Protect yourself from personal liability claims.

For many entrepreneurs it is unimaginable: after a long and successful business history, their company finds itself in an insolvency-threatening situation for the first time. And precisely because this situation has always been so unimaginable, even unrealistic, it is difficult to come to terms with it and even think about private liability and criminal liability. In the course of my professional career as a consultant, but also as a managing director and shareholder of companies that have often found themselves in crisis or turnaround situations, I have come across this topic time and again. Based on this experience, I can strongly recommend that you recognize the importance of dealing with the essential framework conditions at an early stage. These framework conditions have changed several times in recent months due to coronavirus, and the situation has become more complex, but no less urgent. That’s why I’ve written down here what you need to know.

What is the current legal situation?

The obligation to file for insolvency was last amended on October 1, 2020 to the effect that – in the event of existing insolvency – filing is again required in a timely manner. In the case of (exclusively) existing over-indebtedness, the corona-related suspension of the application obligation will continue to apply until the end of 2020.

From 02.01.2021, the usual application obligation will therefore apply again with regard to all criteria.

Now is therefore the right time to examine the issue of possible insolvency in detail. Because in an emergency, it is not just about the company but also about private liability or criminal liability.

To what extent am I liable as a company director in the event of insolvency?

The fact is that the management bodies of companies, i.e. GmbH managing directors, AG board members, association board members etc., are liable with their private assets for omitted or unauthorized payments. In this case, liability relates not only to the amount of the actual payment, but also to the amount of the damage incurred.

In the event of insolvency, the company representatives run the risk of being held liable by the court-appointed insolvency administrator. Liability also applies if those responsible have allegedly or negligently failed to recognize the insolvency or over-indebtedness. If the insolvency administrator establishes that the time of so-called insolvency maturity should have been recognized significantly before the time of the application, the company director can be held liable for the payments. And the company director can be hit even harder if the insolvency petition is not filed in time: A prison sentence may be imposed. Even if not all of the criminal proceedings result in a prison sentence, there can still be considerable consequences for the private and professional future.

Does my D&O insurance cover the damage?

Some people rely on their D&O insurance (if they have taken out and paid for it) to cover the damage. However, it regularly happens that a D&O insurance policy provides no or only very limited insurance cover in the event of a liability claim in insolvency situations (cf. Judgment of the Higher Regional Court of Düsseldorf dated July 20, 2018 (case no. I-4 U 93/16)). As a precautionary measure, it is therefore advisable to obtain written confirmation from your D&O insurer that liability under Section 64 GmbHG is also insured with them.

Changes in insolvency law and new restructuring / reorganization options

In addition to the basic rules of imminent or existing insolvency or over-indebtedness, which were reintroduced on January 2, 2021, there are various changes to standard insolvency law which, as a non-lawyer, I will not go into in detail here.

At the same time, however, the amendment to the law opens up a new and innovative procedure for the financial restructuring of over-indebted companies by means of a restructuring plan. It is an alternative to debtor-in-possession management and may even make it possible to completely dispense with the involvement of a court. For companies in (early-stage) crisis situations, this offers new opportunities to future-proof the company in the face of current challenges. I recently took a closer look at this topic in an article and would therefore just like to refer here to the keyword “Stabilization and Restructuring Framework” (StaRUG).

If you missed the article, or if you are generally interested in an exchange on an entrepreneurial level on the topics of restructuring or liability, please send me a personal message.