Managing Directors' Duties Following Signs of a Crisis

Director liability issues, in particular with respect to a potential insolvency of the company, frequently concern German courts. In a recent decision, the Federal Court of Justice (Bundesgerichtshof – BGH) specified the standard of care for a managing director of a German limited liability company (GmbH) in the event of signs of a potential financial crisis of the company. If the managing director lacks the necessary knowledge or skills to determine whether the company is either illiquid or over-indebted (the two reasons that require the filing of a petition for the opening of an insolvency proceeding under German law), he or she must, the BGH stated, seek expert advice and ensure that such experts promptly submit their findings.

In this recent case (BGH, Decision dated March 27, 2012 – II ZR 171/10), the insolvency administrator of a GmbH brought a suit against its former sole managing director for the payment of EUR 45,000. The claim was based on the following facts: in August 2003, the managing director, at the urging of the company’s bank, engaged a management consultant to evaluate the assets and liabilities of the company as well as possibilities for restructuring the company. The consultant took until November 2003 for the assessment and concluded with a positive going-concern forecast. Nevertheless, one month later the managing director filed for the opening of insolvency proceedings due to illiquidity, and the proceedings were opened shortly thereafter.

In his claim, the insolvency administrator argued that the company had already been insolvent due to illiquidity at the end of August 2003. Thus, all payments made by the company between then and the filing for the opening of the insolvency proceedings amounting to EUR 45,000, he argued, were made in violation of Section 64 of the German Limited Liability Company Act. In principle, this provision holds managing directors liable for all payments made by the company after illiquidity or over-indebtedness occurred. This does not apply, however, if the payments are made in accordance with the duty of a prudent businessman, namely payments necessary for the continuance of the business.

For its decision on this case, the BGH cited the following considerations:

The first, which had been decided before, relates to situations in which the managing director lacks certain knowledge or skills. If the managing director does not have the sufficient knowledge necessary to determine whether he or she is obliged to file for the opening of insolvency proceedings, the BGH reiterated, he or she must promptly seek advice from an independent expert at the first sign of a financial crisis of the company.

Der zweite vom BGH hervorgehobene Aspekt betrifft die zeitliche Komponente der Hinzuziehung von Experten zur Beurteilung der Insolvenzreife der Gesellschaft. Hier sagt der BGH, dass sich der Geschäftsführer nicht mit einer unverzüglichen Auftragserteilung begnügen dürfe, sondern zugleich auf eine unverzügliche Vorlage des Prüfergebnisses hinwirken müsse. Im vorliegenden Fall sah der BGH dies für den Zeitraum zwischen August und November 2003 nicht als erfüllt an. Allgemeine Aussagen dahin, wann ein Zeitraum unkritisch ist, dürften sich hingegen nur schwer treffen lassen, denn es gilt der im Einzelfall auszufüllende Maßstab, dass der Geschäftsführer unverzüglich („ohne schuldhaftes Zögern“) handeln muss.

The duties of the managing director with respect to the knowledge of the current financial status of the company are, as this case illustrates again, very strict. In the view of the BGH the managing director must continuously monitor and review the economic situation as well as a potential insolvency of the company. If due and claimed payment obligations of the company cannot be fully satisfied, the liquidity of the company must be verified by means of a so-called liquidity balance sheet. If a retained expert, who must be independent and qualified for the matter, concluded that no reason for the opening of insolvency proceedings exist, the managing director may only rely on this opinion if he or she made a full disclosure of the assets and liabilities of the company and provided the expert all necessary documents. In addition, the managing director must conduct his or her own plausibility check of the expert's conclusions.

The second consideration of the BGH concerns the timing of the retention of the expert for determining a possibly insolvency of the company. In this regard the BGH stated that it is not enough for the managing director to promptly retain the expert, but he or she must also ensure that the expert's findings are promptly submitted. In the case at hand, the BGH considered the time period (August until November) as not in line with that standard. As it is difficult to specify the required time period, a general guideline is that the managing director must act “without undue delay,” a standard dependent on the particulars of the case.