Most important points

• The obligation to file for insolvency is the legal obligation of the company management (managing director, board of directors) to file an application for the opening of insolvency proceedings with the competent court immediately, at the latest within 3 weeks, if there is a reason for opening insolvency proceedings (Section 15a of the German Insolvency Code, InsO).

• Insolvency occurs when the company is no longer in a position to meet its due payment obligations (usual guideline: >10% of liabilities cannot be settled within 3 weeks).

• Over-indebtedness in the case of legal entities: Liabilities exceed assets, and no positive going concern forecast. If the going concern prognosis is positive, over-indebtedness can be disregarded as an insolvency exception.

• If a responsible person violates the obligation to file for insolvency (“delay in filing for insolvency”), they may be personally liable for any damages incurred, face criminal prosecution (§ 15a InsO, § 283 StGB) and be banned from acting as a managing director.

• Early financial monitoring is particularly important for start-ups, which are often short of cash. In the event of imminent insolvency, it is important to react in good time (e.g. restructuring measures, financing rounds) or, in an emergency, to file for insolvency in order to avoid liability risks.

Reasons for opening insolvency proceedings

The Insolvency Code recognizes three grounds for opening insolvency proceedings:

• Insolvency (§ 17 InsO): Generally given if the company is unable to meet its payment obligations as they fall due. A reference value: If more than 10% of the liabilities due remain unpaid for more than 3 weeks, insolvency exists. Acute liquidity bottlenecks are the main reason for insolvencies among start-ups (e.g. financing round fails, sales do not materialize).

• Imminent insolvency (Section 18 InsO): If it is foreseeable that you will probably not be able to meet future payment obligations on the due date. This reason entitles the debtor to file an application voluntarily (not mandatory) in order to be able to initiate insolvency proceedings earlier for the purpose of restructuring.

• Over-indebtedness (§ 19 InsO): Only applies to corporations and equivalent legal entities (GmbH, AG, UG etc.). Over-indebtedness exists if the assets no longer cover the debts (negative equity in the over-indebtedness balance sheet), unless the continuation of the company is highly probable under the circumstances for at least 12 months (positive going concern forecast). For many start-ups, over-indebtedness can occur purely on the balance sheet (e.g. due to start-up losses), but as long as investors are available or sales growth is likely, there is no obligation to file for over-indebtedness.

Deadlines and duties of the management

In the event of insolvency or over-indebtedness, the insolvency application must be filed “without undue delay”, but at the latest within three weeks of the occurrence of the cause (Section 15a InsO). This period is only intended for the examination and, if necessary, implementation of restructuring measures.

If, for example, a financing solution can be found within the three weeks that eliminates the inability to pay, no further application needs to be made. If this is not possible, the insolvency application must be received by the local court (insolvency court) by the last day of the deadline.

The duty to apply applies to the members of the representative body:

• In the case of a GmbH: all managing directors.

• In the case of an AG: the Management Board.

• In the case of a GmbH & Co. KG: the general partner managing director (often a GmbH in turn, then its managing director).

De facto managing directors or those who actually manage the business may also be responsible.

Legal consequences of delaying insolvency

If an application is filed too late or not at all, this is referred to as delaying insolvency. The consequences:

• Liability: The responsible executive bodies are personally liable for payments made after the company has become insolvent (Section 15a (1) InsO). Example: The managing director still pays suppliers or social security contributions even though the company was already insolvent – private claims can be made against him for these payments. They are also liable for damages incurred by creditors as a result of the delayed application (quota deterioration damage).

• Criminal liability: delay in filing for insolvency is a criminal offense (Section 15a (4) InsO punishes the violation of the duty to file for insolvency with up to 3 years imprisonment or a fine). In addition, there are possible further offenses, e.g. bankruptcy (§ 283 StGB), if assets have been set aside.

• Professional ban: In serious cases, those involved can be excluded from future positions on governing bodies (by court order or by law for certain sectors).

• Loss of trust and reputation: Apart from legal sanctions, there is often long-term damage to the trust of investors, business partners and new employers in the persons responsible.

Importance for start-ups

Start-ups often operate on a tight budget. It is therefore critical to always keep an eye on liquidity status and financial planning.

Recommendations:

• Early warning system: A simple liquidity plan tool or financial controlling to recognize impending insolvency before it occurs. Above a certain size, a CFO or external accountant is important.

• Communication with investors: If a financing gap becomes apparent, seek discussions at an early stage instead of waiting until the last cent.

• Legal advice: In the event of a crisis, seek insolvency law advice immediately. There may be options such as restructuring under self-administration or protective shield proceedings that can be used.

• No payments in the event of insolvency maturity: Should insolvency maturity actually occur, payments are then only permitted within narrow limits (e.g. to avert major disadvantages such as fines). Otherwise, it is better to apply immediately to avoid liability.

Even if the topic is unpleasant, it is the responsibility of a founder or managing director to be aware of these obligations. Filing for insolvency in an orderly manner is often the first step towards a fresh start (e.g. insolvency plan, takeover by new investors) and protects against personal ruin due to subsequent liability.