The managing director of a legal entity such as a GmbH (limited liability company) is legally obliged to file for insolvency in the event of certain preconditions of a company crisis. But what are these conditions? And what are the consequences if such a petition is filed too late or not at all?
In the following legal advice, attorney Sascha C. Fürstenow would like to give a brief overview of the answers to these questions.
When must an insolvency petition be filed?
An insolvency petition can or must be filed in Germany if one of the statutory grounds for insolvency is present pursuant to Section 16 InsO. These would be insolvency (§17 InsO), imminent insolvency (§18 InsO), as well as over-indebtedness (§19 InsO).
While imminent insolvency is a so-called optional event, but does not (yet) constitute an obligation to file for insolvency, the situation is different for insolvency that has occurred and overindebtedness. According to §15a InsO, in this case an insolvency petition must be filed “without culpable hesitation” by the members of the responsible representative body; in the case of a GmbH, this is regularly the managing director. In the case of insolvency, the deadline requires an application to be filed after three weeks at the latest, and in the case of over-indebtedness after six weeks at the latest.
If this is violated, §15a InsO also provides for liability for delaying insolvency of up to 3 years in prison or a fine. In addition, further actions or omissions subject to penalties can lead to penalties under the German Criminal Code (StGB).
In addition, further claims can also be asserted against the managing directors by the insolvency administrator in the subsequent insolvency proceedings, as payments made that are disadvantageous to the creditors can also be contested in principle.
It is therefore urgently necessary to inform oneself as a board of directors or managing director always about the business development, liquidity and balance sheets of the own enterprise and if necessary to initiate necessary steps at an early stage, advises attorney Fürstenow.
Many make themselves for it also the support third to use; which however, if these make a mistake and do not clear up in time or not at all over the economic situation? Do they then also have to bear the consequences?
Liability of appointed third parties
The liability of third parties depends above all on the contractually agreed rights and obligations. Higher demands are regularly placed on a specially commissioned insolvency or restructuring consultant than on an external accountant or auditor. In addition, a distinction must be made between whether the contract concluded between the parties only stipulates the accounting obligation or also an audit obligation. In the latter case, the requirements are by far higher and the sanctions to be expected are therefore also likely to be higher on a regular basis. The law also imposes a duty on the managing director to keep proper accounts and, as shown above, only he is entitled or obliged to file an insolvency petition for his company in good time. In order to fulfill his duty, he can certainly accept the help of suitable third parties (e.g. auditors or tax consultants), but this does not absolve him from his own duty of examination and due diligence.
Nevertheless, the third party commissioned to prepare the annual financial statements has a liability risk that cannot be ignored if he ignores the clear, obvious reasons for insolvency. In this context, however, the auditor is not required to make a forecast for the future, but merely to assess the facts of the current situation.
In addition, the auditor has a statutory liability under Section 323 of the German Commercial Code (HGB), among other things for “conscientious and impartial auditing”.
Does a D&O insurance policy protect: What is a D&O insurance policy anyway?
A D&O insurance (Directors-and-Officers insurance) is one of the professional liability insurances and is usually taken out by the employer for executives and board members and covers them up to a certain amount for damages caused in the course of their work, explains attorney Fürstenow.
Since such demands can become often very high, the border can be reached here however also fast and one is in the “unprotected” range, which can work also fast existentially threatening.
But what is the case if the managing directors hire an external auditing company for the accounting or the consolidated financial statements and this company makes a mistake or does not notify the managing directors quickly enough about the reason for insolvency?
As a rule, D&O insurers then want to be reimbursed by the third party for the damage incurred by you. However, a contractual relationship exists only between the third party and the management of the legal entity. Since all contracts are generally only inter partes, i.e. between the contracting parties and not against third parties, this does not affect the D&O insurer. In addition, a breach of duty would have to be present, which, under the “simple” circumstances described above (without an audit mandate), may often be at least doubted.
Conclusion: serious consequences for the managing director
Filing an insolvency petition too late or not at all can have serious consequences for the managing director. Therefore, it is of utmost importance to always have an overview of the company’s finances and accounting. Due to the relevance, it is also advisable to have professional expertise on hand. Nevertheless, you should not rely on them alone, as you as the management still bear full responsibility in the end.
Do you have questions on this topic, are you in a company crisis or already at the beginning of insolvency proceedings and would like to have possible breaches of duty by third parties examined? Attorney Sascha C Fürstenow will be happy to do so.