Delaying insolvency in companies – definition, risks and tips
What is meant by delaying insolvency?
Delaying insolvency occurs when a company does not file an insolvency application with the local court within 3 weeks in the event of insolvency or within 6 weeks in the event of over-indebtedness.
Failure to comply with this deadline may result in legal consequences.
Summary - Delaying insolvency in companies 2024
- For whom delaying insolvency represents a threat.
- definition and legal basis
- Delaying insolvency under the German Criminal Code: When is this a violation?
- Important deadlines and obligations for managing directors
- What penalties are threatened for delaying insolvency?
- Delaying insolvency of a GmbH: Exceptions & Special Features
- What does delaying insolvency mean for managing directors of a GmbH?
- Typical signs of delayed insolvency in companies
- How to avoid delaying insolvency in simple steps
- Early warning systems and risk management in the company
- Delaying insolvency is reported: How and when to file a complaint
- Conclusion: Take insolvency delay seriously – act in a timely manner
For whom delaying insolvency represents a threat.
Delaying insolvency only affects corporations. They are obliged to file for insolvency if they are unable to pay or are over-indebted.
The affected corporations include:
• AG (stock corporation)
• KgaA (limited partnership with shares)
• GmbH (limited liability company)
• UG (entrepreneurial company)
Self-employed persons, sole proprietors and owners of partnerships such as GbR, OHG or GmbH & Co. KG do not have to file for insolvency and therefore cannot be prosecuted for delaying insolvency.
definition and legal basis
Delaying insolvency is the most common criminal offense in insolvency law.
This occurs when the insolvency application is filed too late. The obligation to file an application and the deadlines are regulated in Sections 17 and 19 of the Insolvency Code (InsO).
These paragraphs determine when an application for insolvency must be filed due to insolvency or excessive indebtedness.
Delaying insolvency under the German Criminal Code: When is this a violation?
Delaying insolvency is a criminal offense if those responsible for a corporation, such as a GmbH, do not file an insolvency application in a timely manner or do not file it at all in the event of insolvency or excessive indebtedness.
The obligation to submit an application lies with managing directors, board members or other legal representatives.
A violation occurs when insolvency occurs (due to insolvency or excessive indebtedness) and the insolvency application is not submitted on time. In this case, legal consequences for delaying insolvency proceedings may arise.
Important deadlines and obligations for managing directors
The deadline for filing for insolvency begins as soon as a reason for insolvency arises. It does not matter when the managing directors notice this, but when they should have recognized it. The deadline starts from this point. The length of the deadline depends on the respective reason for insolvency:
• In case of imminent insolvency, the deadline is three weeks (Section 18 Paragraph 2 InsO).
• In case of insolvency, the period is three weeks (Section 15a InsO).
• In case of over-indebtedness, the period is six weeks (Section 19 Paragraph 2 InsO).
Since these deadlines are very short, a late application can also be considered as delaying insolvency.
What penalties are threatened for delaying insolvency?
Delaying insolvency is a criminal offense that can have serious consequences. These include a ban on managing directors, denial of discharge of residual debts and fines or prison sentences.
The amount of the penalty depends on whether the delay in filing for insolvency was committed intentionally or negligently. In the case of intentional delay in filing for insolvency, up to three years' imprisonment or a fine may be imposed in accordance with Section 15a of the Insolvency Code.
Only managing directors of corporations can be prosecuted for delaying insolvency. They are personally liable with their private assets for payments made after insolvency or over-indebtedness occurred.
Overview of fines and prison sentences
Fines Example:
If insolvency is delayed, heavy fines and prison sentences can be imposed. For example: 110 daily rates of 70 euros each plus procedural costs.
https://www.rechtsanwaelte-marienplatz.de/agwue-110ts-insolvenz/
The maximum penalty for intentional delay in filing for insolvency is up to three years imprisonment. Negligent delay in filing for insolvency can result in a prison sentence of up to one year or a fine. A five-year ban on managing directors can also be imposed.
Case law and current judgments on delaying insolvency proceedings
Judgments can be found listed here:
https://urteile-gesetze.de/insolvenzverschleppung-urteile
The Federal Court of Justice (BGH) ruled on July 27, 2021 that the deliberate delay in filing for insolvency with the intention of delaying the end of a company constitutes immoral damage pursuant to Section 826 of the German Civil Code (BGB) if the damage to creditors is knowingly accepted.
Another ruling by the Federal Court of Justice of June 29, 2023 (IX ZR 56/22) extends liability to consultants. According to this, tax consultant liability can apply in the event of delaying insolvency, even if the tax consultant was only commissioned to prepare annual financial statements.
Delaying insolvency of a GmbH: Exceptions & Special Features
An exception exists if the GmbH negotiates with its creditors and agrees on a later payment date. A maximum period of three weeks applies for this. If no agreement is reached within this period, the insolvency application must be filed immediately.
If this obligation is violated, this can lead to civil liability under Section 823 Paragraph 2 of the German Civil Code (BGB) and criminal prosecution under Section 283 of the German Criminal Code (bankruptcy) of the managing director.
The obligation to file an application and possible criminal liability particularly affect legal entities such as GmbH or AG. Private individuals, sole traders and partnerships such as OHG or KG are not included.
In times of crisis, such as the coronavirus pandemic, there were temporary exceptions to the obligation to file for insolvency. For example, the obligation was suspended in certain cases between March 1, 2020 and September 30, 2020. However, this suspension only applied if the insolvency was due to the consequences of the pandemic and the company was still solvent as of December 31, 2019. In addition, there had to be prospects of eliminating the insolvency.
Caution: Even during the Corona crisis, exemption from the obligation to apply was not always granted. The details can be crucial, and the regulation only applies under strict conditions.
What does delaying insolvency mean for managing directors of a GmbH?
The consequences of delaying insolvency proceedings can be serious for managing directors, both under civil and criminal law.
Managing directors are personally liable for damages caused by a late filing of an insolvency application. This means that payments made after insolvency has occurred can lead to liability.
This includes claims for damages from creditors who suffer bad debts, as well as liability for unpaid taxes and social security contributions. The financial consequences can affect your private assets and threaten your existence.
In addition to civil liability, criminal sanctions are also a threat. In the case of deliberate delay in filing for insolvency, fines or prison sentences of up to three years can be imposed. In the case of negligent delay in filing for insolvency, a fine or prison sentence of up to one year can be imposed. A conviction can have a significant impact on both your professional career and your private life.
Typical signs of delayed insolvency in companies
There are some early warning signs that may indicate impending bankruptcy:
- deterioration of liquidity,
- Increase in the use of supplier credit,
- Frequent reminders,
- Bad debts, for example due to insolvent customers,
- repayment of shareholder loans,
- Increased resignations of employees.
In such cases, an insolvency audit is crucial. If the company is at risk of becoming insolvent or over-indebted, the management must file for insolvency immediately, but no later than three weeks after the onset of insolvency or over-indebtedness (§§ 17, 19 InsO). If the company loses at least half of its share capital, a shareholders' meeting must also be called immediately.
The management is obliged to avoid excessive indebtedness or insolvency. The following measures can be taken to this end:
- subordination,
- provision of shareholder loans,
- waiver of claims,
- capital increase,
- agreement on payment deferrals,
- assignment of claims,
- borrowing,
- sale-and-leaseback transactions,
- agreement of bank moratoriums,
- Salary waiver by management.
The management decides which measures are appropriate in each individual case. However, it is advisable to consult external consultants at an early stage. For the personal liability of the management, it is of great importance to be able to prove that all necessary steps have been taken to prevent insolvency - ideally in cooperation with experienced consultants.
If it subsequently turns out that the company was already insolvent or over-indebted before the insolvency application, the management is personally liable. Creditors whose claims arose before the insolvency application was required receive only a low insolvency rate, on average less than five percent. This rate would often be significantly higher if the application had been made on time. The management is liable for the difference with its private assets.
This is how you can avoid delaying insolvency in simple steps.
If investigations are initiated against you for delaying insolvency, please follow these steps:
Stop all payments and transactions to avoid your personal liability.
Secure the last financial resources for social security contributions and the wages of your employees. This will prevent additional criminal charges, for example for fraud or withholding contributions.
Do not contact the investigating authorities without first consulting a lawyer.
Consult an insolvency lawyer immediately if you are threatened with bankruptcy or are accused of delaying bankruptcy. A lawyer will help you avoid mistakes and avoid possible penalties.
Early warning systems and risk management in the company
Early warning systems are a central component of risk management. They enable potential risks to be identified early and counteracted in good time. The company management bears responsibility for this.
The board of directors of a stock corporation is legally obliged to set up a monitoring system to identify developments that could endanger the continued existence of the company at an early stage. In the case of a GmbH, there is no explicit legal obligation, but this responsibility is derived from the general duty of care of the managing director.
An early warning system does not have to cover every risk, but rather concentrate on risks that threaten the existence of the company. The larger and more complex the company, the more comprehensive the management's organizational duties. Even smaller companies should not view an early warning system as an unnecessary expense.
In addition, risk prevention strategies should be developed, such as the introduction of guidelines or technical safety standards. In certain cases, it may be useful to consider insurance coverage to mitigate economic risks.
When should you file for bankruptcy?
An application for insolvency must be submitted to the responsible district court within 3 weeks at the latest in the case of insolvency or within 6 weeks in the case of over-indebtedness. It is the responsibility of the management to adhere to these deadlines in order to avoid legal consequences.
Support from specialist lawyers and insolvency consultants
Protect yourself early on so that you can make the right decisions in good time in the event of impending insolvency or delayed insolvency. Our team of specialist lawyers, accountants and tax consultants is at your side to support you in the corporate insolvency process and avoid insolvency.
Delaying insolvency is reported: How and when to file a complaint
An investigation usually begins with a complaint. This is often filed by the insolvency administrator, but creditors or employees can also inform the public prosecutor's office.
After the complaint is filed, the public prosecutor's office usually requests access to the company's documents and questions the management and employees. In rarer cases, the business premises are also searched.
An experienced criminal defense attorney plays an important role here by presenting exculpatory circumstances and trying to get the case dismissed.
Intermediate procedure:
If the public prosecutor decides against dropping the case, it files charges. The court then examines whether to open the main proceedings or to dismiss the charges. Sometimes a penal order procedure is carried out, in which the court can impose a sentence without a main hearing. An objection leads to a public court hearing.
main proceedings:
If the court considers a conviction to be likely, the main proceedings begin. There will be at least one oral hearing, which will end with a conviction or acquittal.
Who can be affected by a complaint of delaying insolvency?
The obligation to file for insolvency applies to companies that do not have any personally liable natural persons. The persons responsible are those who have insight into the finances and are in charge of the management of the company. In the case of a GmbH, this is typically the managing director. If there is no management, the obligation can be transferred to the shareholders. In the case of a AG, registered cooperative or partnership, the representatives of the liable companies are responsible.
If the company is in liquidation, the obligation to file for insolvency can also be transferred to those responsible for winding up the company.
In addition, the obligation can also apply to the so-called de facto managing director. These are people who, through their behavior and actions, actually shape the company's business, even though they do not officially have a managing director role.
Who can you contact?
If you are accused of delaying insolvency or another insolvency-related crime, do not make hasty statements to the investigating authorities. Instead, contact a lawyer or a qualified insolvency advisor immediately. Our initial insolvency consultation service offers you early support with all important insolvency law issues.
We are always available to provide you with competent advice and support.
Conclusion: Take insolvency delay seriously – act in a timely manner
Waiting is not an option.
Entrepreneurs must definitely clarify whether they are obliged to file for insolvency. The strict requirements regarding insolvency should not be underestimated.
Anyone who hesitates or is unsure and simply waits risks negligently delaying insolvency - this can be punished with a fine or up to one year in prison.
The management is obliged to regularly and carefully check whether the company is required to file an application. In case of doubt, professional help from an insolvency advisor or legal expert should be sought at an early stage.
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