BGH ON THE DETERMINATION OF INSOLVENCY: LIABILITIES II MUST BE TAKEN INTO ACCOUNT
The Federal Court of Justice [Bundesgerichtshof – BGH] has ruled that when determining insolvency, the liabilities (Liabilities II) that fall due within the three-week period after the reporting date must also be taken into account. Furthermore, the decision specifies the considerable evidence and presentation requirements for managing directors of a limited liability company [Gesellschaft mit beschränkter Haftung – GmbH] who is being claimed by the insolvency administrator because of the initiation of payments after insolvency maturity.
I. Liability of managing director for payments after maturity of insolvency
The managing director of a GmbH is generally liable in accordance with section 64 sentence 1 German Law on Limited Liability Companies [GmbHG] if he initiates payments by the insolvent company after insolvency or overindebtedness has occurred. The BGH judgement of 19 December 2017 (file no. II ZR 88/16) was based on a case in which the managing director had filed for insolvency. After his examination, the insolvency administrator came to the conclusion that the company had already been insolvent a few months earlier and sued the managing director for reimbursement of the payments he had made during the period between the maturity of insolvency and the time of filing for insolvency. The parties disputed about the time at which the company became insolvent.
The BGH took this case as an opportunity to substantiate the determination of solvency within the meaning of section 17 German Insolvency Code [Insolvenzordnung – InsO]. Furthermore, the BGH also ruled on the scope of the presentation and burden of proof requirements of the managing director in this constellation.
II. Determination of solvency
According to established case-law of the BGH, insolvency pursuant to section 17 InsO and not merely a temporary suspension of payment exists if the debtor is not in a position to procure the financial funds required to settle the due receivables within three weeks and to reduce the liquidity gap to less than 10 %.
1. Previous basis of calculation
To determine insolvency, the Ninth Civil Senate of the BGH has so far argued that the available liquid funds (so-called Assets I) and also the funds that can be liquidated within three weeks (so-called Assets II) must be taken into consideration on the reporting date. These liquid funds were compared with the due and claimed liabilities (so-called Liabilities I) as of the balance sheet date. The BGH case law and the courts of appeal left open whether the liabilities which fall due within a three-week period from the reporting date (so-called Liabilities II) should also be included in the analysis. It was therefore previously assumed that when preparing the liquidity balance sheet, the Assets I and Assets II existing at the reporting date “only” had to be compared with Liabilities I, but Liabilities II may be disregarded.
2. BGH’s decision
In the present decision of the Second Civil Senate of the BGH, the insolvency administrator as claimant brought a personal claim against the managing director for payments after maturity for insolvency. The insolvency administrator had already assumed the company’s insolvency at an earlier point in time because he compared the Assets I and II in the liquidity balance sheet not only with Liabilities I, but also with Liabilities II. The Second Civil Senate of the BGH therefore had to clarify the previously unambiguous question as to whether the liabilities (Liabilities II) falling due within a three-week period after the reporting date should also be included in the liquidity balance sheet to determine insolvency.
The Second Civil Senate confirmed the insolvency administrator’s action on the grounds that the inclusion in the forecast of only future assets without taking into account the liabilities maturing in this period would artificially impose a different valuation on the assets and liabilities side and grant debtor interests an unfair advantage over the legitimate interests of creditors. This would allow debtors to postpone a “bow wave” of liabilities, of which only old receivables would be settled with newly added funds, so that at the end of the three-week period there might be an even greater shortfall than there was previously.
If, when comparing Assets I and II with Liabilities I and II, it becomes apparent that the liquidity gap cannot be reduced to less than 10 %, the decision of the Second Civil Senate requires insolvency proceedings to be initiated as of that reporting date.
On the basis of the assessment of the Second Civil Senate of the BGH on the case law of the Ninth Civil Senate of the BGH that the latter had left open the question of the inclusion of Liabilities II, the Second Civil Senate saw no reason to pass on the question to the Grand Senate of the BGH for a decision. However, it cannot be predicted at this time and remains to be seen whether the Ninth Civil Senate will follow the case law of the Second Civil Senate.
III. Burden of proof lies with managing director
The managing director who was sued in the present case wanted to defend himself against his personal claim by the insolvency administrator pursuant to section 64 sentence 1 GmbHG with the assertion that at the time of the payments he had initiated there had not yet been any insolvency – in contrast to the statements made by the insolvency administrator. He cited the fact that the insolvency administrator’s liquidity balance sheet was incorrect because the underlying accounting of the company was not correct. The BGH decided that although the managing director could refer to the incorrectness of the bookkeeping for which he was responsible, the blanket assertion of the incorrectness of the liquidity balance was not sufficient, but that the managing director had to explain in detail which liabilities had been wrongly taken into account. The managing director had to prove that the respective liabilities either no longer existed or were deferred.
If the insolvency administrator has presented the insolvency in detail on the basis of the company’s accounting document, it is incumbent on the managing director to prove the contrary. This proof can only be provided on the basis of the accounts of the insolvent company which are held by the insolvency administrator at this time. According to the BGH, the managing director has the right to inspect these documents.
IV. Consequences for practical situations
1. Consideration of Liabilities II can mean an earlier obligation to file for insolvency
The BGH has specified the legal standards for the determination of insolvency and, by including Liabilities II, ensured that insolvency applications must be filed at an early stage. It thus takes account of the regulatory purpose of the Insolvency Code to preserve the insolvency assets as far as possible in the interest of the creditors. Managing directors of GmbHs are therefore required to compare Assets I and II with Liabilities I and II on each reporting date of an insolvency audit and to exercise the greatest caution in assessing which liabilities are to be included in Liabilities II.
However, it is not quite clear from the judgement whether the insolvency audit is only a “one-step audit”, in which (added) Assets I and Assets II are compared with Liabilities I and Liabilities II, or whether it is a “two-step audit”, in which in a first step Assets I are compared with Liabilities I and only if this comparison results in a deficit of at least ten percent, Assets II and Liabilities II are included in the analysis in a second step. This question, which is very relevant in practice, will hopefully be decided soon; until then, managing directors should use both methods in crisis situations as a precaution.
2. Denial of insolvency maturity by the managing director
The BGH sets up very high hurdles for the pleading of the managing director, who wants to deny the insolvency maturity of the company. If the insolvency administrator has drawn up a detailed liquidity balance sheet of the company on the basis of its accounting, the managing director may claim that his own false accounting is incorrect, but must then present a concrete and substantiated statement for each individual liability and, if necessary, prove why it is not due (Liabilities I) or becomes due within three weeks (Liabilities II). It is not sufficient for the managing director to simply contest the liquidity balance.
In the proceedings, the managing director is therefore required to inspect the company’s accounting documents held by the insolvency administrator in order to substantiate his pleading. The managing director should exercise this right of inspection in good time. A mere application in court, without a substantiated statement for an expert opinion is likely to become more difficult in the future. The managing director will only succeed in proving that the insolvency administrator has wrongly included liabilities in the liquidity balance sheet of the company if he can demonstrate and prove the extinguishment or deferral of these liabilities.
The decision of the BGH therefore once again gives rise to great caution in assessing insolvency maturity and shows the importance of proper accounting and liquidity planning.
3. In case of old cases there should be no culpability within the meaning of section 64 GmbHG
In old cases, at least those cases in which insolvency had to be examined prior to the publication of the judgement, there are some indications that there is no culpable breach of the obligation to file an application as a liability precondition for section 64 sentence 1 GmbHG because the question of the inclusion of Liabilities II had not yet been decided, if the delayed application is (only) based on the fact that Liabilities II were not taken into account.
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