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Managers’ liability for damage: The obligation to file for insolvency does not arise only upon preparation of a balance sheet | Schaffer & Partner

Managers’ liability for damage: The obligation to file for insolvency does not arise only upon preparation of a balance sheet

27. 3. 2023

In summer 2022, the German Federal Court of Justice decided that the debtor’s insolvency can be demonstrated by means other than liquidity balance in a dispute relating to managers’ liability for damage caused by late filing for insolvency, causing a heated debate and managers’ uncertainty.

It was a case in which a managing director of a subsidiary involved in holding-wide cash-pooling returned a sum of EUR 3,000,000 in an upstream loan to the mother company’s account before a petition for insolvency was lodged. The insolvency administrator brought an action requiring the managing director to pay the amount. The court of first instance and court of appeal dismissed the action due to the fact that according to them, the petitioner (insolvency administrator) failed to prove the claimed date of insolvency, not presenting the overall group liquidity balance. The insolvency administrator “only” presented a liquidity balance (retrospectively) based on the development of liquidity in the three weeks following the date of the year-end financial statement (more than a year before the petition for insolvency was filed and more than 10 months before the transactions allegedly rendering the managing director liable for damage).

Both the court of first instance and the court of appeal dismissed the managing director’s liability for damage. However, the Federal Court of Justice decided that both courts had made excessive demands on proving insolvency and the executive’s liability for damage. In accordance with settled German case-law, a company is insolvent where it is not capable of discharging at least 90% of its due monetary obligations within 3 weeks following the date insolvency was established. Within the period the insolvency administrator referred to, the company in question had only been capable of settling 50% to 60% of its due monetary obligation.

However, the Federal Court of Justice added that it is not necessary to prove the fact of insolvency through a liquidity balance for a 3-week period. A simple liquidity statement for 3 selected days during a 3-week period is sufficient. As such, it greatly limited the factoring in of expected revenues and profits.

In the Czech Republic, the situation is different. An executive is obliged to file a petition for insolvency where the company is unable to pay its more than 30 days overdue monetary obligations towards at least 2 creditors. What matters is not the rate of inability to repay debts but the fact that the debts must be towards multiple creditors.

In Germany, the focus is on the rate of capacity to repay debts within a specific period, and it is envisaged for an entrepreneur to repay its debts without undue delay. As such, the concept of insolvency is very different in German and Czech law. German law emphasizes the capability to repay debts within a relatively short period (i.e. 3 weeks). The demand on a company’s solvency is relatively high since during these 3 weeks, the company must be able to repay 90% of its debts.

In the Czech Republic, insolvency is not established based on continuous capacity to discharge monetary obligations. What is relevant, by contrast, is how long a company is not able to repay its debts at all.

A liquidity stress test is used not to confirm a company’s insolvency, but to refute it. However, the same measure as in Germany is used to establish it. A company’s insolvency is considered where its inability to repay debts amounts to less than 10% of its monetary obligations. The method is different, though: liquidity is not measured continuously, but on aggregate for 30 days using an operational liquidity statement.

In the Czech Republic (and in Germany, as well), an entity can also be insolvent where the debts of a company amount to more than its assets (over-indebtedness).

Where a managing director fails to file a petition in accordance with the above-mentioned criteria, he or she shall be liable to the creditor for damages, also for breach of contracts for non-compliance with the obligations. Furthermore, criminal liability shall not be excluded either.

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