For companies suffering from the Corona crisis, a number of relaxations have been made, including the obligation suspension to file for bankruptcy. However, managing directors should consider a few aspects.
Germany is suffering from the effects of the Corona crisis. For companies, easements were quickly decided to ease the economic burden. The compulsion to file for bankruptcy is postponed until the end of September 2021, and the payment bans linked to bankruptcy and portfolio recovery lawsuit have been relaxed. What managers should not overlook, however, is that companies do not suddenly have a free hand in a crisis. The following also applies: Finances and liquidity must be continuously monitored, otherwise personal and criminal liability threatens.\
Payments and liabilities
Company management must continue to critically review payments to shareholders and affiliated companies. Payments may only be made after the bankruptcy maturity has occurred if they maintain operations or a restructuring is sought. Payments to the shareholders from the company’s assets at the expense of the share capital remain prohibited. The obligation to convene a general meeting of a company continues – if this obligation is violated, personal liability threatens.
In addition to the liability risk, there is also the risk of criminal prosecution. The criminal law remains unchanged due to the legal regulations to mitigate the consequences of Covid-19. The regulations on the suspension of the obligation to file for insolvency do not automatically exclude the risk of the bankruptcy being delayed. The new law, COVInsAG, only makes a presumption in favor of the management: If the debtor was still solvent at the end of 2020, it is assumed that the bankruptcy is due to the consequences of the Corona crisis and that the existing bankruptcy can be overcome. Caution is advised, however, because: This presumption can be refuted with the result that an application was required. Management should therefore thoroughly document the effects of the crisis.
In addition to criminal liability for delaying bankruptcy, criminal prosecution for bankruptcy is still possible. This can be relevant, for example, if actions are taken when payments are suspended that reduce the company’s assets and grossly contradict the requirements of proper economic activity. The courts have not yet decided when such a gross violation occurs in times of Corona.
Do not hide insolvency
Furthermore, a criminal liability for fraud can be considered if services are used on the target despite the inability to pay. In such cases, the case law assumes that the suppliers were deceived by concealing the insolvency. It is good advice to point out to creditors in critical phases that payment cannot be guaranteed due to the current situation. In any case, the company should sufficiently document the overall economic situation on the day of the order. This could later prove that one was justified and rightly assumed to prevent insolvency after Corona and to be able to make payments.
In the case of bankruptcy, there is also the risk of a criminal offense of favoring creditors. This is fulfilled if a creditor is paid in times of insolvency or collateral is provided, although he is not entitled to it. This can be, for example, the payment of a claim that is not due. The regulations of the COVInsAG only protect the management if it provides services for due claims during the insolvency.
Last but not least, there is also the risk of criminal liability for breach of trust. This is where the preservation of the share capital comes into play: If decision-makers withdraw liquidity from the company for no justifying reason or if they make payments to shareholders from the protected share capital, this can be punishable. Investments made when bankruptcy is imminent can also constitute breach of trust if they are not justified. Against this background, management should again ensure that the record is comprehensive.
The bottom line is: Corona does not protect against punishment. In order to be able to justify measures taken later and to avoid criminal liability for fraud, breach of trust and bankruptcy, they should be documented in great detail and the financial and liquidity situation should be strictly and closely monitored.
Quantity of successful reorganizations during bankruptcy proceedings has been very low in the past
Yes, because the companies that file for bankruptcy because of the coronavirus have a basically functioning business model. If they restructure themselves during the bankruptcy at the points where there have been problems in the past and then the pandemic is over at some point, these companies have a good chance of success.
What requirements does a company have to meet for self-administration bankruptcy?
In essence, the management must be able to convince the court that they are reliable and have sufficient competencies to know which rules the company must adhere to during bankruptcy – for example, preferring certain creditors in payments. It definitely helps if the management gets advice before and during the bankruptcy.
The decision to go bankrupt will not be easy for any entrepreneur. What do you advise, what should the managing director base his decision on?
The most important thing is to be honest with yourself. There is no point in ignoring or belittling your company’s financial problems. On the contrary, in the worst case scenario, you can even make yourself liable and punishable. In order to get a realistic picture, it can be useful to exchange ideas with someone who does not belong to the company and therefore has an outside view. That is why self-administered insolvency also requires a restructuring advisor to accompany the process.
It makes sense to create several forecasts – a best case and a worst case, so to speak. In these mind games you should look at, among other things, how dependent you are on individual customers, suppliers and foreign markets and how you assess their situation for the future. If you look at the results and determine that major economic problems are likely in the long term, then at least one should consider self-administration bankruptcy.
Anyone who is insolvent is not entitled to aid loans. Should there be a second wave of infections with serious effects on the economy, these companies would then be left in the rain.
Yes, but since the companies that should now grapple with a bankruptcy are already in financial distress, they would have big problems even without a registered bankruptcy – for example with repaying the aid loans. So should there actually be a second, larger wave of infections, we will probably also see a larger wave of insolvencies among medium-sized companies.