StaRUG: Advisor obligations and advisor liability

Pursuant to section 102 StaRUG, tax advisors, tax accountants, certified public accountants, sworn auditors and lawyers must make the client aware of the existence of possible grounds for insolvency pursuant to sections 17 to 19 of the German Insolvency Code (Insolvenzordnung, InsO) and of the obligations that this places on managers and members of supervisory bodies if there are obvious indications of such grounds and if they have reason to assume that the client is unaware of possible material insolvency.

The aim of this new rule is to ensure that, by giving them an early warning, companies in crisis have the ability to take recovery measures – whether under the StaRUG or otherwise.

The obligation is imposed on the designated advisors irrespective of the legal form of their client. It therefore applies both in the case of a sole proprietorship and in the case of a corporation. However, the grounds for insolvency differ depending on the respective client. Where the client is a sole proprietorship or partnership, the only possible grounds are illiquidity (section 17 InsO) and imminent illiquidity (section 18 InsO). But where the client is a corporation, a limited liability company or a limited partnership with a limited liability company as general partner, the advisor must also make it aware of potential overindebtedness (section 19 InsO). Furthermore, where grounds for insolvency exist, the advisor is required to make the client aware of the attendant obligations, which also differ depending on the client’s legal form. For instance, if a limited liability company or a limited partnership with a limited liability company as general partner is illiquid or overindebted, it is obligated to apply for commencement of insolvency proceedings, but this is not required for sole proprietorships or partnerships. If the managers breach this obligation, they are both civilly and criminally liable.

The designated advisors are subject to this obligation to warn only if they have been engaged to prepare the annual financial statements. Mere assistance work, such as an attorney’s letter, is insufficient for establishing liability. In addition, contrary to the wording initially contained in the bill, section 102 StaRUG does not establish an obligation to warn in the case of an audit of the annual financial statements.

Furthermore, the advisor is first obligated to warn the client once it is in possession of all relevant information, at which point the client may assume that the advisor has begun to prepare the financial statements and is expeditiously pressing ahead with the process. In other words, an issued mandate alone is insufficient. However, avoidable delays in contravention of the mandate do not relieve the advisor of liability.

The obligation to warn arises where there are obvious indications that one of the grounds for insolvency may exist. In this regard, obvious does not mean whether the potential ground for insolvency was evident to a layperson. It is not without reason that section 102 StaRUG places the obligation specifically on specially trained, expert advisors, who because of this very expertise are engaged to prepare the financial statements.

If the advisor determines that one of the grounds for insolvency possibly exists, he/she must ask himself/herself whether the client is also aware of this. Determinative here is not only whether the client or its managers are aware of the actual circumstances giving rise to the possible insolvency. The advisor must also assess whether the client is capable of drawing the correct legal conclusions from these circumstances. In other words, the advisor’s obligation to warn turns on the client’s knowledge of the circumstances and its ability to make a legal judgment. The advisor may dispense with the notification only if he/she may reasonably assume that the client is aware of the possible insolvency as well as the obligations this entails for it.

The obligation to warn is not limited simply to the possible existence of one of the grounds for insolvency but also covers the obligations that result from this for the client’s managers and supervisory bodies. If the client is obligated to file an application for commencement of insolvency proceedings, the advisor must make it aware of this, as well as the prohibition of making payments pursuant to section 15b InsO. In some cases, there may be additional obligations or prohibitions. For instance, it may also be necessary to make the client aware of the criminal insolvency offences set forth in sections 283 et seq. of the German Criminal Code (Strafgesetzbuch, StGB). Finally, coming full circle, the advisor should also make the client aware of the recovery options under the StaRUG.

If the advisor breaches his/her obligation to warn, this may establish claims on the part of the client for damages. In this regard, the amount of damages would be determined by the condition that the client’s assets – or the insolvency estate – would have been in had the advisor provided a timely, accurate warning. Where an application for commencement of insolvency proceedings is lodged late, this can quickly lead to high damage claims. Managers may also have recourse claims against the advisor if they are exposed to compensation claims by the insolvency administrator or creditors as a result of the advisor having failed to provide a notification. This is because they are included in the protective scope of the engagement agreement.

With the lapsing of the special Covid-19 rules that provided a broad exemption from the obligation to apply for commencement of insolvency proceedings, along with a rising number of insolvency proceedings, including where assets may be insufficient, it is expected that insolvency administrators will increasingly examine whether it is worthwhile going after advisors. Therefore, both the examination of grounds for insolvency and any notifications given to clients should in any case be carefully documented.

Dr Annerose Tashiro, Attorney at Law in Germany, Registered Foreign Lawyer (SRA)

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Schultze & Braun GmbH & Co. KG
Eisenbahnstr. 19-23, 77855 Achern/Germany
Phone: +49 7841 708-0
Fax: +49 7841 708-301

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Eisenbahnstr. 19-23, 77855 Achern/Germany
Phone: +49 7841 708-0
Fax: +49 7841 708-301

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