Insolvency Case Law Increases Director Liability Risk
A recent ruling by Germany's Federal Court of Justice clarifies the definition of insolvency, potentially increasing personal liability for company directors. The decision aids insolvency administrators in pursuing claims.
Germany's Federal Court of Justice (Bundesgerichtshof) issued a ruling on December 19, 2017, that clarifies the definition of insolvency and, consequently, increases the personal liability risk for company directors. The new case law shifts the timeline for assessing a company's financial distress, making it more challenging for management.
Under German law (GmbHG § 64), directors can be held liable for payments made after a company becomes insolvent or over-indebted, unless the payment was consistent with the diligence of a prudent business person. Insolvency is generally defined as the inability to meet due payment obligations.
A key point of contention has been whether liabilities falling due within the next three weeks should be considered when assessing insolvency. The Federal Court of Justice has now confirmed that these near-term liabilities must be included. The court rejected the "bow wave theory," which suggested that a debtor could postpone future liabilities without being considered insolvent.
The ruling also stated that directors cannot broadly claim deficiencies in bookkeeping as a defense. They must specifically detail how the accounts do not reflect the actual financial situation. This decision simplifies the process for insolvency administrators to assert claims and effectively moves the date of insolvency earlier. dhpg's expert team provides advice on insolvency law and director liability.