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GRP Rainer Rechtsanwälte – Report on insolvency and liability of managing directors

February 2019 - Corporate & Commercial. Legal Developments by GRP Rainer LLP.

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A managing director’s obligations include filing for insolvency on behalf of the company in a timely manner. He or she may be held personally liable for failing to fulfil this obligation.

Managing directors who fail to fulfil their obligations may be held personally liable as a result. A managing director’s obligations include filing for insolvency in due time if the company is insolvent or over-indebted. We at the commercial law firm GRP Rainer Rechtsanwälte can report that it is often difficult to accept the onset of a company’s insolvency. In many cases, there is also frequently a lack of clarity surrounding the latest point in time by when one needs to have filed for insolvency.

We at GRP Rainer Rechtsanwälte note that it is necessary to file for insolvency without undue delay, but no later than three weeks after the company becomes insolvent or over-indebted. A company is deemed to be over-indebted if its assets no longer cover its existing liabilities. Moreover, there is a presumption of insolvency if the company is no longer able to settle the bulk of its liabilities. While this means that the company is to some extent still in a position to make payments, it also represents a risk to managing directors; payments can only continue to be made insofar as they do not diminish the insolvency estate.

During difficult economic times, companies understandably want to continue paying wages to their employees for as long as possible, but they would do well to proceed with caution. Following the onset of insolvency, further payments are only allowed if the consideration in return for the payment offsets the reduction in the value of the insolvency estate. In ruling from July 4, 2017, the Bundesgerichtshof, Germany’s Federal Supreme Court, held that the consideration intended to form part of the insolvency estate needs to be capable of being used by the creditors (Az.: II ZR 319/15). The Court went on to note, however, that services and wages are generally not suitable for this purpose. This means that if in these kinds of cases the managing director nevertheless arranges for the payment of service providers or the remittance of wages and salaries, he or she may be personally liable to make restitution.

Due to the substantial risk of personally liability they face, it is imperative that managing directors do not ignore the signs of imminent insolvency but instead proceed with caution. Lawyers who are experienced in the field of company law can offer professional advice in these kinds of crisis situations. 

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