1. What are the key topics that boards should focus on to ensure proper discharge of their duties as directors, as their businesses return to work following a lockdown?
Measures to be considered to avoid personal liability
The law obliges directors to act prudently and diligently (e.g. Section 25 GmbHG and Section 84 AktG). To comply with this obligation the directors shall procure, in particular:
- Functional and efficient communication in the company
The directors are to ensure primarily that communication in the company is guaranteed, so that recent developments can be immediately included in planning (e.g. impact of returning to business on costs incurred or saved (e.g. additional on-site security, cleaning fees).
A lack of communication can lead to (negligent) non-compliance with required procedures and result in liability.
- Examination of any adjustments required i+n financial reporting and deadlines
Liquidity planning will necessarily need to be adjusted, as customers are expected to default on payments, but fixed costs continue to accumulate. As a result, sales expectations must also be reassessed.
Annual financial statements not yet published (including management reports) may have to be adjusted accordingly to comply with Commercial Code (UGB) regulations on the preparation of financial statements. According to the Corporate COVID-19 Act the deadline for the preparation of financial statements of corporations (AG, GmbH) with a balance sheet date between 16 October 2019 and 31 July 2020 may be extended by a maximum of four months. The respective accounting documents (in particular, annual financial statements and consolidated financial statements) must be filed with the companies register for disclosure no later than twelve months after the balance sheet date.
- Monitoring current regulatory and administrative changes
To avoid severe administrative fines and personal liability established by inter alia COVID-19 Measures Act (COVID-19-Maßnahmengesetz) and insolvency law, directors should keep themselves informed on the latest developments on business restrictions and closures, and also observe any measures taken regarding restrictions on the movement of goods. It is crucial to keep up to date with economic and legal developments and to monitor the external and internal situation closely.
Specific liability risks from a corporate law perspective and avoidance strategies
Duties of directors in the event of impending insolvency
- See the questions below on restructuring.
- The deadline for filing an application in the event of insolvency or indebtedness exceeding the thresholds established by law, which has been triggered by the consequences of the COVID-19 pandemic, is extended from 60 days to 120 days
Corporate law issues
- Assessment of profit distribution for the past financial year
- Management may be faced with the question of whether a planned profit distribution on the basis of the annual financial statements for the past financial year is still permissible to the extent planned due to current developments or a possible negative outlook.
- From the shareholders' point of view, the corporate duty of good faith (gesellschaftsrechtliche Treuepflicht) may result in the shareholders temporarily waiving the distribution of profits.
- Limited liability company (GmbH): For the purposes of the creditor’s protection, profit distributions are prohibited, if – and to the extent that - losses and impairments, occurring between the balance sheet date and the adoption of the annual financial statements, are expected to be not merely temporary but to persist for a longer period of time (Section 82 para 5 GmbHG). If this is the case, managing directors must refuse the payment despite a shareholders’ resolution to the contrary.
- Stock corporation (AG): The Austrian Stock Corporation Act (AktG) does not contain a provision corresponding to Section 82 para 5 GmbHG. The Annual General Meeting may exclude all or part of the net profit from distribution if it is authorised to do so under the articles of association (Section 104 para 4 AktG).
- Organisation of shareholders' meetings and board meetings (board of directors, management board, supervisory board)
- Holding of shareholders’ meetings and boards’ meetings.
- General meetings of stock corporations (AG) and shareholder meetings of limited liability companies (GmbH) can currently be held without the physical presence, provided it is possible to participate in the meeting from any location by means of an acoustic and optical two-way connection (image and sound) in real-time. It must be possible for each participant to speak and vote. The participants are entitled to participate in the virtual meetings only acoustically, provided that the total number of such participants is less than half. The same applies to other partnerships, cooperatives, private trusts and foundations, associations, mutual insurance companies and small insurance companies.
- In case of listed stock corporations with more than 50 shareholders, it is sufficient to broadcast the AGM (or EGM) on the internet. Four independent proxy representatives must be proposed by the company, and shareholders can choose one of them to act on their behalf in the meeting, to ask questions and to submit proposals.
- All meetings of the corporate bodies (e.g. meetings of the board of directors, the managing directors and the supervisory board) can currently be held without the physical presence of the participants. The law also takes precedence over any regulations in the articles of association and in rules of procedure.
- Convening of shareholders’ meetings and boards’ meetings
- The convening body decides whether a virtual meeting will be held and what technology is used.
- In principle, the regulations regarding the convocation of the meeting (e.g. convening notice period) remain unaffected. The organisational and technical requirements for participation in a virtual meeting must be stated in the invitation.
- The AGM of an AG and the ordinary shareholders’ meeting of a GmbH must now be held within the first 12 months of the financial year of the company concerned, rather than within the first eight months.
2. Should boards adopt particular governance practices in this context?
Management must ensure they are informed about, and comply with, all legal requirements in the context of the COVID-19 acts, and all other measures and guidelines of the state authorities.
- establishing a return-to-work task force;
- addressing health and safety issues (e.g. hygiene guidelines, establishing protocols for the use of shared equipment or workspaces, minimising exposure to COVID-19);
- appointment of group of employees dedicated to resolving consequences of COVID-19;
- short-time work;
- homeworking (e.g. evaluate improvement of remote working and effectiveness of collaboration tools);
- elaboration of measures related to the large number of absent employees;
- elaboration and compliance with measures related to halting the spread of infection; and
- effective communication (internal and external).
3. To what extent are boards being encouraged to take into account corporate purpose and values in the context of COVID-19 and a return to work?
The business was allowed to resume normal working activities from 4 May 2020 (unless any other agreement has been made with groups of employees or individual employees, such as further time off, extension of homeworking and remote working). However, due to the employer’s duty of care (Fürsorgepflicht), the management must ensure that the risk of infection among the firm’s employees is kept to a minimum.
4. Your company is facing liquidity issues as a result of COVID-19:
a. What are the repercussions for continuing to operate your company?
Insolvency risks and a possible delay in filing for insolvency resulting in a liability of the management of the company.
b. Do you have to file for insolvency if your company cannot pay all its debts as they fall due?
Yes. The debtor has to file a petition for insolvency if the company is insolvent or over indebted. Such a petition must be filed with the court immediately – at the latest within 60 days after insolvency or over-indebtedness has been established.
The insolvency law takes account of insolvency triggered by exceptional situations (such as the COVID-19 pandemic) so that the 60-day period is doubled to 120 days in the case of "natural disasters." The law refers to "floods, avalanches, snow pressure, landslides, hurricanes, earthquakes or similar disasters of comparable magnitude" (Section 69 (2a) IO; 2nd COVID-19 Act (in force since 22 March 2020).
The use of this time limit is permissible only as long as serious restructuring efforts are made that have a chance of success.
c. Are there any steps that should be taken to minimise the risk of your actions as director being challenged?
A late application for insolvency leads to substantial personal liability risks for board of directors of the company, so management should not delay any actions.
d. Will your company be wound up if you fail to make payments when due?
The temporary inability to pay for a limited period of time (about three months) does not constitute insolvency. However, if a company is not able to make payments anymore, the management is obliged to file a petition for insolvency.