Corona - preventive insolvency-related advice and liability avoidance

Every business faces both opportunities and risks. The coronavirus pandemic poses an additional risk to virtually the entire economy. The pandemic alone—or the simultaneous occurrence of another risk—can quickly push a business to the brink of insolvency.

Advice provided in the run-up to insolvency is specifically aimed at avoiding the initiation of insolvency proceedings whenever possible and guiding the company out of the crisis. It is essential that those involved do not expose themselves to liability risks in the process. Another key objective of pre-insolvency counseling is therefore to avoid or at least minimize liability risks for those involved in management and supervisory bodies. This is because those involved are exposed to significant risks in pre-insolvency situations—risks that can sometimes threaten their very existence. Well-intentioned actions can quickly lead to personal disaster (in terms of civil and criminal liability).

The primary goal of pre-insolvency counseling is to avoid insolvency proceedings. Pursuant to Section 15a of the Insolvency Code (InsO), legal entities (e.g., GmbH, AG, GmbH & Co. KG) are required to file for insolvency immediately, but no later than within three weeks, in the event of insolvency (Section 17 InsO) or over-indebtedness (Section 19 InsO). Although the legislature suspended this obligation to file for insolvency from March 1, 2020, to September 30, 2020, in cases where a company became insolvent as a result of the spread of the COVID-19 virus, merely “waiting and hoping” is not advisable here: Action is required!

Pre-insolvency consulting often opens up the possibility of averting insolvency and thus allowing the business to continue without entering insolvency proceedings: in this case, management, supervisory bodies, and majority shareholders continue to determine the course of action. Whether this option is available depends largely on the causes of the economic crisis and its severity. If consulting can be initiated at the very first signs of a crisis, there are simply more options available: in particular, strategic measures such as bringing in additional shareholders or raising new capital are conceivable. Once the critical stage under insolvency law has already been reached, the only remaining options are usually measures such as deferral agreements regarding significant claims, subordination agreements to avoid over-indebtedness, or the issuance of a letter of comfort.

Sometimes insolvency is unavoidable. In such cases, it is possible to continue operating the business during insolvency (with the assistance of insolvency law, if necessary). Two options are particularly feasible here: First, when filing for insolvency, a petition for self-administration may be submitted: In this case, management remains in the hands of the existing personnel, but only under the supervision of an administrator appointed by the insolvency court. Alternatively, a so-called protective shield proceeding can also be conducted within the framework of self-administration. This offers the company temporary protection from enforcement measures by individual creditors and, at the same time, the opportunity to develop a continuation plan in the form of an insolvency plan. Alternatively, within the framework of the insolvency proceedings, the possibility of a so-called “transfer-based restructuring” (purchase of the essential operating assets from the insolvency by an investor, liquidation of the remainder by the insolvency administrator) should always be examined.

While pre-insolvency counseling serves the purpose of defending against insolvency claims, insolvency administration has a different objective: it serves to manage the insolvent company for the benefit of the insolvency creditors. This includes, for example, asserting liability claims against the controlling entities. At the heart of every insolvency-related measure is thus the question of how to avoid liability for the persons acting on behalf of the company threatened by insolvency.

We therefore offer:

• Early-stage insolvency counseling (measures to avoid insolvency, developing business continuity plans)
• Consulting During an Insolvency Crisis
• Advice on avoiding liability for key decision-makers within the company (managing directors, board members, supervisory board members, advisory board members)