Liability for damage to the executive: The obligation to file an insolvency petition does not arise until the financial statements are drawn up

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In the summer of 2022, the German Federal Court of Justice ruled that the debtor’s bankruptcy can be proven by means other than the liquidity balance in a dispute over the liability for damages of executives for the late filing of an insolvency petition, thus provoking a stormy debate and uncertainty among executives.

It was a case where the manager of a subsidiary involved in the entire holding’s cash-pooling transferred a sum totaling EUR 3,000,000 to the parent company’s account, at a time when an insolvency petition had not yet been filed. The insolvency administrator filed a lawsuit to pay the amount. The court of first instance and the court of appeal rejected the claim on the grounds that, according to them, the plaintiff (the insolvency administrator) did not prove the claimed date of the company’s bankruptcy, as he did not submit a summary balance sheet of liquidity within the concern. The insolvency administrator submitted “only” a liquidity statement that was based (backwards) on the development of liquidity in the three weeks following the date of the financial statements at the end of the year (more than a year before the filing of the insolvency proposal and more than 10 months before the transactions that should have established liability for damage executive).

Both the first-instance and the appeals courts rejected the manager’s responsibility for the damage. However, the Federal Court of Justice ruled that the requirements to prove both the insolvency and the liability of the executive for the damage of both courts are exaggerated. According to established German jurisprudence, the company is in bankruptcy if it is unable to meet at least 90% of its due monetary obligations within a period of 3 weeks following the date of the discovery of insolvency . The company in question was able to meet only 50% to 60% of the monetary obligations due in the period referred to by the insolvency administrator.

However, the German Federal Court of Justice added to this that the fact of bankruptcy does not need to be proven by a liquidity balance for a three-week period. A simple liquidity statement for three selected days during a three-week period will suffice. He thus greatly limited the consideration of expected returns and profit.

The situation is different in the Czech Republic. The executive is obliged to file an insolvency proposal for insolvency if the company cannot meet its monetary obligations with at least two creditors thirty days after the due date. The percentage rate of default is not measured, but that the default must be against multiple creditors .

In Germany, the emphasis is on the percentage ability to repay obligations during a given period of time, while it is calculated that the entrepreneur repays obligations without undue delay. The concept of decline in German and Czech law thus differs considerably. In Germany, the emphasis is placed on the ability to repay one’s obligations over a relatively short period (ie a period of three weeks). The company’s solvency requirement is quite high, as during these three weeks the company must be able to pay 90% of its liabilities.

In the Czech Republic, insolvency is not determined by the ongoing ability to meet one’s obligations. On the contrary, it is relevant how long the company is unable to perform at all.

The liquidity test is used not to confirm the bankruptcy of the company, but to disprove it. When calculating it, however, the same scale as in Germany is used. The bankruptcy of the company is questioned if its inability to fulfill amounts to less than 10% of its monetary obligations. However, the method differs, where liquidity is not measured continuously, but in aggregate over the entire 30 days using the so-called operating liquidity report.

In the Czech Republic (but also in Germany), a subject can be in bankruptcy and in the form of so-called over-indebtedness, when the amount of the company’s debts is more than its assets.

If the executive does not submit a proposal according to the above-mentioned criteria, he is liable to creditors for damages, on the one hand, for contractual damages caused by non-fulfillment of obligations. In addition, criminal liability is not excluded.