What you need to know, when your business is insolvent

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When there’ s nothing left to save
What you need to know, when your business is insolvent

The insolvency of your business is not only a crisis situation, but might weil also represent the possible loss of your ‘life’s work’. You may be tempted to save what can no longer be saved, to delay the insolvency for as long as possible, to ‘save your own skin’, to put assets aside for later, or to favour certain creditors in preference to others. But a note of caution – such actions not only run the risk of personal liability, but can result in criminal prosecution. The event of insolvency requires professional intervention and guidance.

1. What does this mean?

lf your company is insolvent, i.e. over-indebted or unable to pay its debts, you as director (Geschäftsführer or Vorstandsmitglied) are obligated, without delay, and in any event within three weeks after the company has become insolvent, to file an application for the commencement of insolvency proceedings with the responsible lnsolvency Court. lf you breach this duty, you will be liable for any damages that are caused as a result of the delay, and will also have committed a criminal offence. In addition, you will be obliged to reimburse the company for every payment that you effect after the company has become insolvent. In order to make matters more complicated, you may actually be committing a criminal offence if you do not effect certain payments, particularly if you cease to forward the employee social security contributions to the social security provider. You should not give in to the temptation to quickly satisfy individual creditors (or even yourself) or to put assets ‘to one side’. These sorts of transactions (also in the run-up to insolvency) are in many cases voidable, i.e. the insolvency administrator can later demand the rescission of the transaction. In addition, you would be in breach of your duty as a director, which on the one hand can lead to personal liability for any damages caused as a result of the transaction, and on the other hand can also give rise to criminal proceedings. Even after you have filed for insolvency, there are many pitfalls to be aware of. You are und er a duty to provide both the lnsolvency Court as weil as the insolvency administrator with detailed and complete in-formation concerning the company, and assist these with their work. The Local Court (Amtsgericht), to which the lnsolvency Court belongs, will first appoint a temporary administrator, who will secure the insolvency assets and undertake the initial evaluations to determine whether the business can be saved or how it is best to proceed. You will initially formally retain your office. Whether you continue to function as a director will depend on the individual circumstances. After the institution of the insolvency proceedings, if the power of disposal of property has passed to the insolvency administrator, he will often revert to you for assistance to benefit from your knowledge and your experience. In any event, however, from the point in time of the filing of the application for insolvency, you are no longer entitled to dispose of company assets without consent. lf you do deal with company property without consent, the disposal will be void. Further, you risk both civil and criminal liability.

2. What can you do?

At the stage of (impending) insolvency at the latest, we strongly recommend that you seek expert advice. This begins with the question, whether an event of insolvency has actually taken place for the purposes of the insolvency legislation, and accordingly whether you must file for company insolvency. Expert advice is also crucial in connection with the actual filing of the insolvency application and the subsequent carrying on of company activities, which are subject to multiple restrictions. A further point which you should note: insolvency increases the risk that the insolvency administrator may make claims against you for damages flowing from breaches of duty in the past, or as a result of a delayed filing for insolvency. Suitable measures should be taken to deal with this.

3. How can we help you?

We have longterm experience in providing advice to insolvency administrators and insolvency creditors, as weil as companies and company directors in the event of company insolvency. With our help you can at least avoid, as far as possible, the many pitfalls associated with this worst of all imaginable situations for your business.

We would be very pleased to be of support to you and your business.

Please contact us if you have any questions.

SCHUBERT Rechtsanwälte

+49 221 1602200