Obligation to file for insolvency | IT-Medienrecht

The Obligation to File for Insolvency in Germany: Key Legal Aspects for Businesses

Key Legal Obligations Regarding Insolvency

The obligation to file for insolvency represents a critical legal duty for company management, including managing directors and boards of directors. They must file an application for the opening of insolvency proceedings with the competent court without undue delay. This must occur at the latest within three weeks if a reason for insolvency proceedings exists, as stipulated in Section 15a of the German Insolvency Code (InsO).

Insolvency typically arises when a company can no longer meet its due payment obligations. A common guideline suggests this occurs if more than 10% of liabilities cannot be settled within three weeks.

For legal entities, over-indebtedness is another ground for insolvency. This means liabilities exceed assets, and there is no positive going concern forecast. If a positive going concern prognosis exists, over-indebtedness might be disregarded as an insolvency exception.

Violating this obligation, known as "delay in filing for insolvency," carries severe consequences. Responsible individuals may face personal liability for damages, criminal prosecution (pursuant to § 15a InsO and § 283 StGB), and even a ban from acting as a managing director.

Early financial monitoring is especially crucial for start-ups, which often operate with limited cash reserves. In situations of impending insolvency, timely action is vital. This could involve restructuring measures, securing new financing rounds, or, if necessary, filing for insolvency to mitigate liability risks.

Reasons for Opening Insolvency Proceedings

The German Insolvency Code identifies three primary grounds for initiating insolvency proceedings:

1. Insolvency (§ 17 InsO): This is generally present if the company cannot meet its payment obligations as they fall due. As a reference, if more than 10% of due liabilities remain unpaid for over three weeks, insolvency is deemed to exist. Acute liquidity bottlenecks are a significant cause of insolvencies among start-ups, often due to failed financing rounds or unrealized sales.
2. Imminent Insolvency (Section 18 InsO): This ground applies when it is foreseeable that the company will likely be unable to meet future payment obligations on their due date. This condition allows, but does not mandate, the debtor to file an application voluntarily. This enables earlier initiation of insolvency proceedings, potentially for restructuring purposes.
3. Over-indebtedness (§ 19 InsO): This applies exclusively to corporations and equivalent legal entities (e.g., GmbH, AG, UG). Over-indebtedness exists if assets no longer cover debts, resulting in negative equity on the over-indebtedness balance sheet. This rule is waived, however, if the continuation of the company is highly probable for at least 12 months under the circumstances (a positive going concern forecast). For many start-ups, balance sheet over-indebtedness can arise from initial losses, but as long as investor funding is available or sales growth is anticipated, there is no obligation to file for insolvency based on over-indebtedness.

Deadlines and Duties of the Management

In cases of insolvency or over-indebtedness, the insolvency application must be filed "without undue delay." This period, however, should not exceed three weeks from the occurrence of the insolvency event (Section 15a InsO). This timeframe is specifically allocated for examining and, if possible, implementing restructuring measures.

For example, if a financing solution can be secured within these three weeks that resolves the inability to pay, no application needs to be made. If such a solution is not feasible, the insolvency application must reach the local court (insolvency court) by the final day of the deadline.

The duty to apply falls on 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, whose managing director is then responsible).

Furthermore, de facto managing directors or individuals who effectively manage the business may also be held responsible.

Legal Consequences of Delaying Insolvency

Failing to file an application on time or at all is termed "delaying insolvency." This leads to several serious consequences:

• Liability: Responsible executive bodies are personally liable for payments made after the company became insolvent (Section 15a (1) InsO). For instance, if a managing director pays suppliers or social security contributions while the company is already insolvent, private claims can be made against them for these payments. They are also liable for damages incurred by creditors due to the delayed application (quota deterioration damages).
• Criminal Liability: Delay in filing for insolvency is a criminal offense. Section 15a (4) InsO penalizes violations of the filing duty with up to three years imprisonment or a fine. Additionally, other offenses may arise, such as bankruptcy (§ 283 StGB), particularly if assets were improperly set aside.
• Professional Ban: In severe cases, individuals involved can be excluded from future positions on governing bodies, either by court order or by law for specific sectors.
• Loss of Trust and Reputation: Beyond legal sanctions, delaying insolvency often causes long-term damage to the trust of investors, business partners, and future employers in the responsible persons.

Importance for Start-ups

Start-ups frequently operate with tight budgets. Therefore, it is essential to constantly monitor their liquidity status and financial planning. Recommendations for start-ups include:

• Early Warning System: Implement a straightforward liquidity plan tool or financial controlling system. This helps identify impending insolvency before it materializes. For companies exceeding a certain size, engaging a CFO or external accountant becomes critical.
• Communication with Investors: If a financing gap becomes apparent, engage in discussions with investors early on, rather than waiting until resources are fully depleted.
• Legal Advice: In a crisis, seek insolvency law advice immediately. Options such as restructuring under self-administration or protective shield proceedings might be available and can be strategically utilized.
• No Payments During Insolvency: Should actual insolvency occur, payments are then only permitted within strict limits (e.g., to prevent significant disadvantages like fines). Otherwise, it is prudent to file for insolvency immediately to avoid personal liability.

Fazit

While an unpleasant topic, awareness of these obligations is a fundamental responsibility for founders and managing directors. Filing for insolvency in an orderly manner can often be the initial step towards a fresh start, perhaps through an insolvency plan or acquisition by new investors. Crucially, it also protects individuals from personal financial ruin due to subsequent liability claims.