How Can Managers Avoid Personal Liability for the Financial Impact of the Corona Crisis on the Company they Manage? Precautionary Measures to Avoid Insolvency
|Limited liability companies and stock companies must file for the opening of insolvency proceedings if they are unable to pay their open debts (illiquidity) or over-indebted without a positive prognosis. If such ground to file for insolvency has occurred, managers are obliged to file for insolvency as soon as possible, but at the latest within 60 days. Otherwise they are personally liable - without limitation - for damages caused by a delayed filing for insolvency (i.e. loss of new creditors and quota damage of old creditors). In Austrian practice, approximately 99% of all insolvency proceedings are opened due to illiquidity, whereby according to established case law illiquidity is presumed if 95% of the due debts cannot be paid when due.|
However, Section 69 para 2a of the Austrian Insolvency Code could provide some relief in the current situation. Austrian insolvency law provides that in the event of an insolvency triggered by exceptional circumstances (the law refers to natural disasters such as "floods, snow slides, snow pressure, landslides, hurricanes, earthquakes or similar disasters of comparable consequences"), the 60-day period is extended to 120 days.
In our view, there are good reasons to subsume the current crisis caused by the Coronavirus under the catchall criteria "similar disaster of comparable consequences" and therefore to apply the extended 120-day period. Mandatory prerequisite for such application is however, that the insolvency was) caused by the current Corona crisis or at least that the Corona crisis contributed to the occurrence of insolvency. Even if the period is extended to 120 days, managers may only exhaust this period as long as restructuring measures that are implemented within this (extended) period have a chance of success.
The Federal Government is attempting to avoid the spread of the virus through comprehensive measures that reduce personal contact between people. As welcome as these measures are, they lead or can lead to liquidity shortages due to a lack of turnover (e.g. in discotheques) or reduced turnover (e.g. restaurants, due to limited opening hours and low attendance). Further, slow payment of outstanding receivables is likely, especially as debtors may also have lower liquidity due to the Corona crisis. There is no need to say that companies must therefore adjust their liquidity planning, especially the 12-week cash flow plan, to the current situation.
The law clearly stipulates that managers are obliged to exercise the diligence of a prudent businessman in their management of the company. If they fail to do so, they are liable. The diligence of a prudent businessman also includes adapting liquidity planning to changing situations. This is also required by the Business Judgement Rule, which the legislator introduced as a 'safe harbor' a few years ago.
In our opinion it is therefore required by law that (probably almost all) companies reassess their sales expectations for the coming weeks. This may as well lead to higher sales in the food trade. Generally, however, this expectation will probably include lower sales, at least due to risk discounts (e.g. for uncertain supply chains). On the other hand, companies must now also keep a closer eye on their costs: In this newsletter, we will also show you possible measures to achieve this (possibilities, deferral of tax and ÖGK (Austrian health insurance company) contributions, short-time work and others).
We recommend checking and documenting the adapted liquidity planning and assessing whether this is in line with existing liquid funds or revolving credit facilities. It should also be assessed, whether such facilities are this is still fully available.
If there are significant changes in turnover, other measures must also be taken, such as the postponement of projects (if performance of such projects is still feasible at all; also in case of concluded contracts, this may be possible due to MAC clauses or force majeure) or the (partial) suspension of profit distributions. Please also note that you must include relevant information in the management report of the previous financial year - if such report has not yet been approved. (see)
All this also applies to group companies in Austria and abroad, that may be more or less affected by the crisis. Without open communication within the group - and in any case also externally in the event of serious risks for individual group companies - this will otherwise lead to even greater difficulties.