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Director and parent company liability

Liability

Under what circumstances can a director or parent company be held liable for a company’s insolvency?

Directors

Generally, as long as directors comply with their general duties of care (eg, fiduciary duties), they cannot be held liable simply because the company has become insolvent.

In the event of insolvency (ie, illiquidity or over-indebtedness within the meaning of the Insolvency Code), directors of the insolvent company must file for judicial insolvency proceedings without undue delay but no later than 60 days after the occurrence of insolvency. This 60-day period is an absolute maximum period and can be taken advantage of only if:

  • serious and promising efforts to restore solvency within the 60-day period are pursued; or
  • an application for judicial restructuring proceedings is prepared with serious efforts.

If directors do not comply with this duty to file, they may become personally liable towards the company and, in certain circumstances, directly liable to creditors.

In addition, directors may face personal liability if they commit criminal offences related to the company’s insolvency or violate other relevant laws (eg, business reorganisation law, tax law or social insurance law).

Shareholders

As a basic principle, shareholders are not held liable in relation to a company’s insolvency. Liability can only arise in exceptional circumstances – in particular, if shareholders:

  • are considered as actual shadow directors; or
  • have actively delayed the insolvency or prevented the directors from filing.

However, majority shareholders may underlie the duty to file if the company does not have a director at all; they also may be held responsible for a cost contribution to the costs of the insolvency proceeding (eg, several thousand euros).

Defences

What defences are available to a liable director or parent company?

Directors

Depending on the actual allegations, directors may argue that:

  • the company was not illiquid or over-indebted at all;
  • illiquidity or over-indebtedness was objectively not apparent;
  • the directors permissibly took advantage of the 60-day period; or
  • performed payments were in accordance with the care of a prudent businessman.

Shareholders

In principle, shareholders may bring forward similar arguments to directors and may additionally argue that they did not act as an actual director (eg, they did not otherwise perform actions which constitute liability) or that the company in fact had a managing director and therefore the duty to file was on them.

Due diligence

What due diligence should be conducted to limit liability?

As a general rule, directors must monitor the financial status of the company based on functional accounting and internal control mechanisms. If financial or operational difficulties arise, directors must adapt their actions to the company’s situation. In particular, they should record every step taken and look for external experts’ support in order to assess whether the company is illiquid or over-indebted and, if so, how it can manage a turnaround. Written evidence about timely and proper external advice can be a key argument against personal liability in later court disputes.   

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