Companies in Crisis: What Are the Responsibilities of a GmbH Managing Director?

As an entrepreneur, you strive to set your company up for long-term success. Unfortunately, external factors, unforeseen circumstances, or poor decisions can affect any business. A corporate crisis is not always avoidable. Currently, we can see how many companies are struggling with the consequences of the COVID-19 crisis. The corporate crisis itself is difficult to prevent, as we cannot influence its causes. It is important that, as a GmbH managing director, you respond appropriately to the unforeseen situation while taking legal aspects into account. With this article, we aim to offer guidance to companies in crisis. It is essential that the GmbH managing director understands their fundamental duties.

What role does the managing director play during a corporate crisis?

The GmbH managing director is the legal representative of the GmbH and represents the company vis-à-vis the shareholders and third parties. Thus, the managing director bears primary responsibility for the company. As a managing director, one has a great responsibility toward customers, suppliers, and the tax authorities. It is important that the managing director always acts in accordance with the principles of a prudent businessman. Duties and responsibilities become even more relevant in times of corporate crisis. During the crisis, the managing director of a GmbH plays a primary and leading role. But even at the first signs of a potential crisis, the managing director must react quickly and fulfill various obligations.

In the context of a crisis, the company and all parties involved can suffer significant damage. The worst-case scenario is the insolvency of the GmbH. Insolvency is typically preceded by a “minor” crisis within the GmbH. It is therefore important that the managing director acts early and fulfills his duties. If he breaches his duties, he risks being held personally liable by the company and the shareholders for any resulting damages. As a managing director, one should therefore not take one’s duties lightly!

How does a crisis turn into insolvency?

Very few companies become insolvent practically overnight. Companies usually go through a crisis phase that can eventually lead to insolvency. Crises cannot be planned. Often, an unexpected event triggers a chain of problems. It is important for the managing director to recognize early on that their company is in a crisis. Classic signs of this include:

• Deteriorating liquidity
• Increased reliance on supplier credit
• Increasing number of reminders from creditors
• Loss of a major customer due to the customer’s own insolvency (bad debt)
• Customers switching to competitors
• Recovery of shareholder loans
• Change in the product range
• Short-time work
• Employees resign

Unfortunately, these early warning signs are all too often ignored or dismissed as irrelevant in practice. As a result, the crisis steadily worsens. If a corporate crisis is ignored for too long, insolvency is not far off. From a legal perspective, a crisis at a GmbH begins with formal undercapitalization and/or a lack of creditworthiness. Once it has come to this, the civil and criminal liability risk for the GmbH’s managing director increases enormously. It is therefore very important that every managing director is aware of their duties and risks and responds early to possible signs of a crisis.

Liability of the GmbH Managing Director

The managing director must fulfill his or her duties with the diligence of a prudent businessman. As the managing director of a GmbH, one must always observe the framework of the law, the articles of association, and the binding resolutions of the company’s governing bodies. One must always act in the best interests of the company and prevent harm. This fundamental duty should be taken seriously and never disregarded. If the managing director fails to meet these requirements and the GmbH suffers damage as a result, the managing director is personally liable! If there are multiple managing directors, they are jointly and severally liable. It is particularly serious if the managing director delays filing for insolvency beyond the statutory deadline. Claims and damages may be sought by a wide variety of stakeholders. These include:

• Claims in favor of the insolvency estate
• Claims by banks
• Claims by the GmbH’s creditors
• Claims by the shareholders
• Liability for the GmbH’s tax debts
• Claims by social security agencies

In addition, there may be various criminal consequences. The managing director may face penalties for fraud, preferential treatment of creditors, bankruptcy, embezzlement, and tax evasion.

What are the duties of the GmbH managing director?

Minor crises can often be resolved quickly. However, if a major or protracted crisis arises, the managing director must fulfill a wide range of obligations. Conducting an insolvency assessment is essential in this context. If the company is at risk of becoming insolvent or over-indebted due to a crisis, the managing director must act quickly. The managing director must file a petition to open insolvency proceedings without undue delay—that is, immediately, but no later than three weeks after the GmbH becomes insolvent or overindebted.

If half of the share capital is lost, the managing director must immediately convene a shareholders’ meeting. After an insolvency petition has been filed, the managing director has further obligations to fulfill. Within the three-week filing period, no further services or deliveries may be made using the company’s assets. The managing director must ensure that all expenses are reduced to an absolute minimum.

The managing director is obligated to prevent insolvency by all means. This includes measures to eliminate legal over-indebtedness and measures to eliminate insolvency. Appropriate measures include:

• Subordination of claims
• Shareholder loans
• Waiver of claims
• Ordinary capital increase
• Deferral agreement
• Assignment of receivables
• Borrowing
• Sale and leaseback
• Moratorium with the bank
• Waiver of the CEO’s salary

The managing director must decide which measures are feasible and appropriate in each individual case. It is advisable to seek external assistance. It is important that the managing director can demonstrate that he has done everything possible to prevent insolvency.

Suspension of the Obligation to File for Insolvency During the COVID-19 Crisis

Now that the basics of the managing director’s obligations have been clarified, we would like to draw attention to a recent change in the law. Amid the ongoing COVID-19 crisis, many companies are struggling to survive. Insolvency and excessive debt have become a bitter reality for a large number of companies. According to the obligations explained above, many managing directors would therefore be required to file for insolvency. However, since April 1, 2020, the Act to Mitigate the Consequences of the COVID-19 Pandemic in Civil, Insolvency, and Criminal Procedure Law has been in effect. As a result, the obligation to file for insolvency is suspended until September 30, 2020 (both for insolvency due to insolvency and for that due to over-indebtedness). The new regulation applies only to companies that have actually fallen into crisis due to the coronavirus pandemic and have the potential to resolve their insolvency.

The liability of GmbH managing directors regarding the obligation to file for insolvency is also suspended under this temporary regulation. However, the fundamental duties of the managing director naturally continue to apply. The current crisis is therefore no excuse for misconduct!

Questions for a Tax Advisor in Düsseldorf and Oberhausen

In times of crisis, managing directors regularly face tax-related questions. In Düsseldorf and Oberhausen, our tax advisors and certified public accountants are here to help, even during a corporate crisis. We are convinced that sound advice is essential for your decision-making. Our team can assist you with its strong industry expertise. So, do you have any questions on this topic or need support with tax matters? Simply contact us to schedule a consultation.