Directors' and officers' liability in the Corona-Krisis

The spread of the new SARS-CoV-2 virus (COVID-19 pandemic) has lead to considerable restrictions in all areas of private and business life in the Federal Republic of Germany. In order to contain the ever-increasing number of infected persons, the German authorities ordered the closure of recreational and cultural facilities, childcare facilities, catering and retail outlets and prohibited numerous public events in March 2020. These measures affect in particular self-employed persons, arts and culture professionals, and owners of catering and cultural facilities, who have suffered significant losses in their income.

However, dependent employees whose employment contracts have been terminated as a result of the closures or for whom short-time work has been ordered also suffer a loss of income. As a result, manufacturing companies have also restricted or closed down their operations.

The Federal Government has introduced various financial support measures for entrepreneurs, sole traders, other small, medium-sized and large enterprises and credit institutions.

On 25 March 2020, the German Bundestag adopted the "Act on Mitigating the Consequences of the COVID-19 Pandemic in civil law, insolvency law and criminal procedure law" ["Gesetz zur Abmilderung der Folgen der COVID-19-Pandemie im Zivil-, Insolvenz- und Strafverfahrensrecht"], which will enter retroactively into force on 1 March 2020 and which is expected to be approved on 27 March 2020. The comprehensive relief package includes the following regulations in the field of insolvency law:

The COVID-19 pandemic has a significant negative impact on the business of many companies, which might even lead to insolvency. In case of insolvency, creditors may file a request for the opening of insolvency proceedings (Section 14 Insolvency Statute [Insolvenzverordnung - InsO]), while directors of limited liability companies are obliged to file such request for the opening of insolvency proceedings. If they do not comply with this obligation, they have to expect severe consequences in terms of criminal law and liability. Additional liability risks derive from the provisions concerning liability for payments following illiquidity or over-indebtedness (Section 64 sentence 1 Limited Liability Companies Act [Gesetz betreffend die Gesellschaften mit beschränkter Haftung - GmbHG], Section 92 (2) sentence 1 Stock Corporation Act [Aktiengesetz - AktG], Section 130a (1) sentence 1, also in conjunction with Section 177a sentence 1, German Commercial Code [Handelsgesetzbuch - HGB] and Section 99 sentence 1 Cooperative Act [Genossenschaftsgesetz - GenG]. Also boards of associations are required to file for insolvency if they are insolvent or overindebted (Section 42 (2) German Civil Code [Bürgerliches Gesetzbuch - BGB]). Furthermore, the current uncertainties make it difficult to prepare reliable forecasts and plans on which loan restructuring could be based. Consequently, loan restructuring is also associated with liability risks and risks of legal challenges which are another hindrance for loan commitments. Shareholders are reluctant to provide funding since their repayment claims would be subordinated in an insolvency by operation of law ("equitable subordination") pursuant to Section 39 (1) No. 5 InsO and related provisions (Sections 44a, 135 (1) No. 2 InsO). Finally, once overindebtedeness occurred there is a risk that creditors and contractors of the debtor have to return benefits and payments received in subsequent insolvency proceedings following proceedings to set aside insolvency. This may jeopardize the maintenance of the business relations with the debtor. The objective of the proposed insolvency legislation is to enable and facilitate the continuation of businesses as a going concern that have become insolvent or are experiencing economic difficulties as a result of the COVID-19 pandemic.

Main content of the draft law/temporary suspension of the obligation to file for insolvency and accompanying regulations

The obligation of directors of limited liability companies to file for insolvency (Section 15a InsO), which has severe consequences in terms of criminal law and liability, and the obligation of boards of associations to petition for the commencement of insolvency proceedings, which has consequences for liability (Section 42 (2) BGB) and other legal entities (e.g. foundations), to which Section 42 (2) BGB applies mutatis mutandis, for a limited period to 30 September 2020, are suspended by the new regulations. Hereby companies are given the opportunity to avert insolvency proceedings, in particular by making use of the government relief to be provided, but also, where appropriate, by way of reorganisation or financing arrangements. The suspension does not apply if the overindebtedness is not attributable to the COVID-19 pandemic or if there is no prospect of resolving the existing illiquidity, which is to be proven by the authority enforcing the obligation to file for insolvency.

Businesses under duty to file for insolvency are granted additional relieve as it will be assumed that even if the business was illiquid as early as on 31 December 2019, the subsequent insolvency is related to the COVID-19 pandemic and that there is prospect of discharge of their debt. However, the burden of proof is not affected by the presumption regulation. Even if the debtor was illiquid on 31 December 2019, it remains the case that the burden of proof that the illiquidity was not caused by the consequences of the COVID-19 pandemic or that there are not prospects of discharge of their debt is with those relying on the suspension of the legal obligation to file for insolvency. In order to prevent additional liability claims against the management, the prohibition of payments associated with insolvency pursuant to Section 64 sentence 1 GmbHG, Section 92 (2) sentence 1 AktG, Section 130a (1) sentence 1, also in conjunction with Section 177a sentence 1 HGB and Section 99 sentence 1 GenG is also suspended for the period of the suspension of the legal obligation to file for insolvency, insofar as those payments are made in connection with management measures within the normal course of business, including measures for maintaining or resuming the business activities as well as reorganisation of the business itself or the business model. In addition, new loans can be granted to without the risk of claw-back and lender-liability in order to provide an incentive for granting such loans. Existing business relationship are protected against claw-back to a certain extend to encourage business partners to continue its business with the company.

Practice note

In the course of our normal work for business reorganisation clients, our Legal Team based in Munich has frequently dealt with these questions and will be pleased to provide quick assistance to your business or to you as a management body to respond to this difficult situation.

Contact

Josef Nachmann
Partner
T +49 89 36849 4301
E josef.nachmann@wkgt.com

Christian Wagner
Associate Partner
T +49 89 36849 4317
E christian.wagner@wkgt.com