Insolvency or bankruptcy of a company: how to act?

If you notice a reduced financial liquidity of your company or already insolvency, you must immediately apply for necessary bankruptcy procedures. In the worst case, further waiting and hesitation can lead to a so-called bankruptcy delay. Delaying bankruptcy counts as a criminal offense and can lead to imprisonment. In the event of insolvency, insolvency must be registered within three weeks of the occurrence. In addition to the delay in bankruptcy, what is known as quota damage can also arise, that occurs due to late or non-bankruptcy filing.

The penetration liabilities checked in this case: The quota damage denotes the difference between the amount that would have had to be paid back if the bankruptcy filing had been made in time and the amount that actually had to be paid due to the late/non-bankruptcy filing. Through the direct liability, the company’s managing director is personally liable: he is now also liable with his private assets. Shareholders and managing directors should act immediately in the event of insolvency in order to avoid the delay in bankruptcy, quota damage and direct liability. A timely registration for the standard bankruptcy procedure can avert further damage, for example also the professional ban.

Liability trap: risks for the company’s managing director – is the managing director liable with private assets?

For the managing director, there are numerous risks in a company bankruptcy. Apart from the risks of delaying bankruptcy, direct liability and quota damage, there are other risks that can cost a managing director dearly if he reacts incorrectly. Failure to pay tax obligations or social security contributions threatens him with personal liability.

But at the same time, the settlement of claims at the time of insolvency (regardless of whether this has already been registered or not) creates a liability trap: According to insolvency law, all creditors must be treated equally. This case no longer applies when the managing director pays claims. Thus, he can be obliged to reimburse these payments to the insolvency administrator, as the payment prospects of the other creditors were reduced by the payment of the claims. So a real liability dilemma arises for the managing director: If he does not pay, he is liable to prosecution and may have to be personally liable. If he pays, he must also be liable. This dilemma can only be resolved by filing for bankruptcy in good time.

Register for bankruptcy: The standard bankruptcy procedure

For companies with limited liability, registration for standard insolvency proceedings must take place in the event of insolvency. In the standard insolvency proceedings, managing directors, shareholders or even creditors can file for bankruptcy. Creditors who can file for bankruptcy of a company, usually the tax office or social insurer. In most cases, tax claims from the tax office or non-payment for employee social insurance are the trigger for third-party applications. The standard insolvency procedure is in contrast to private bankruptcy, which can only be applied for by the consumer himself.

The type of bankruptcy

In order to have an overview of the situation, it is important to understand what type of insolvency one is affected by: the entrepreneur must differentiate between permanent, temporary, disturbed or threatened insolvency. Is it just a short-term insolvency due to insufficient liquid capital or is it already over-indebted? In any case, employees and creditors should be informed in good time so that they are informed of the impending payment default.

However, when there is an impending bankruptcy, an entrepreneur should consider filing for bankruptcy preventively. This ensures that the regular insolvency proceedings run smoothly and the risk of delaying bankruptcy is minimized. It is also possible to have the financial situation analyzed in detail by a financial advisor,  visit the website to find ways out for portfolio recovery lawsuit. For example through cost restrictions, reorganization, restructuring, or the operational dismissal of parts of the staff.

The bankruptcy petition

Every application for bankruptcy received is comprehensively reviewed by the competent bankruptcy court; in principle, the applications are also granted. If the company’s assets are not sufficient to finance the proceedings, the bankruptcy petition will be rejected “for lack of assets”. The court can also order a preliminary bankruptcy administration. The provisional insolvency administrator is now ensuring that the company and business operations continue as before until the final decision by the court is reached.

The provisional insolvency advisor then ensures that the bankruptcy estate is secured, for example by issuing a general prohibition of disposal for the debtor. With this ban, the authority to administer and disposal of the company assets are transferred to the provisional insolvency administrator.

If the contract is approved, the first step is to appoint a “regular” liquidator. He advises the company and especially the managing director in all financial matters. The insolvency advisor should always be a person who has no relationship with the company; usually a lawyer takes on this task. This checks in detail the financial situation of the insolvent company.

Reclaim of the share capital

Anyone who has their share capital paid out after the establishment of the company must expect that this can be demanded in the event of insolvency. Partners are personally liable for these repayment claims.

The creditors’ meeting

In the case of the company bankruptcy, the creditors’ meeting is the most important element of the procedure. At this meeting it is decided whether the company should be restructured or the remaining assets should be distributed among the creditors. All creditors as well as the debtor (managing director and partner of the company) and the insolvency administrator take part in this meeting.

In the creditors’ meeting (also: “reporting date”) the insolvency administrator has to report on the economic situation of the company. He must also explain the possibilities for an insolvency plan and explain what effects this has on the satisfaction of the creditors. The creditors’ meeting can also instruct the insolvency administrator to draw up an insolvency plan.

The execution phase

During the liquidation phase, the resolutions of the creditors’ meeting are implemented and the existing assets are used. Depending on the size of the procedure, this phase can take anywhere from six months to several years. Every six months, the insolvency administrator submits an interim report on the developments in the bankruptcy file.

Debt discharge of a GmbH?

In contrast to private bankruptcy, there is no entitlement to a residual debt discharge in the standard bankruptcy procedure. In the case of legal entities, such as the private limited company, the implementation of the insolvency procedure generally leads to the deletion and termination of the company. It is of course something different if the creditors’ meeting decided to reorganize and continue the company at the beginning of the procedure; in this case the company remains in existence for the time being.

Protective screens for managing directors

In the event of bankruptcy, the managing director is often liable with his private assets, especially in the case of late filing for bankruptcy. A so-called protective screen can help, releasing the managing director from any personal liability. A clause on the insolvency protective shield can be incorporated into the creative part with the help of a lawyer when drafting the insolvency plan.