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GRP Rainer LLP

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GRP Rainer Rechtsanwälte – Assessing manager liability in the event of imminent insolvency

July 2018

One of a managing director’s duties is filing for insolvency on time. If this duty is breached, the managing director may be held personally liable.

Under no circumstances should managing directors ignore signs of imminent insolvency, as filing for insolvency in a timely manner is one of their duties. Failure to file for insolvency on time or making undue payments in spite of impending insolvency can make life extremely unpleasant for the managing director; his or her breach of duty can give rise to personal liability and an obligation to pay damages to both the company’s shareholders and creditors.

We at the commercial law firm GRP Rainer Rechtsanwälte note that the managing director is obligated by law to file for insolvency without undue delay, but no later than three weeks following the onset of insolvency or the company’s over-indebtedness. The initial decisive factor here is an assessment of the point in time when factual insolvency occurred, or when the company became insolvent or over-indebted.

According to the Insolvenzordnung, the German Insolvency Act, insolvency has occurred if the company is not able to meet its payment obligations. This condition is said to have been satisfied if a large proportion of due liabilities is not being paid, even if payments are still being made. However, it also needs to be assessed whether solvency is capable of being re-established within the three-week period. A company can typically be said to be over-indebted if its assets no longer cover the existing liabilities.

In the case of imminent insolvency, it is no longer permissible for any payments to be made that might reduce the insolvency estate. The managing director should therefore ensure that no more payments are made from within the company, including by other persons who are authorized to make payments. If the managing director breaches his duty, he may be held personally liable.

To avoid the risk of manager liability, if a company experiences financial difficulties it ought to be assessed whether insolvency has in fact already occurred or whether there are only some indications of this. Managing directors should take prompt action in these cases. Lawyers who are experienced in the field of company law can serve as go-to experts.

https://www.grprainer.com/en/legal-advice/company-law/managing-director.html

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