The Higher Regional Court of Hamburg (OLG Hamburg, 25 June 2010, 11 U 133/06) ruled that the business continuation prognosis according to § 19 (2) of the German Insolvency Code is based only on the view of a prudent director at the time of assessment. Subsequent findings concerning the director's assessment made on such a basis do not give rise to any liability of the director. In addition, the court held that in exceptional circumstances a director may have more than three weeks after the company has become illiquid or over-indebted to conclude restructuring efforts.
In the case at hand, the director of a company was sued for restitution of payments made by the insolvent company, some payments were made even after the three weeks' maximum insolvency petition filing period.
Under German law, the directors of a company have to compensate the company for any payment which was made after the occurrence of the company's illiquidity or the establishment of its over-indebtedness unless a prudent businessman acting with due care would have made such payments. A company is over-indebted if the company's assets no longer cover its existing payment obligations. To determine whether such covering assets exist, an assessment of the company's assets has to be made. According to § 19 (2) of the German Insolvency Code, the assessment of the company's assets shall be made under the assumption that the company's business is continued, provided that such continuation is highly likely according to the circumstances.
The question to be determined by the court was on what basis such business continuation prognosis has to be established.
The court held that in case of a positive business continuation prognosis for the preparation of the over-indebtedness status, going-concern values can be taken into account. Furthermore, the court ruled that a positive business continuation prognosis requires on one hand the intention to continue the debtor's business and on the other hand the objective possibility of the company's survival. A positive prognosis requires the economic viability and debt coverage on the basis of going-concern values set out in detailed documentation. According to general business principles, an income and financial budgeting has to be made and documented. When establishing the prognosis, the director has a certain discretion. In particular, the prognosis only depends on the director's point of view at the time of the assessment. Subsequent findings cannot change the assessment retroactively.
Regarding the payments made by the company after the three weeks maximum insolvency petition filing period the court had to decide whether an extension of the statutory three weeks' period for directors to file for insolvency was possible to complete restructuring efforts.
Where a company becomes insolvent, the directors are obliged to file for insolvency without undue delay but at the latest three weeks after the occurrence of an insolvency event. The maximum period of three weeks is intended to allow finalisation of restructuring measures when there is a positive business continuation prognosis. Pursuant to case law, an insolvent company may make expenses in connection with serious restructuring efforts during that three weeks' filing period without the directors incurring personal liability.
Since in the case at hand some payments had been made after the statutory three weeks period had expired so that the director would be personally liable for payments made thereafter, the court ruled that special circumstances of the individual case may justify a modest extension of the three weeks period. In the case decided the restructuring efforts had seemed almost finalised at the end of the three week period and were suddenly aborted by the shareholders three days after the expiry of the filing period. The court therefore held that it was justified by exception to extend the statutory three weeks filing period to "just about four weeks".
The decision has been appealed to the Federal Court of Justice who will have the ultimate word in this case.
Practice guide
- The business continuation prognosis to be made by the company's directors in order to determine whether the company is over-indebted, requires a documentation of the future income and financial planning. Furthermore, the judgment clearly states that subsequent findings do not give rise to liability of the directors.
- Despite the ruling of the Higher Regional Court, directors of limited liability companies should conclude restructuring efforts within the statutory three week period until the legal requirements for an extension have been confirmed by the Federal Court of Justice. A company can also be restructured after filing for insolvency if there is a positive business continuation prognosis and the shareholders and creditors agree.