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Insolvency Delay: A Guide for Management in Germany

Insolvency delay is often underestimated in corporate management but can have significant legal and economic consequences. This article provides a comprehensive overview of the relevant legal aspects of insolvency delay, explains its background, and outlines how management can avoid liability risks.

What is Insolvency Delay?

Insolvency delay refers to the failure to file for insolvency proceedings in a timely manner, despite the company being insolvent or over-indebted. The obligation to file in due time is regulated under Section 15a of the German Insolvency Code (InsO) and primarily applies to the members of the representative body, such as managing directors of a GmbH or board members of an AG. This obligation does not end solely due to resignation or other organizational changes.

The primary purpose of this regulation is to protect the creditors’ interests. A delayed filing can lead to a further depletion of assets, significantly reducing creditors’ chances of recovering their claims. Insolvency delay is therefore a criminal offense (Section 15a (4) InsO) subject to severe penalties.

When Does Insolvency Delay Occur?

The legal framework for assessing insolvency is based on two grounds: insolvency (Section 17 InsO) and over-indebtedness (Section 19 InsO).

Insolvency occurs when a company is unable to meet its due financial obligations. This is determined by preparing a liquidity statement that compares available funds to payable liabilities. A liquidity gap exceeding 10% is deemed critical.

Over-indebtedness arises when a company’s liabilities exceed its assets unless a positive going concern prognosis exists. This prognosis must convincingly demonstrate that the company can be restructured within a reasonable timeframe.

The law mandates that an application for insolvency must be filed no later than three weeks after the onset of insolvency and six weeks after over-indebtedness. Failure to comply constitutes insolvency delay.

The Role of Management

The obligation to file for insolvency primarily falls on managing directors and board members. Subsidiary liability may also extend to other parties, such as supervisory board members or de facto managers. De facto managers are individuals who, without formal appointment, effectively exercise managerial authority. They can be held criminally liable if they dominate decision-making and control key business processes.

Special attention must be given to management actions during a crisis. Preparing a liquidity statement and a going concern prognosis is not only advisable but necessary to evaluate the onset of insolvency. Negligence in this regard may be deemed grossly negligent and result in criminal liability under Section 15a (5) InsO.

Legal and Civil Consequences

Criminal penalties for insolvency delay range from fines to imprisonment of up to three years. In severe cases, such as deliberate delay to cover up other offenses, harsher penalties may apply. Additionally, creditors may assert civil claims. A managing director who delays the insolvency filing may be personally liable if creditors suffer financial harm due to the delay.

Particular attention must be paid to the so-called disqualification. Under Section 6 (2) No. 3 GmbHG and Section 76 (2) No. 3 AktG, individuals convicted of insolvency delay are barred from holding managerial positions in capital companies for five years.

Practical Tips to Avoid Insolvency Delay

To minimize the risks of insolvency delay, management should implement effective early warning systems. These include regular liquidity assessments, adherence to documentation obligations, and early involvement of external advisors such as lawyers or auditors. If signs of imminent insolvency or over-indebtedness arise, immediate measures should be taken to assess the company’s restructuring potential and, if necessary, prepare for an insolvency filing.

Special caution is required during external crises, such as economic downturns or market disruptions, which may exacerbate a company’s financial situation. In such cases, temporary legal provisions, such as the COVID-19 Insolvency Suspension Act (COVInsAG), may provide relief. However, these exceptions must be carefully documented and observed.

Conclusion

Insolvency delay is a complex and high-risk issue with severe legal and economic consequences. For management, understanding legal requirements and acting proactively to ensure timely filings are critical. This approach minimizes liability risks and protects the interests of creditors and the company alike. Early consultation with specialized legal counsel and consistent implementation of crisis management strategies are indispensable components of effective corporate governance.

German Lawyer Jens Ferner (Criminal Defense & IT-Law)
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