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Insol­vency filing oblig­ation of the managing director and liability issues

19. July 2023

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.