Failure to file for insolvency in good time: These are the fines and penalties you could be facing as a managing director
In one out of three cases of insolvency, the managing director fails to file the request for insolvency in good time (often unintentionally). The consequences can be devastating: as the managing director you are personally liable, and in the worst case you may even end up in prison.
But when do you have to file for insolvency at the latest if your company is in financial difficulties? Is it true that you always face criminal charges, or could you also emerge from this unscathed? How can you prevent your company from insolvency and how can you safeguard yourself against these dangers?
Even if your company is financially sound and the risk of insolvency equals zero, you should know the answers to these questions. Only then will you be able to react appropriately in the (unlikely) event of a crisis or be able to recognize the first warning signs.
In this post, you will learn:
- What constitutes a failure to file the request for insolvency in good time
- What penalties you may face
- What the 5 most common reasons for insolvency are
- How often a failure to file the request for insolvency in good time occurs
- What measures you can take to protect your company
This post was updated on 16 August 2021.
What constitutes a failure to file the request for insolvency in good time?
We speak of a delayed filing for insolvency if the request for insolvency is not filed within the statutory period after the company becomes illiquid or overindebted (cf. Section 15 a (1) German Insolvency Statute (InsO)).
Since 1 May 2021, this period has been reduced again to three weeks. From March 2020 to April 2021, the period had been suspended due to the massive disruptions resulting from the pandemic.
What are the fines and penalties you could be facing as a managing director?
In the case of a failure to file the request for insolvency in good time, a distinction can be made between two different scenarios (cf. Section 15a (5) German Insolvency Statute (InsO)):
1) Negligence: If the managing director violates his or her duty of care within the meaning of Section 43 German Limited Liability Companies Act (GmbHG) the delay in filing for insolvency is considered negligent. A distinction is made here between slight negligence, negligence, and gross negligence.
A negligent delay in filing for insolvency can lead to a fine or imprisonment for up to one year.
2) Intent: If the delay in filing for insolvency is brought about deliberately, the failure to file for insolvency is classed as intentional.
An intentional delay in filing for insolvency can lead to a fine or imprisonment for up to three years.
Does a delay in filing for insolvency only affect the managing director or also the shareholders?
As a general rule, it is the duty of the managing director of the GmbH to file for insolvency if the company is illiquid.
However, if the managing director can prove that shareholders have prevented him or her from filing for insolvency, the shareholders themselves are liable to prosecution.
This means: A delay in filing for insolvency generally concerns exclusively the managing director of the GmbH. However, if shareholders intervene in the proceedings and prevent the managing director from filing for insolvency, this is also against the law and they become liable.
The 5 most common reasons for insolvency in Germany
Unlike many other tax consultants, I do not only look at the financial key figures but always take the company as a whole into account when it comes to an insolvency.
After all, the lack of liquid funds is usually the result of bad business decisions and not just financial misjudgments. My top 5 reasons for insolvency therefore deviate from the conventional approach of simply looking at the figures in the balance sheet.
Reason 1: Poor funding
This is (almost) always due to a lack of liquidity. Either the company did not have sufficient financial means right from the start or it suffers from poor receivables management.
In practice, this means: Your customers pay their bills too late and by the time you finally receive their payments you are literally up to your neck in debt. While you have sold your products or services, you are still unable to pay your costs in a timely manner.
One way of mitigating this problem is to introduce shorter payment terms and tools to send out automated payment reminders.
Reason 2: Staff management issues
If your staff base fluctuates a great deal and you have to constantly train new hires, or well-trained employees frequently leave the company, this is not a sign of a sound employee management.
The result: The costs for the company are too high and the benefit provided by the staff is too low.
As an entrepreneur, you should then think about ways of introducing conditions in which fluctuation goes down and you are able to keep productive, happy, and loyal employees who stay with your company for years.
Reason 3: Not enough customers or not the right ones
If you do not have enough customers, the problem could be related to deficiencies in your marketing strategy or product development, which may not be sufficiently focused on the needs of the market.
A frequent problem when you do not have enough customers: high dependency on a small number of customers, which creates enormous pricing pressure. This usually means that you will sell your products or services under value.
If you have the wrong customers, this means that the resources needed to serve or supply these customers exceed the benefit. As a result, you usually fail to earn enough for the products or services provided by your company.
Reason 4: Deficiencies in internal processes
Internal processes are an important cost driver in companies that is often neglected. Failure to define workflows or standardize processes can waste huge amounts of money as it means that certain work steps take double or even triple the effort and others are not even carried out at all.
The result: You have “invisible” cost drivers and no control over them.
On paper, the solution is relatively simple: You have to standardize as many processes as possible and describe them in a process handbook (preferably digital).
For all tax matters, for example, it is advisable to set up a Tax-CMS.
Reason 5: No differentiation from the competition
This aspect reaches far into product development and also marketing but it is hugely important from an entrepreneurial point of view. After all, it is also one of the reasons for insolvency that is often underestimated.
The result: Without differentiation, you or your products are exchangeable, and you will be exposed to constant pricing pressure.
In order to solve this problem, it is often necessary to completely rework your product range or reposition your company.
How often does it come to a failure to file the request for insolvency in good time in Germany?
According to statistics provided by the German Federal Criminal Police Office (BKA) there were a total of 11,283 cases of delayed filing for insolvency in 2016. This means that the police at least investigated every third insolvency with regard to a potential delay in filing.
Economic damage amounted to more than EUR 1.5 billion. Offences related to insolvency are thus by far the most damaging form of economic fraud in Germany, ahead even of tax fraud, market manipulation or investment fraud.
Three measures you can take to protect your company from insolvency in the long term
The best protection against delayed filing for insolvency is to prevent an insolvency at (almost) any cost. Therefore, you need to put your company on a financially sound footing. The following three concrete measures will help you with this:
1) Draw up budgets and improve cost management
A budget comprises the planning of probable income and expenditure in a financial year. By determining an exact budget, you are forced to plan most expenses in advance. This makes it easier for most companies to keep cost discipline and avoid unnecessary expenses.
You define your objectives in advance and then state the resources needed to achieve them in your budget.
2) Prepare a half-year balance sheet and recognize problems at an early stage
A half-year balance sheet is a balance sheet halfway through the financial year. This allows you to see at an early stage where your company stands financially and whether you may have to take countermeasures in the second half of the year.
A half-yearly balance sheet therefore facilitates business planning and can also be used as a tool for tax structuring. After all it shows you whether you should bring forward investments or postpone them until the next financial year. This way you can optimize your tax burden.
3) Carry out target/actual comparison and avoid planning errors in the future
In a target/actual comparison, the actual figures from the balance sheet or the profit and loss account are compared with the budget calculated in the year before. If these figures do not add up at all, you urgently need to work on your budget preparation.
Sometimes, the deviation can be explained by unexpected events that occurred during the financial year. Often enough, however, not enough time was taken for planning and budgeting. If actual figures then deviate too far from the planning, your company may face tremendous difficulties.
Positive going concern forecast: This is how you manage to avert insolvency in the short term
If your company is insolvent or on the verge of insolvency, it is already too late for the above-explained measures. However, the going concern forecast is another way how you might still be able to save your company.
If you as managing director consider the going concern of the company to be possible despite the current insolvency, you can justify your view in a going concern forecast.
All statements and forecasts regarding the future development of the company must be substantiated by facts, however. Furthermore, you are personally liable for the accuracy of facts and forecasts.
This means for you: If you provide a positive going concern forecast, you must provide verifiable reasons for this.
If your forecast is based on wishful thinking or even false statements, this constitutes a criminal offence.
My advice: Be extra cautious here. As a last, desperate attempt to still save your business, this forecast is in most cases unsuitable and can get you into even more trouble.
Conclusion: Failure to file the request for insolvency in good time is an underrated risk
As the managing director of a GmbH, it is your legal duty to file for insolvency in good time if the company becomes illiquid. Otherwise, you will be liable to prosecution.
As a matter of fact: The maximum period of 3 weeks allowed between the established insolvency and the deadline in which you have to file for insolvency is very short.
Especially in larger companies with a complicated corporate structure, this period is hardly long enough to get a comprehensive overview or initiate rescue measures.
The result: In practice, attempts to rescue the company often continue to be made until the very last minute. This often leads to the statutory period being exceeded, which causes a failure to file the request for insolvency in good time. You as the managing director have thus breached your duty of care and are personally liable for the misconduct.
If you are the managing director and your company enters a difficult financial situation, the alarm bells should be ringing immediately.
You have to be very careful with short-term rescue measures such as the positive going concern forecast, as you may also be liable for this. When in doubt, the best solution is to file for insolvency immediately.
You have more questions regarding the delayed filing for insolvency?
If you have further questions about the failure to file the request for insolvency in good time, please feel free to visit me at my tax consultancy office.
As a tax consultant in Hamburg with many years of experience, I can point out important facts to look out for and advise on how to best proceed in the case of insolvency.
For a personal consultation you can reach me anytime by phone (+49 40 443311), e-mail (firstname.lastname@example.org) or via my contact form (click here).
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