Coronavirus: Guidance on liability risks and courses of action


These financial difficulties are emerging in many sectors and entail personal risks for the organs of the company concerned, which will be completely new to managers of companies without experience of economic crisis situations. Schultze & Braun would like to offer you some initial guidance at this time.

Just like the health aspects of the crisis, it is important to be aware of the risks and follow certain rules. It may not be possible to eliminate the risks, but we can significantly reduce them.

Focus on the present – monitor the progress of the crisis

Board members and directors – the management of the company – need to continuously monitor the company’s economic situation if there are signs of a crisis and make sure they are aware of the financial and liquidity situation of the business. If the company is at risk of illiquidity or over-indebtedness, further action must be taken. For example, many types of company are required to call a shareholders’ meeting in the event of a loss amounting to one half of the share capital. If a director breaches this obligation, this may constitute an administrative offence. Should the crisis deepen, actions by the organs of a company will also be subject to stricter requirements.

Initiate countermeasures – make use of government assistance

A federal programme (a KfW programme) has been announced in Germany and will soon be available to supply liquidity to companies (see KfW news release). You should apply for this assistance via your regular bank. To access financial assistance, it is likely that you will need to demonstrate that you are in need of assistance and that this is due to the coronavirus pandemic. Given the numbers involved, we can also expect to see delays, despite promises to process applications quickly. There are plans to roll out two more KfW programmes in connection with the coronavirus pandemic (for small and medium-sized enterprises and for large companies).

It is likely that the payment of such loans and direct assistance will be conditional on the need for assistance arising due to the effects of the coronavirus pandemic and the assistance giving the company good prospects of recovery. There will also certainly be limits on the funds granted in each case, and the level of financing needed will have to be evidenced. We anticipate that this will need to be certified by a third-party expert.

Alternative financing options such as factoring, goods purchase financing or sale-and-lease-back transactions can also be used and have been thoroughly tried and tested in times of economic crisis.

If other finance providers threaten to cancel your financing – if you cannot meet conditions agreed in the financing agreement, for example – the director should seek to negotiate a solution as soon as possible and plan for any additional liquidity requirements.

Ease the burden in case of capacity reductions – apply for short-time allowance

A law that entered into force on 15 March 2020 changes the rules for the short-time working allowance. The key elements of the new provisions are as follows:

  • If a company suffers a shortfall of orders due to the economic situation, the business may apply for short-time working if at least 10% of employees could be affected by a lack of work. The previous threshold was 30% of the workforce.
  • Negative working time account balances should not be needed before short-time allowances can be paid. The law previously required businesses with agreements regarding fluctuations in working hours to use working time account balances to avoid short-time working and accumulate negative balances.
  • The short-time working allowance is also available for contractors.
  • The social insurance contributions that the employer usually has to pay for its employees are to be fully reimbursed by the German Federal Employment Agency going forward. In “normal” situations, the employer must pay all of its social insurance contributions in full for the period of short-time work.

The new rules apply retroactively from 1 March 2020.

Indirect assistance from tax authorities and social insurance agencies

Several German states have recently announced extensive measures to relieve the tax burden on companies. The Federal Ministry of Finance (Bundesministerium für Finanzen, BMF) has now standardised the approach throughout Germany. The following measures will soon be implemented:

  • Tax authorities will be able to more easily defer tax liabilities, allowing companies to defer billions of euro in taxes. The BMF has already obtained the necessary agreement from the federal states.
  • Where companies are directly affected by the coronavirus pandemic, the German Federal Fiscal Court wants to cease enforcement action and penalties for late payment until the end of 2020. Enforcement measures such as account garnishments are to be suspended until 31 December 2020 in such cases.
  • Options for reducing payments on account will be improved. The process for doing this is to be simplified.
  • For taxes administered by the customs authority (such as energy tax and air passenger tax), the German Central Customs Authority has reportedly been instructed to assist taxpayers. The same applies to the Federal Central Tax Office, which is responsible for insurance tax and VAT, and should proceed accordingly.

The following other measures will be discussed in relation to VAT and income tax:

  • Extension of deadlines for preliminary VAT returns
  • A general changeover to quarterly preliminary returns

A BMF circular on this topic is expected soon.

Various local authorities have indicated that they will take the same or similar approaches to the taxes they levy (particularly in the case of trade tax).

Obligation to file for insolvency – with potentially serious consequences

These measures will help companies. How quickly they can be implemented and whether they will have sufficient impact, however, remains to be seen. Management bodies, particularly those with no experience of acute and existential threats to their organisation, should therefore review the conditions under which an obligation to file for insolvency arises and the planned measures.

The management bodies of most companies are obliged to promptly file for insolvency if their company is materially insolvent – in case of over-indebtedness or illiquidity. As mentioned above, the question of over-indebtedness and illiquidity according to insolvency law needs to be monitored. If a company is already materially insolvent, opportunities for restructuring and the action that can be taken by the management bodies in general without filing for insolvency are very limited.

In this case, the management must immediately – within three weeks at the latest – file for insolvency. Failure to do so can have serious legal consequences. If the management continues to operate the business without making any changes, material insolvency may even mean that directors and officers become personally liable for prohibited payments. This can only be avoided by immediately stopping most payments and filing for insolvency without delay. Consideration is not currently given to the reason for material insolvency, i.e. whether or not the coronavirus pandemic is the cause of the company’s problems, or the previous situation in the company.

Suspension of the obligation to file for insolvency – further relief during the coronavirus crisis

In the current economic crisis, this situation would be likely to trigger an avalanche of insolvency proceedings in the short term. Government assistance is unlikely to be available soon enough to restore the liquidity of many companies and prevent them from becoming illiquid and/or over-indebted. The German government therefore intends to suspend the obligation to file for insolvency for companies that have been damaged by the coronavirus pandemic. This is based on the model of the measures taken by the government after the catastrophic flooding in 2002, 2013 and 2016.

The details of the planned new rules are currently discussed and drafted by the legislator. Based on experience during the flooding, however, management bodies cannot expect a blanket suspension of the obligation to file.

As in the case of past floods, we can expect measures to prevent companies from taking advantage of the situation. It is likely that the following requirements will need to be met:

  • The reason for insolvency relates to the effects of the coronavirus pandemic
  • Serious financing and restructuring negotiations have been conducted and cannot be concluded quickly/applications for public assistance cannot be granted quickly
  • The measures must offer reasonable prospects of saving the company

The measures are expected to be in place until 30 September 2020, with the possibility of an extension until 31 March 2021.

It the prerequisites expected to be set out in the legislation are not met, the obligation to file for insolvency will not be suspended. If insolvency proceedings are subsequently initiated, the management body will later need to prove that there were reasonable prospects of the company’s recovery and, what’s more, that the coronavirus pandemic was the only reason for the company’s difficulties. This will pose a problem for companies that were already showing the first signs of financial difficulty before the pandemic began. In this situation, the certification expected to be required for funding from the recently announced government programmes may help.

Personal risks for directors and officers – liability risks may remain

The suspension of the obligation to file for insolvency will eliminate criminal risks for directors and officers, particularly with regard to late filing for insolvency. The legislators have also recognised that personal and crisis-specific civil liability needs to be eliminated if the business continues to operate after illiquidity or over-indebtedness. This was not the case during the flooding. Directors and officers were at risk of being held personally liable with their own assets if the company continued to make payments while illiquid or over-indebted.

The relevant provisions of company law are now to be amended (particularly section 92 (2), sentence 2 of the Stock Corporation Act (Aktiengesetz, AktG), section 64, sentence 2 of the Limited Liability Companies Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung, GmbHG), sections 177a, sentence 1 and 130a of the Commercial Code (Handelsgesetzbuch, HGB) and section 99, sentence 2 of the Cooperative Societies Act (Genossenschaftsgesetz, GenG). However, the proposed changes do not give companies a carte blanche to continue operating unchanged. Only certain payments are likely to be privileged, by extending one of the privileges already contained in the regulations. The extension is expected to allow specific payments that help to maintain business operations.

Material insolvency – what do you need to consider?

To better understand this change and its concrete implications for personal liability risks, we should first consider the current situation without the proposed new rules:

In case of material insolvency, there is only a short window of up to three weeks available to analyse restructuring options before directors and officers are potentially committing an offence. The company-specific liability rules mentioned above are also directly linked to material insolvency, which can lead to a personal payment obligation on the part of management bodies if insolvency proceedings are subsequently initiated. The amount of this liability could be close to the total revenue from all business activity after the onset of material insolvency.

To avoid this typical personal liability, only very specific payments can currently be made to business partners. However, the management body has to prevent all outflows of funds and will otherwise become personally liable.

For example, if the company has a bank loan or a tolerated overdraft, the management body must divert all expected incoming payments to a new or existing credit account. Under the existing rules, payments from the balance or cash held are only permitted without liability if they are compatible with the “due care of a prudent businessperson”, do not diminish the assets available to cover liabilities, or if failure to make such payments would constitute at least an administrative offence by the management body. The courts have taken a strict approach to date. The idea behind this is that the company should not do any further business, or at least not under the responsibility of the existing management.

Added to this is the fact that the management body may need to demonstrate compliance with strict criteria for the specific payments. Payments in connection with employees are one example highlighting the difficulty of practical assessment:

  • Payment of the salary itself is not generally allowed (cf. ruling of the Federal Court of Justice of 04/07/2017 – II ZR 319/15).
  • If social insurance contributions are due, the employee contributions of employees subject to mandatory insurance can be paid, as a penalty applies (ruling of the Federal Court of Justice of 08/06/2009 – II ZR 147/08).
  • The payment of employer contributions, however, leads to a liability (cf. ruling of the Federal Court of Justice of 25/01/2011 – II ZR 196/09).

It is barely possible to continue to operate without liability in this phase and this is only realistic if the management bodies seek the advice of specialists in crisis situations. It has not been desirable for a company to continue to operate in this state in the longer term. This still applies completely to companies whose material insolvency is not due to the effects of the coronavirus pandemic.

What is changing? – You’re not completely in the clear

Supporting regulations concerning the obligation to file for insolvency will extend the privilege options available. It is expected that all payments that help ensure the continuity of business operations will be privileged if the material insolvency is related the coronavirus pandemic and the obligation to file for insolvency is therefore suspended.

Where insolvency proceedings later become unavoidable, a generous interpretation in favour of the management bodies is likely to prevail. Nevertheless, to avoid future liability risks, we recommend that all affected organs of the company document compliance with the criteria as clearly as possible. In particular, the general requirements for the suspension of the obligation to file for insolvency should be documented, as well as – if in any doubt – the fact that specific payments helped to ensure business continuity.

Outlook for companies affected by coronavirus

Even if the legislators temporarily suspend the obligation to file for insolvency and the government’s liquidity measures are effective, operational losses will still make their mark on companies’ annual accounts. At the same time, there will be long-term changes in framework conditions due to the coronavirus pandemic and the upheaval already foreseen. For example, we are already seeing changes in supply chains, with cost considerations no longer determining their structure. Therefore, beyond the immediate restructuring, business concepts will need to be rebalanced. This goes beyond operational and financial restructuring but may be based on proving prospects for recovery. Although difficult when dealing with the immediate effects of the coronavirus pandemic and the overall management of a company in crisis mode, it is important not to lose sight of your future business concept.

Dr Annerose Tashiro, Attorney at Law in Germany, Registered European Lawyer (London)


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Schultze & Braun GmbH & Co. KG
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