The risk to our health, which we can take appropriate steps to mitigate, is not the only risk associated with the coronavirus pandemic: it also has an ever-growing economic dimension. As its length increases, the pandemic poses a threat to the liquidity and survival of previously successful companies. 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 with little experience in dealing with economic crisis situations.
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 the legislators have now significantly reduced them.
The obligation to apply for insolvency proceedings is suspended for companies experiencing material insolvency that is attributable to the coronavirus pandemic. The suspension is in effect until 30 September 2020 and applies retroactively from 1 March 2020.
Suspension of the obligation to apply for insolvency proceedings does not apply generally but rather only if
- material insolvency is a consequence of the coronavirus pandemic and
- it is likely that current illiquidity is only temporary.
However, both of these requirements are presumed to be met if the company was not illiquid on 31 December 2019.
Suspension of the obligation to apply for insolvency proceedings is flanked by arrangements relating to company law, which are designed to shield the management bodies of the most important types of companies from extensive personal liability to which they would otherwise be subject. Payments made in the normal course of business are permissible, particularly those that help to maintain or resume business operations or to implement a restructuring plan.
After the new act enters into force, this relief is also in effect until 30 September 2020 and applies retroactively from 1 March 2020. However, it is conditioned on suspension of the obligation to apply for insolvency proceedings.
Where insolvency proceedings are unavoidable after the end of the suspension, we nevertheless expect that the liability arrangements will be interpreted in a light favourable to management bodies. At a minimum, the company should document
- that it was not illiquid on 31 December 2019 and
- that a payment helped to maintain or resume business operations or to implement a restructuring plan, at least to the extent that this could later be called into question.
Absent the suspension of the obligation to apply for insolvency proceeding, the company’s management – i.e. managing directors and board members – would be at risk of serious consequences. After the suspension expires in October 2020, that will once again be the case. It is important to keep any eye on the situation from the outset in case material insolvency cannot be remedied in time.
In general, board members and managing directors need to continuously monitor their company’s economic situation if there are signs of a crisis and make sure they are aware of its financial and liquidity situation. If the company is at risk of illiquidity or overindebtedness, further action must be taken. For example, many companies are required to call a meeting of the shareholders, members, or partners in the event of a loss amounting to one-half of the share or equity capital. If a managing 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.
The management bodies of most companies are obliged to promptly apply for insolvency proceedings if their company is materially insolvent – in case of overindebtedness or illiquidity. If a company is already materially insolvent, opportunities for restructuring and the action that can be taken by the management bodies in general without insolvency proceedings are very limited.
In that case, the management must immediately – within three weeks at the latest – apply for insolvency proceedings. Failure to do so can have serious legal consequences. In the case of material insolvency occasioned by the coronavirus pandemic, the temporary suspension of the obligation to apply for insolvency proceedings currently offers some assistance here.
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 applying for insolvency proceedings without delay. Only very few payments are generally exempt from this prohibition, and even for specialists, the risks are difficult to manage. As a rule, the reason for material insolvency is irrelevant, i.e. whether or not the coronavirus pandemic is the cause of the company’s problems, or the previous situation in the company. In addition, because the arrangements concerning payment prohibitions have been suspended, the liability risks have largely been eliminated for the time being. However, when these arrangements expire in October 2020, the previous strict regime will once again apply if the company does not apply for insolvency proceedings in a timely manner.