Up Again Germany: Governance

Corporate

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?

Boards are generally responsible for compliance with all relevant government regulations, guidelines and recommendations. This includes the wellbeing of the workforce, particularly regarding the hygiene regulations applicable for the workforce returning to work.

Boards should:

  • develop/review plans and guidelines for the returning workforce;
  • instruct the workforce of the rules they need to comply with; and
  • implement monitoring procedures to ensure that such rules are adhered to.

These measures should be documented as proof of compliance and a shield from personal liability. In companies conducting business that is sensitive in terms of  hygiene standards (e.g. the food industry), it may be prudent to engage an independent third party to review and certify compliance.

Though there is no specific back-to-work regulation for listed companies, it may be prudent to actively communicate to the market to what extent the workforce has returned to work and how the business is ensuring compliance with governmental regulations.

Listed companies should consider whether a return to work or its effect constitute inside information that could significantly affect the market price of its shares or instruments, and would then need to be published as an ad-hoc disclosure under the Market Abuse Regulations.

2. Should boards adopt particular governance practices in this context?

Boards should develop particular governance practices, as described in the answer above, to ensure compliance and avoid personal liability.

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 corporate purpose does not have any specific effect on how to return to work. Values, in particular those with respect to proper treatment of the workforce, should encourage boards to make sure that hygiene standards should be as high as possible – even exceeding government regulations.

Restructuring

4. Your company is facing liquidity issues as a result of COVID-19:

a. What are the repercussions for continuing to operate your company?

Besides the directors' duty to act in the best interests of the company and promote the success of the company, the main repercussions are as follows.

Directors' civil and criminal liability for late insolvency filing

Under German law, the management of a company is obliged to monitor the financial status of the company and to file for insolvency if it is becoming illiquid or over-indebted. Non-compliance with this obligation may result in civil and even criminal liability if third parties continue trading with the company while insolvent and then suffer losses.

The recently introduced legislation in relation to the COVID-19 pandemic (COVID-19 Law) in principle suspends the duties to file for insolvency from 1 March 2020 until 30 September 2020 (the Suspension).

However, the Suspension applies only if the insolvency is caused by the effects of the spread of the COVID-19 pandemic and if there are prospects of eliminating an existing illiquidity.

If the company demonstrates that it was not illiquid on 31 December 2019, it is presumed that the prerequisites for the Suspension exist: that the occurrence of insolvency after 1 March 2020 is caused by the effects of the spread of the COVID-19 pandemic, and that there are prospects of eliminating an existing illiquidity.

Directors may later be challenged that the prerequisites for the Suspension in fact did not apply and, should therefore prepare documentation to counter such a challenge. In other words, they should be able to evidence that:

  • the company was not illiquid on 31 December 2019;
  • the insolvency (i.e. illiquidity or over-indebtedness), during the Suspension was caused by the COVID-19 pandemic; and
  • there were prospects of eliminating an existing illiquidity.

Directors' civil liability for payments after insolvency

Under German law, the management of a company can be held liable for payments made while illiquid or over-indebted, except where such payment is in line with the due care of a prudent businessman.

The recently introduced COVID-19 Law provides that, if the insolvency filing duty is suspended (see above), the liability of directors for payments after the occurrence of insolvency is limited, provided payments are made in the ordinary course of business, including payments serving the continuation or resumption of the business or serving the implementation of a restructuring.

Such payments are recognised as in line with the due care of a prudent businessman, and can thus be made by directors without risk of personal liability.

Directors' civil and criminal liability for non-payment of social security contributions and tax obligations

Under German law, non-payment of certain social contributions and certain taxes is a criminal offence. The COVID-19 Law does not provide for any relaxation in this regard. However, the duty to pay social contributions and tax obligations may be suspended on application to the competent social authority (i.e. the health insurance and/or tax authority).

This does not apply to retained income tax, which are funds of the employee. If retained income tax is not transferred, directors are deemed to violate their duties in a grossly negligent way.

Directors' liability for capital maintenance violations

We are not aware of any liability exemptions in the context of the COVID-19 crisis.

General civil and criminal liability risks (e.g. insolvency offence, fraud)

The general civil and criminal liability is not exempted in the context of the COVID-19 crisis.

Fraud

In particular a fraud entering into a transaction (Eingehungsbetrug): If a party concludes a new contract in the knowledge that it will not be able to fulfil its obligations under the contract.

Insolvency offense

In the event of insolvency filing, the following acts performed negligently or wilfully while there is imminent or actual illiquidity or over-indebtedness may result in criminal liability:

  • derogation of assets of the GmbH beyond the usual business;
  • entering into speculative business dealings or transactions;
  • wrongly asserting the existence of additional assets;
  • violation of the obligation under accounting and trade law provisions to precisely present the financial situation of a GmbH in the statements, and to accurately report its business prospects;
  • endangering of creditor’s assets that the GmbH holds as a fiduciary for the creditor; and
  • privileging certain creditors by unauthorised provision of collateral or payment to them, to the detriment of other creditors.

These acts may also lead to criminal liability if they cause insolvency (i.e. illiquidity or over-indebtedness).

b. Do you have to file for insolvency if your company cannot pay all its debts as they fall due?

Yes. If the company is not able to pay all its debts as they fall due, it may qualify as illiquid and the directors have a duty to file for insolvency proceedings.

This is not the case, however, if the company is not able to pay at least 10% of its liabilities due during the subsequent three weeks, unless it is foreseeable that the threshold of 10% will be reached or exceeded in the near future.

There may even be exemptions if the company is unable to pay 10% or more of its due and payable liabilities during the subsequent three weeks, provided it is almost certain that the liquidity gap will be almost completely eliminated in the near future and that the creditors can reasonably be expected to wait. However, this needs to be assessed on a case-by-case basis.

Please also see the answers above, including regarding the Suspension under the COVID-19 Law.

c. Are there any steps that should be taken to minimise the risk of your actions as director being challenged?

Actions of the directors – in particular in a financial crisis – need to be properly documented, so that directors have evidence to defend their actions later:

  • Hold and document board meetings.
  • Properly document decisions and the reasons for them, including the factual basis.
  • Carry out daily liquidity monitoring and 13-week forecasts.
  • Regularly review the “going-concern” prognosis of the company.

We recommend you document the effects of COVID-19 in detail in your liquidity monitoring, in particular (if true) that:

  • there was no illiquidity on 31 December 2019; and
  • should an insolvency have occurred, it was based on the effects of the COVID-19 pandemic and there were or are prospects of eliminating the illiquidity.

In addition, you should create a documentation that allows you to prove that over-indebtedness (e.g. that the going-concern prognosis became negative), was caused by the effects of the COVID-19 pandemic.

To comply with their general duties, directors should seek help under the various support programs provided by federal and state governments, and document that no insolvency occurred before 1 March 2020 (i.e. before the Suspension).

For more information, see our article on German Government Assistance in Response to COVID-19.

d. Will your company be wound up if you fail to make payments when due?

The company may be wound up (liquidated) if this is decided in the course of insolvency proceedings. For the sake of completeness, the company may also be wound up by the shareholders (ordinary and solvent liquidation).

Insolvency filing duty: The failure to make payments when due (at least a large part of the debt due) may be a presumption for the existence of a duty to file for insolvency proceedings. However, this presumption may be rebutted.

Under the COVID-19 Law,the duty to file for insolvency proceedings may be suspended until 30 September 2020. For details and restrictions see question 4 above.

Insolvency filing by creditor: If a company fails to make payments when due, a creditor, and in particular the respective unpaid creditor, may consider filing for insolvency proceedings for the company.

To be admitted to file for insolvency proceedings, the creditor must:

  • have a legal interest in the commencement of the insolvency proceedings; and
  • demonstrate to the satisfaction of the insolvency court the existence of the claim and the reason why insolvency proceedings should be opened.

However, under the COVID-19 Law,the right of a creditor's insolvency application is further restricted:

  • Any application filed by a creditor between 28 March 2020 and 28 June 2020 requires that the company was insolvent (i.e. illiquid or over-indebted on or before 1 March 2020).
  • So directors should be prepared (and prepare respective documentation) to demonstrate the company was not insolvent (i.e. illiquid or over-indebted), on or before 1 March 2020 to counter a creditor's application.