, LL.M. (University of Sydney):
It is often missed that there is currently no blanket suspension of the obligation to file for insolvency. It is important that both illiquidity and over-indebtedness are "armed" again on the merits and that the suspension of the obligation to file an application only applies under the special conditions named. The extended suspension of the obligation to apply should only benefit debtors who are entitled to financial aid which have not been paid yet. Free riders should not be able to invoke the suspension of the obligation to apply.
If the company is so severely affected by the pandemic that it meets certain criteria (including a slump in turnover of more than 30%), the over-indebtedness test even only requires a period of four months to be considered for the solvency prognosis.
3. Executive board and managing director liability for payments after insolvency
Furthermore, the legislator has reorganised the liability of managing directors for payments made after the occurrence of illiquidity or over-indebtedness.
In addition to the systematic reorganisation of the previous liability rules in a newly created section 15b InsO, the legislator also changes the previously applicable rule-exception relationship.
What remains the same?
The principle remains that payments - and the term is still to be understood very broadly - are inadmissible after the occurrence of insolvency (illiquidity or over-indebtedness) as long as they are not consistent with the diligence of a prudent and conscientious business manager.
How is liability facilitated?
Depending on the stage of crises the debtor is in, new reliefs take effect.
For example, payments made in the ordinary course of business are considered to be made with due care. This includes, in particular, payments that serve to maintain business operations. The prerequisite is that the debtor
- is still within the period of time relevant for a timely filing of an application for insolvency and
- dutifully pursues measures to eliminate the insolvency in the long term or to prepare an application for the filing of insolvency.
After a petition has been filed, payments made with the consent of a preliminary insolvency administrator are privileged. The appointment of the provisional insolvency administrator must therefore be organised as quickly as possible in ongoing business operations.
How is liability increased?
In contrast, the legislator does not want to privilege a delay in filing for insolvency. If the debtor has missed the right time to file for insolvency without filing an application, there is a statutory presumption that payments made after the expiry of the deadlines of section 15a InsO are not consistent with the diligence of a prudent and conscientious business manager and are therefore inadmissible leading to the liability of the management.
This presumption can only be rebutted "under exceptional circumstances" (cf. explanatory memorandum to the law BT-Drs. 19/24181, p. 195). Within narrow limits, situations of emergency management to avert damage directly threatening the later insolvency estate might be conceivable here.
- The payment of district heating supplies to maintain the heating of the business to avoid water damage.
- The payment of fire insurance if the building has a value for the estate.
In contrast, since reorganisation opportunities must be taken within the extended application periods, a "general maintenance of business operations for the purposes of the insolvency proceedings" is not sufficient.
The primary duty of the management at this stage is to file an insolvency petition. In this way, the manager can also avoid the self-inflicted collision of duties that can arise in the area of conflict between the payment ban pursuant to section 15b (1) sentence 1 InsO and the obligations to pay employee social security contributions (section 266a StGB) or the obligation to pay taxes, which is subject to fines and liability.
Practical advice by Attorney at Law Dr Robert Brahmstaedt, LL.M. (University of Sydney):
What is new in this context is the express statutory order (section 15b (8) InsO) that, contrary to the previous case law of the Federal Fiscal Court, the payment obligations under tax law are not violated if claims arising from the tax debt relationship are not fulfilled or not fulfilled in time after the occurrence of insolvency and the insolvency court's decision on the application. The management's duty to safeguard the estate thus takes precedence. However, in the case of an insufficiency of assets caused by a late filing of an application, the protective rule in favour of the management does not apply.
- In future, the legislator will extend the period for filing for insolvency due to over-indebtedness to a maximum of six weeks.
- The forecast period for the assessment of over-indebtedness relevant under insolvency law is modified and basically adjusted to 12 months. If the over-indebtedness is due to the COVID 19 pandemic, even a forecast period of only 4 months applies. For the time being, there are special regulations for insolvency applications in the wake of the Corona pandemic, the prerequisites for which must, however, be examined carefully in each individual case.
- The new section 15b InsO essentially retains the existing payment prohibitions and the management's obligation to pay compensation in the event of violations. What is new is the clear privileging of liability for payments made in the ordinary course of business up to the point in time relevant for the timely filing of an insolvency petition. As soon as the "clock is ticking", it is important that all reorganisation options be examined and pursued. In addition, an insolvency application should be prepared in parallel in order to be able to safely make use of the liability relief.
- After the "clock has run out", i.e. in the case of an insolvency delay that has occurred, on the other hand, there will be an intensification of liability in the future due to the presumption effect of section 15b (3) InsO. From this point on, payments are only permitted as due diligence under exceptional conditions, provided that the payments have any value at all for the subsequent estate. Here, only clear, genuine emergency management measures can be recognised as exceptions.
Practice Note by Attorney at Law Dr. Robert Brahmstaedt, LL.M. (University of Sydney):
The new regulations show: In this dynamic environment, it is more important than ever for companies and their management to determine where they stand with regard to a possible insolvency. This applies not only because of the well-known liability risks if an insolvency petition is filed too late or because the legislator demands active early crisis detection and crisis management from business managers (§ 1 StaRUG), but also in view of the possibility of being able to make use of the new reorganisation instruments of the StaRUG in order to overcome a crisis.
Dr. Robert Brahmstaedt, LL.M. (University of Sydney)
Author of this article
Dr. Robert Brahmstaedt advises nationally and internationally active companies and banks on all matters of insolvency and corporate law. He has considerable experience in advising companies in crisis situations, in corporate acquisitions (distressed M&A) and in restructuring. Another focus of Dr. Brahmstaedt's practice are restructuring and security trusts. His industry focus is on renewable energies as well as the shipping and shipping company industry.