If a company is faced with imminent insolvency or over-indebtedness, the managing director must file for insolvency. Failure to do so in due time may result in him or her being held personally liable.

It is often difficult for managing directors and other governing bodies to accept that the company is facing insolvency. Understandably, every possible measure is taken to avoid insolvency in a lot of these cases. Notwithstanding this, managing directors should not under any circumstances ignore signs of imminent insolvency, as one of their duties is to file for insolvency in due time. We at the commercial law firm GRP Rainer Rechtsanwälte note that the managing director might otherwise be held personally liable for the delay in filing for insolvency. Our experience shows that many managing directors are unaware of when an insolvency petition needs to be filed and which payments can still made.

In principle, an insolvency petition must be submitted without undue delay, but no later than three weeks after the company becomes insolvent or over-indebted. A company is considered to be over-indebted if the company’s assets no longer cover its existing liabilities. In the case of insolvency, the company is no longer able to meet its payment obligations. A company is deemed to be insolvent if the vast majority of liabilities can no longer be settled, even if individual payments are still being made.

In that case, managing directors must above all take care to ensure that no payments are made that diminish the insolvency estate. Otherwise, they may be liable to pay damages. According to a ruling of the Bundesgerichtshof (BGH), Germany’s Federal Supreme Court, from 4 July 2017, payments made under these circumstances are only permissible if the compensation or return contribution offsets the reduction in the insolvency estate (Az.: II ZR 319/15). To this end, the compensation or return contribution to be added to the insolvency estate needs to be suitable for use by the creditors. The BGH noted that wages or services are generally not suitable for these purposes. The Court went on to state that if the managing director nevertheless arranges for payment of wages, he or she may be liable to make restitution.

A looming threat of insolvency may entail a high risk of personal liability for the managing director. That is why legal advice ought to be sought if there are signs that the company is on the verge of insolvency or over-indebtedness. Lawyers who are experienced in the field of company law can serve as expert advisers.

https://www.grprainer.com/en/legal-advice/company-law/restructuring-insolvency.html