dr Christian Andrelang, LL.M.
Specialist lawyer for international business law
Specialist lawyer for commercial and corporate law
Corona insolvency risk of criminal liability – The stranglehold of the Corona crisis continues. Many companies are already making it clear that they can only hold out for a few more weeks before they become insolvent. The legislature suspended the obligation to file for insolvency between March 1, 2020 and September 30, 2020. So there is no longer any risk of criminal liability for managing directors? Not even close. The consequences of suspending the obligation to file for insolvency can be immense. The following article discusses the risk of criminal liability.
Corona insolvency risk of criminal liability – what is it about?
The insolvency regulations oblige every managing director to file for insolvency immediately, but at the latest within three weeks of the occurrence of insolvency. In addition, he is personally liable for the reimbursement of all payments that were made as a result of the delayed filing for insolvency. Not a very nice view. A company is insolvent if it is over-indebted or insolvent. A company is over-indebted if the value of its assets is not sufficient to cover all liabilities and there is no positive continuation forecast. A company is insolvent if it is not only temporarily unable to service more than 10% of its due liabilities and payment obligations. Temporary means less than three weeks.
A managing director who, in the event of over-indebtedness or insolvency, intentionally or negligently fails to file an application for insolvency with the responsible insolvency court in a timely manner, i.e. not without culpable hesitation or no later than three weeks after the onset of insolvency, is committing a criminal offense and can be punished with a prison sentence of up to three years or a fine become.
As a result of the lockdown, the interrupted supply chains, the liquidity bottlenecks in key accounts and the collapse in demand, many companies are suffering from an acute drop in sales. Your liquidity is in danger of falling behind your due liabilities. This also applies to companies that were in excellent health before the Corona crisis and are now in financial difficulties. If these inherently healthy companies become over-indebted or insolvent as a result of the drop in sales, the managing director would have to file for insolvency immediately, but at the latest after three weeks. Politicians want to avoid this at all costs so that restructuring measures, for example through KfW loans, can be effective. No company should go bankrupt because applications for public aid or credit checks are processed by banks with a delay. However, the obligation to file for insolvency should not be lifted for other reasons - this should always be kept in mind when it comes to the risk of criminal liability.
Risk of criminal liability – what’s new?
The law to mitigate the consequences of the Covid-19 pandemic now suspends the obligation to file for insolvency from March 1, 2020 to September 30, 2020. However, this does not apply if the insolvency is not due to the consequences of the spread of the corona virus or if there are no prospects of resolving an existing insolvency. At first glance, that sounds very good for the managing directors: If you don't file for insolvency, you won't be liable to prosecution. This gives you more time for renovation measures. But is everything really that simple?
After all, the following is even assumed by law: If the company was not insolvent on December 31, 2019, it is assumed that the insolvency is due to the effects of the COVID-19 pandemic and that there are prospects of eliminating an existing insolvency. Even the law assumes that the Corona crisis is to blame for a company that was economically healthy on December 31, 2019. However, if insolvency occurs at a later date, the risk of criminal liability is reinstated: the insolvency administrator must always check whether there was an insolvency case between January 1, 2020 and February 29, 2020. The new law only applies from March 1, 2020.
Furthermore, no managing director should rely on the fact that the presumption cannot be refuted or can only be refuted with great difficulty. The law is intended to free the managing director from prognosis and evidence problems. Every insolvency administrator will still carefully examine whether the Covid-19 crisis was the cause of the insolvency and whether the insolvency could be eliminated due to the structure and equipment of the company. This is so that you are not liable yourself.
Corona insolvency risk of criminal liability – what does that mean?
First of all, the managing director is apparently spared from having to file for insolvency and thus become the gravedigger of his otherwise healthy company through no fault of his own. However, just because the law removes the obligation to file for insolvency does not eliminate the managing director's personal risk of criminal liability. The new law is intended to prevent a company from having to file for insolvency because, for example, a KfW quick loan or KfW special loan applied for has not yet been approved. The new law is intended to provide time where time is helpful.
The legal presumption that a company that was healthy on December 31, 2019 was close to insolvency due to the Corona crisis is treacherous because it can be refuted. If the insolvency is not due to the Corona crisis, the obligation to file for insolvency still exists. Every managing director must therefore check how their healthy company would have developed since January 1, 2020 without the Corona crisis. The risk of criminal liability also remains if the insolvency is unlikely to be remedied.
If they want to avoid the risk of criminal liability for delaying insolvency, every managing director must be able to prove the following:
- The company was healthy as of December 31, 2019.
- The company became over-indebted or insolvent solely due to the Corona crisis, in particular the delayed payment of KfW loans, and not due to any other reasons.
- In the event of insolvency due to the Corona crisis: The insolvency can be eliminated.
Corona insolvency – What is important to you now?
The risk of criminal liability for delaying insolvency for managing directors remains immense. There are also risks when applying for KfW quick loans or KfW special loans. The prerequisite there is that there is no case of insolvency. In addition, the Covid-19 Insolvency Suspension Act only refers to the obligation to file for insolvency. The risk of criminal liability for other reasons still exists. If the managing director provides false information, there is a risk of criminal liability for credit fraud. The managing director must also provide correct information when applying for short-time work. There are also the criminal offenses of bankruptcy and endangering creditors and debtors.
In order to minimize your risk of criminal liability as a managing director, you should
- Be sure to document and prove that your company's crisis was caused by the corona pandemic;
- continually check liquidity - just because the insolvency had a chance of being eliminated at a certain point in time does not mean that this should not be assessed differently as developments continue;
- take into account that the obligation to file for insolvency is initially only suspended until September 30, 2020; however, it can be extended until March 31, 2021
Check whether filing for insolvency might be a better option, for example to carry out restructuring measures under self-administration. However, insolvency courts are much more hesitant to entrust self-administration to the managing director if he or she misses the deadline for filing for insolvency.
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