24a) Regulatory content

Section 64 prohibits any reduction in the value of the assets (and hence the subsequent insolvency estate) of a GmbH, and so contains a prohibition on a reduction in assets.Lutter/Hommelhoff/Kleindiek, GmbHG, 18th ed. (2012), Section 64 marginal number 1 From the moment that technical insolvency occurs the managing director should, in the interests of the entirety of

28a) Occurrence of illiquidity

aa) Illiquidity

Illiquidity is defined in section 17 (2) InsO. This provision states that the debtor is illiquid if he is no longer able to meet his due payment obligations. This definition also applies with regard to section 64 GmbHG.Federal Court of Justice, verdict of 24.05.2005 – IX ZR 123/04, marginal number 8 = NZI 2005, 547 Illiquidity thus exists if, on a particular key date, the available liquid assets (credit balances on accounts, cash in hand, cheques, non-exhausted lines of credit) are not sufficient to cover the liabilities due on this key date. It is therefore in principle immaterial whether the GmbH actually pays its due liabilities or merely withholds payment, e.g. out of negligence, in order to procure an interest rate advantage or even to "shaft" the creditor. Mere unwillingness to pay does not constitute an inability to pay, i.e. illiquidity.Federal Court of Justice, verdict of 10.07.2014 – IX ZR 287/13, marginal number 6 = ZInsO 2014, 1661 marginal number 6 The one and only factor is whether the company would be able to meet its due obligations.

29If the shortfall in liquidity is only temporary or slight, this is a temporary stagnation of payments, not illiquidity. According to the Federal Court of Justice, a temporary stagnation of payments is only to be assumed if a liquidity gap that cannot be closed within three weeks is less than 10%, unless it is already foreseeable that the gap will rise to more than 10% in the near future.Federal Court of Justice, verdict of 24.05.2005 – IX ZR 123/04, principle 2 = BGHZ 163, 134 If, on the other hand, the liquidity gap is 10% or more and cannot be closed within three weeks, illiquidity must normally be assumed unless, exceptionally, it can be expected with a likelihood bordering on certainty that the liquidity gap will be closed or almost completely closed within the near future and the creditors can reasonably be expected to wait, having regard for the particular circumstances of the individual case.Federal Court of Justice, verdict of 24.05.2005 – IX ZR 123/04, principle 3 = BGHZ 163, 134 This definition, which has been expressed repeatedly by the Federal Court of Justice, leads to the follow steps to determine illiquidity.

30(1) Liquidity status as of a key date

The first step is to determine all obligations which are due and payable on a specific key date (liabilities I) and compare these with the liquid assets available on that key date (assets I). If the assets I exceed or at least cover the liabilities I, the company is liquid. If the assets I lag behind the liabilities I by less than 10%, the company is still liquid unless it is already foreseeable that the funding gap will be greater than 10% in the near future.Federal Court of Justice, verdict of 12.10.2006 – IX ZR 228/03, marginal number 27 = ZIP 2006, 2222, 2224 Even a funding gap of less than 10% is no longer simply a temporary stagnation of payments if it lasts longer than three to six months.IDW S 11, sec. 4.1.1, marginal number 17 at the end The Federal Court of Justicehas not given any definitive statement on this, but does say that an enterprise with a lasting albeit slight liquidity gap does not appear worth maintaining.Federal Court of Justice, verdict of 24.05.2005 – IX ZR 123/04, marginal number 18 = BGHZ 163, 134

31(2) Liquidity status over a period of time

If the liquidity gap is 10% or more, the funds accrued (or liquidated, where appropriate) within three weeks (assets II) and the new obligations maturing within the next three weeks (liabilities II) must be included in the liquidity statement.By far the prevailing view; in place of many: Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 38; Roth/Altmeppen, GmbHG, 8th ed. (2015), before Section 64 marginal number 19; Uhlenbruck/Mock, InsO, 14th ed. (2015) Section 17 marginal numbers 28, 84 f., 133 This gives the following calculation method:

Assets I + assets II                                                                                    

_________________ =   Funding ratio  >  90 %                                                                                  

Liabilities I + liabilities II                                                                               

32This calculation method (including not only the assets II. but also the liabilities II) has recently been confirmed by the Federal Court of JusticeFederal Court of Justice, verdict of 19.12.2017 - II ZR 88/16, marginal number 34 = NZI 2018, 204, 206.  Earlier statements by the Federal Court of Justice, whereas the funds that are available at the relevant time and to be liquidated within three weeks are (only) to be compared with the obligations maturing and called in on the same key date (and hence only with the liabilities I)Federal Court of Justice, verdict of 12.10.2006 – IX ZR 228/03, marginal number 28 = ZIP 2006, 2222, 2224; Federal Court of Justice, verdict of 14.05.2009 – IX ZR 63/08, marginal number 37 = ZInsO 2009, 1254, 1258; Federal Court of Justice, verdict of 18.07.2013 – IX ZR 143/12, marginal number 7 = ZIP2013, 2015, 2016  had led to heavy discussions among commentatorsBork, ZIP 2008, 1749, 1751; Prager/Jungclaus, FS-Wellensiek 2011, 101. 105ff.; Pape, WM 2008, 1949, 1955; Ganter, ZInsO 2011, 2297, 2300; Lutter/Hommelhoff/Kleindiek, GmbHG, 18th ed. (2012), annex to Section 64 marginal number 10; Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 38; Roth/Altmeppen, GmbHG, 8th ed. (2015), before Section 64 marginal number 19.  and enormous practical uncertainty among legal advisors. Mainly it has been criticised that not taking into account the liabilities II would trigger a backlog effect, because it means that the debtor would always be able to put supply liabilities off for three weeks (this is known as the backlog theory). As the Federal Court of Justice has now clearly stated that the liabilities II have to be taken into accoount und a debtor shall not be allowed to put off liabilities and use the backlog effect, in consultancy practice it is now clear that the managing director has to consider always the liabilities II in his advace liquidity projection. 

34(3) Further development

Even if there is a liquidity gap over a period of time of less than 10%, this must not (foreseeably) climb to more than 10% in the near future.Federal Court of Justice, verdict of 12.10.2006 – IX ZR 228/03, marginal number 27 = ZIP 2006, 2222 f. If a liquidity gap of more than 10% is already foreseeable, this leads to illiquidity straight away. Furthermore, illiquidity also exists if there is a liquidity gap of less than 10% and this cannot be closed within a reasonable period of time, for which four to six months can be assumed.IDW S 11, sec. 4.1.1, marginal number 17 at the end; Uhlenbruck/Mock, InsO, 17th ed. (2015), Section 17 marginal number 28

Conversely, even if there is a funding gap of 10% or more, the ability to meet payments can exceptionally be assumed if it can be expected with a likelihood bordering on certainty that the liquidity gap will be closed or almost completely closed in the near future and the creditors can reasonably be expected to wait, having regard for the particular circumstances of the individual case.Federal Court of Justice, verdict of 24.05.2005 – IX ZR 123/04, principle 3 = ZIP 2005, 1426; Federal Court of Justice, verdict of 12.10.2006 – X ZR 228/03, marginal number 27 = ZIP 2006, 2222 f. Here too, a period of not more than three or, in exceptional cases, six months should be considered.IDW S 11, sec. 4.1.1, marginal number 16; Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 17 marginal number 28

In light of these provisions, the "thirteen-week plan" has become established practice. Not least because of this, there will only be a few sets of circumstances in which a managing director can really rely on a liquidity gap of more than 10% being closed within the thirteen-week period, and he will ultimately bear the full risk in this regard, given the wording used by the Federal Court of Justice ("likelihood bordering on certainty"). If he can exceptionally rely on such a development, the liquidity gap must also be closed or almost completely closed, although a shortfall of less than 5% will be tolerated.Fischer, FS-Ganter, 2010, 153, 163 A reduction in the liquidity gap to less than 10% alone is not sufficient.

35bb) Suspension of payments

If the company has already suspended its payments, then under section 17 (2) clause 2 InsO illiquidity is refutably presumed.Federal Court of Justice, verdict of 12.10.2006 – IX ZR 228/03 = ZInsO 2006, 2012, 2011 A suspension of payments is behaviour of the debtor that is apparent to outside observers, recognisable for the relevant public and typically expressed in that he is unable to meet his mature payment obligations.Federal Court of Justice, verdict of 30.06.2011 – IX ZR 134/10, marginal number 12 = ZIP 2011, 1416; Federal Court of Justice, verdict of 18.07.2013 – IX ZR 143/12, marginal number 9 = ZIP 2013, 2015; Uhlenbruck/Mock, InsO, 14th ed. (2015), InsO, Section 17 marginal number 147; Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 41 At least the relevant public must gain the justified impression that the debtor is not in a position to satisfy his due payment liabilities. The actual non-payment of a considerable part of the mature obligations is sufficient for a suspension of payments.Federal Court of Justice, verdict of 30.06.2011 – IX ZR 134/10, marginal number 12 This applies even if very large sums of money are still paid, if they do not settle the major part of the total debts due.Federal Court of Justice, verdict of 30.06.2011 – IX ZR 134/10, marginal number 12 Even the non-payment of a single liability can establish a suspension of payments if the claim is not inconsiderable in terms of amount. If mature obligations existed in the period in question and these have not been settled by the time insolvency proceedings are opened, a suspension of payments in the period in question can normally be assumed.Federal Court of Justice, verdict of 30.06.2011 – IX ZR 134/10, marginal number 12 The fact of a suspension in payments does not constitute a ground for insolvency itself.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 17 marginal number 146 The fact of a suspension in payments ultimately enables the occurrence of illiquidity to be assumed based on external circumstances alone. Such circumstances include the delayed payment of wagesFederal Court of Justice, verdict of 14.02.2008 – IX ZR 38/04 = ZInsO 2008, 378, 380 or of social security contributions,Federal Court of Justice, ruling of 13.06.2006 – IX ZB 238/05 = ZInsO 2006, 827, 828 several enforcement measures,Federal Court of Justice, verdict of 30.06.2011 – IX ZR 134/10, marginal number 17 = ZInsO 2011, 1410 such as account attachments and the making of a statutory declaration,OLG Celle, verdict of 29.10.2006 – 2 W 114/01 = ZInsO 2001, 1106 the presentation of uncovered chequesUhlenbruck/Mock, InsO, 14th ed. (2015), Section 17 marginal number 158 and the debtor's own declaration that he is unable to settle a mature obligation.Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 64

If such circumstances appear to pertain, this ultimately makes it easier for the suing insolvency administrator to present the case for illiquidity because illiquidity can then be concluded from the suspension of payments. In that case it is incumbent upon the sued managing director to demonstrate, with the aid of a liquidity balance sheet if necessary, that the company was not illiquid on the date in question.

36cc) Occurrence

Illiquidity as of a key date occurs on the day on which a liquid shortfall exists, not merely a temporary stagnation of payments. The managing director must therefore apply suitable control instruments to monitor the liquidity of the company on a continuous basis, and in a crisis situation at reasonable intervals, because liability occurs at once upon the occurrence of illiquidity and not only after the three-week period allowed for filing for insolvency has elapsed.Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 32

37b) Establishment of overindebtedness

Overindebtedness is legally defined in section 19 (2) clause 1 InsO. According to this provision, an enterprise is overindebted if the assets no longer cover its existing liabilities, unless it is highly likely, considering the circumstances, that the enterprise will continue to exist as a going concern. The standard has had an eventful history, with different meanings being ascribed to the term over the course of time.The various overindebtedness concepts are presented in Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 3 ff. There are also a large number of methodical approaches for how overindebtedness is to be verified.The various methods are presented in MüKo-Drukarczik/Schüler, 3rd ed. (2013), Section 19 marginal numbers 41, 43 and 45 Notwithstanding the terminology and the method chosen, there are three main pillars for determining overindebtedness:

• Overindebtedness within the meaning of insolvency law is not related to overindebtedness in the commercial or tax balance sheet.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 17
• The assets and liabilities can only be reported at their going-concern value in the overindebtedness balance sheet if the continued existence of the enterprise is highly likely (positive going-concern prognosis).Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 59 b
• If the going-concern prognosis is positive, the question of mathematical overindebtedness is moot; in this case, overindebtedness in the legal sense is not assumed.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 41; Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal numbers 47a, 59b

38The preparation of an overindebtedness statement at going-concern values (as in the commercial balance sheet) is therefore actually a redundant step. Ultimately, however, in the event of a positive going-concern prognosis (in which case the overindebtedness balance sheet would be measured at going-concern values) mathematical overindebtedness (and hence an overindebtedness balance sheet) is moot. Conversely, if the going-concern prognosis is negative the overindebtedness balance sheet must be prepared at liquidation values. In the final analysis there are only two relevant criteria for determining overindebtedness, at least one of which must be positive: the going-concern prognosis or the overindebtedness balance sheet at liquidation values.

Which of the two criteria is examined first is a matter of preference. The actual case in hand will generally indicate which feature is easier to determine.

Whether these two features are preceded by an overindebtedness statement at going-concern values – which is generally easily derived from the commercial balance sheet – as a sort of guide is likewise a matter of preference.

A practice-oriented presentation can therefore be limited to considering the two above features of the going-concern prognosis and mathematical overindebtedness at liquidation values.

39aa) Going-concern prognosis

The going-concern prognosis focuses on whether the enterprise can be assumed to be able to pay its way in the medium term.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 213 It is as yet unclear whether a positive going-concern prognosis also presupposes the profitability of the enterprise,See for instance AG Hamburg, ruling of 02.12.2011 – 67 c IN 421/11 = ZInsO 2012, 183, 184 i.e. whether it must foreseeably be able to "break even". This cannot be of relevance for the purposes of a liquidity prognosis, however.See also Hamburger Kommentar/Schröder, InsO, 5th ed. (2015), Section 19 marginal number 16 f. It is likewise immaterial whether all liabilities of the enterprise can be redeemed,Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 214 or whether the equity at the end of the prognosis period is positive and therefore able to eliminate the mathematical overindebtedness.

The prognosis period is one to two years, although there are no fixed limits. The prognosis period must be manageable and calculable from a business management perspective.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 214 The current and subsequent financial year have since become established in practice as the prognosis period, echoing the IDW S 6 standard.IDW Standard: Anforderungen an die Erstellung von Sanierungskonzepten, IDW S 6, as at: 20.08.2012, Düsseldorf 2012, marginal number 13 The prognosis period may need to be extended in the individual case, however, e.g. in project business if relevant projects are only brought to completion over a longer term, or if a turnaround following reorganisation measures is not anticipated until later.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 218 If it is not possible to draft serious plans longer than a year in advance, it makes no sense to base a prognosis on what would ultimately be arbitrary plans for a longer period of time. If the planning horizon is short, however, it will be necessary to renew the going-concern prognosis at short intervals.

40What requirements are to be placed on such a going-concern prognosis is a matter of debate. This is because the wording of the law does not indicate clearly whether a business plan – perhaps to be prepared externally – is required. However, the Federal Court of Justice has inferred this requirement – at least in principle – from the former section 19 (2) clause 2 InsO.Federal Court of Justice, ruling of 09.10.2006 – II ZR 303/05 = ZIP 2006, 2171 Certainly, the many different requirements madeCf. Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 45 ff.; Lutter/Hommelhoff/Kleindiek, GmbHG, 18th ed. (2012), marginal number 28; Scholz/Schmidt, GmbHG, 11th ed. (2015), before Section 64 marginal number 32 ff.; IDW S 11, sec. 5.3, marginal number 57 ff. can ultimately only be met by a full and comprehensive expert going-concern report, which is why obtaining advice from experts is recommended.Lutter/Hommelhoff/Kleindiek, GmbHG, 18th ed. (2012), marginal number 28; annex to Section 64 marginal number 28 at the end What this means in practice is that if there are signs of crisis, it will generally be necessary to commission a management consultancy that specialises in such matters to prepare a going-concern prognosis in compliance with insolvency law. Many smaller GmbHs thus fall at this hurdle simply due to these requirements on their ability to continue as a going concern, because an enterprise in crisis is often unable to meet the costs that would be incurred or the costs would in any case exhaust the resources for the last restructuring options. Against this background, too, overindebtedness as a ground for insolvency should be a matter for consideration in terms of legal policy,On the status of the debate: Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 6 ff. since the end effect is that only larger enterprises are allowed to continue as a going concern in the event of mathematical insolvency, while under some circumstances smaller enterprises may not be able to "buy" the legal prerequisites even if there are good prospects of continuation as a going concern.

41An expert report pursuant to the IDW S 6 standard is not demanded.Hamburger Kommentar/Schröder, InsO, 5th ed. (2015), Section 19 marginal number 54 There is as yet no dedicated IDW standard for the preparation of going-concern prognosis, with the exception of the relevant section of IDW S 11.IDW Standard: Beurteilung des Vorliegens von Insolvenzeröffnungsgründen (IDW S 11), sec. 5.3 Accordingly, what matters is the entire financial development of the enterprise for the planning period starting from the liquidity on the key date at the time of examination. The business plan and the financial plan are to be used as a basis for arriving at a qualitative and evaluative overall verdict on the viability of the enterprise in the foreseeable future. The aim is to enable a statement to be made, having regard for the assumptions made and the effects derived from them on the future profitability and liquidity, on whether sufficient financial resources are available that will allow the respective liabilities maturing in the planning horizon to be met. The going-concern prognosis thus consists of three stages: a plausible and conclusive business plan, a financial plan and the going-concern prognosis itself derived from the outcome of the financial plan.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 212

In principle, the managing director of a GmbH must be able – utilising internal company resources such as controlling, where necessary – to draft a corresponding concept himself. Nevertheless, he then runs the risk that a concept he has prepared himself will not satisfy these requirements later.

42bb) Overindebtedness balance sheet at liquidation values

If the going-concern prognosis is negative (or is not even produced in the first place), the overindebtedness statement at liquidation or knockdown values applies.Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 56 The liquidation value is the sale value of every single asset that is achievable in the event of the liquidation of the enterprise, although the costs of realisation and VAT must be deducted.HK/Kirchhof, InsO, 7th ed. (2014), Section 19 marginal number 15 The assumptions are based on a standard, planned liquidation process, not a special liquidation such as occurs in insolvency proceedings, for instance.Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 56a If different realisation options are considered, the most probable must be assumed. The following distinction must be made when considering and valuing the various assets and liabilities:

43(1) Measurement of the assets

On the assets side, the overindebtedness balance sheet must present all assets that would be realisable as parts of the estate in the event that insolvency proceedings were opened.Federal Court of Justice, verdict of 13.07.1992 – II ZR 269/91, marginal number 15 = NJW 1992, 2891, 2893 All items and rights belonging to the fixed and current assets are therefore to be capitalised.Federal Court of Justice, verdict of 27.10.1982 – VIII ZR 187/81, marginal number 15 = NJW 1983, 676, 677

44(a) Tangible fixed assets

Tangible fixed asserts are to be reported at their market value.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 133 The respective book value and any depreciation that has already been applied are irrelevant, since it is the actual liquidation value that will be applied in the overindebtedness balance sheet.Hamburger Kommentar/Schröder, InsO, 5th ed. (2015), Section 19 marginal number 29 Both undisclosed reserves and unrealised losses (e.g. contaminated sites) must be considered.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 133 With property in particular, the liquidation value may differ markedly from the book value.

45(b) Financial assets and investments

Financial assets and investments in other companies are in principle capitalised in the overindebtedness balance sheet at their fair or market value.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 141 If an investment cannot be transferred, but can instead only be terminated, the corresponding settlement claim must be included in the overindebtedness balance sheet.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 65a For securities it is the stock quotation, market price or other market value that prevails.

46(c) Intangible assets and goodwill

Intangible assets such as patents, brands, licences, utility models and trade marks may be capitalised in the overindebtedness balance sheet if they can be sold once the insolvency proceedings have opened.IDW S 11, sec. 5.4.3, marginal number 78; Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 77 with further numbers The value to be stated is the value an imaginary buyer would pay for the specific intangible asset. In the case of licences granted to the debtor for the use of third-party rights, it should be noted that such licences can only be considered in the overindebtedness balance sheet if they can be transferred.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 81 In the absence of transferability (e.g. if the licence is for exclusive use), they cannot be presented.

Goodwill cannot in principle be capitalised in the overindebtedness balance sheet because it is not normally possible to realise goodwill in the event of liquidation.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 82 with further numbers Capitalisation is only allowed if the enterprise as a whole or parts of the enterprise can be sold. However, this presupposes a specific offer of purchase in which the purchase price is expected to lie above the total of the liquidation values of the individual items of the operating assets.IDW S 11, sec. 5.4.3, marginal number 79; OLG Celle, verdict of 05.12.2001 – 9 U 204/01, marginal number 46 = NZG 2002, 730; OLG Frankfurt/Main, verdict of 25.10.2000 – 17 U 63/99, marginal number 40 = NZG 2001, 173

47(d) Items subject to rights of separate satisfaction or separation

If rights of separation exist on items of the fixed or current assets, i.e. a third party can assert on the basis of a right in rem or in personam that a particular asset does not belong to the insolvent estate (section 47 InsO), these items may not be considered in the overindebtedness balance sheet.

By contrast, items that are subject to separate satisfaction on the basis of a collateralisation of receivables of the company (sections 49 ff. InsO) do have to be considered in the overindebtedness balance sheet. The actual value of the item must be stated, not reduced by any costs of realisation.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 135

48(e) Inventories, work in progress, raw materials and supplies

Inventory stocks and raw materials and supplies must be capitalised if their realisation within the scope of liquidation is conceivable.Hamburger Kommentar/Schröder, InsO, 5th ed. (2015), Section 19 marginal number 31 In some circumstances, however, discounts must be applied to the book value (normally between 30 and 50 per cent).Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 138 Work in progress can be considered provided that it can be sold (otherwise only the scrap value is to be stated).Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 58

49(f) Receivables

Receivables are to be reported in the overindebtedness balance sheet if they are enforceable and have an achievable asset value.Federal Court of Justice, verdict of 18.10.2010 – II ZR 151/09, marginal number 18 – ZInsO 2010, 2396, marginal number 18 Nevertheless, a discount of between 20 and 50 per cent must be applied to trade receivables because customers become less willing to pay if they know that the debtor is technically insolvent.See Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 139 Disputed receivables can likewise be capitalised if and to the extent that there is justified hope of being able to realise them.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 67

50(g) Claims against shareholders and managing directors

If claims exist against one or more shareholders to the payment of outstanding contributions, such receivables – if they are to be regarded as having value – must be included in the overindebtedness balance sheet.IDW S 11, sec. 5.4.3, marginal number 77; Federal Court of Justice, verdict of 17.07.2006 – II ZR 178/05, marginal number 7 = DStR 2007, 1360 The same applies for any payment not yet made on an effectively approved capital increase.IDW S 11, sec. 5.4.3, marginal number 77

Likewise, claims that can arise regardless of the opening of insolvency proceedings are to be capitalised in the overindebtedness balance sheet. These include in particular liability claims against members of the management or supervisory institution (especially claims under section 43 GmbHG or section 93 of the German Stock Corporation Act (AktG).Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 51 However, capitalisation is not allowed if the relevant member of the institution does not have the ability to pay or there is no serious intention to prosecute.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 113 f.

On the other hand, claims that only arise in favour of the insolvency estate once the insolvency proceedings are open (and hence can only be asserted by the insolvency administrator) must not be included in the overindebtedness balance sheet. This applies in particular for

• claims arising from the personal liability of partners (e.g. section 128 HGB);Hamburger Kommentar/Schröder, InsO, 5th ed. (2015), Section 19 marginal number 27
• claims for damages against the managing directors due to delay in filing for insolvency (section 15a (1) InsO in conjunction with section 823 (2) BGB);Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 115 and
• claims for damages against the partners due to delay in filing for insolvency if the company is without management (section 15a (3) InsO in conjunction with section 823 (2) BGB).Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 96

51Claims against members of institutions on account of a reduction in the value of the estate (section 64 GmbHG, section 92 (2) AktG, section 130a (2) HGB) constitute a special case. Although such liability cases are typically asserted by the insolvency administrator only after the insolvency proceedings have opened, these claims must still be capitalised in the overindebtedness balance sheet because the claim arose when the prohibited payment was made.Federal Court of Justice, ruling of 23.09.2010 – IX ZB 204/09, marginal number 13 ff. = ZInsO 2010, 2101, marginal number 13 ff. Possible counterclaims of the institution member (in particular to the assignment of any claims to reimbursement that the insolvency estate may have against third parties that are to be assigned to the member in the case of unreduced paymentFederal Court of Justice, verdict of 08.01.2001 – II ZR 88/99, marginal number 32 = ZInsO 2001, 260 marginal number 32 ) are, however, to be shown on the liabilities side, so that claims on account of a reduction in the value of the estate can as a result be at least partly "balance sheet neutral".Hamburger Kommentar/Schröder, InsO, 5th ed. (2015), Section 19 marginal number 25

If a claim against a partner or a managing director is capable of inclusion in the overindebtedness balance sheet, such a claim must be in principle be stated at the nominal value.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 145 Valuation adjustments may frequently need to be made, however, if it is to be assumed that the partner or managing director against whom action is taken is not fully able to pay.

52(h) Letter of comfort

Given the various different kinds of letter of comfort, a distinction must be made when considering whether they can be capitalised (in the debtor's overindebtedness balance sheet):

Only what are known as "hard" and "internal" letters of comfort can be capitalised.IDW S 11, sec. 5.4.3, marginal number 80 A "hard" letter of comfort – in contrast to a "soft" one – means that a binding claim against the guarantor is established. In addition, the letter of comfort must be internal, i.e. given to the debtor, and effective vis-à-vis all creditors.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 109

If a hard letter of comfort is given internally to the debtor, i.e. the debtor acquires a claim against the guarantor, the debtor can capitalise such a claim from the hard, internal letter of comfort in his overindebtedness balance sheet,Federal Court of Justice, verdict of 19.05.2011 – IX ZR 9/10, marginal number 20 f. = NZI 2011, 536, 537 at any rate if a restitution claim of the guarantor is expressly made subordinate or is waived.Maier-Reimer/Etzbach, NJW 2011, 1110, 1116

53The claim against the guarantor that arises from the letter of comfort must also retain its full value, which is only the case if the guarantor is actually in a position to compensate for all unfunded liabilities of the debtor.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 110 On the other hand, it is immaterial if the letter of comfort can be terminated (even at short notice), since a termination would only have effect on the future claims, whereas the guarantor would remain liable until the termination took effect.Federal Court of Justice, verdict of 20.09.2010 – II ZR 296/08, marginal number 29 = NJW 2010, 3442, 3444

A hard letter of comfort that the guarantor gives in favour of individual or all creditors of the debtor (known as an "external" letter of comfort) cannot be capitalised in the overindebtedness balance sheet of the debtor, however, because in such cases the debtor does not acquire any (capitalisable) claim of his own against the guarantor.Federal Court of Justice, verdict of 19.05.2011 – IX ZR 9/10, marginal number 20 f. = NZI 2011, 536, 538; OLG Celle, verdict of 18.06.2008 – 9 U 14/08 = NZG 2009, 308, 309; Maier-Reimer/Etzbach, NJW 2011, 1110, 1117

54(i) Prepaid expenses

Prepaid expenses (e.g. rent or insurance premiums paid in advance) may be included in the overindebtedness balance sheet if the early termination of the contract is possible and a repayment claim exists.IDW S 11, sec. 5.4.3, marginal number 81

55(2) Measurement of the liabilities

All liabilities that already exist or are likely to arise must be stated at their nominal value on the liabilities side of the overindebtedness balance sheet.Hamburger Kommentar/Schröder, InsO, 5th ed. (2015), Section 19 marginal number 37 Their due dates are irrelevant.OLG Hamburg, verdict of 20.06.2013 – 11 U 107/11 = ZInsO 2013, 1517, 1519 On the other hand, equity items are not to be included in the overindebtedness balance sheet.Hamburger Kommentar/Schröder, InsO, 5th ed. (2015), Section 19 marginal number 38 The same applies for liabilities that are only created through the opening of insolvency proceedings.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 200

56(a) Liabilities

All liabilities that exist at present and could establish insolvency claims in the event that insolvency proceedings are opened must be presented in the overindebtedness balance sheet.Federal Court of Justice, verdict of 27.10.1982 – VIII ZR 187/81, marginal number 15 = BB 1982, 2161 They include in principle all kinds of liabilities, e.g. from trade payables and services, bank liabilities, obligations arising out of bills of exchange, down payments received and tax debts.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 148

Liabilities that are not yet due or are deferred must likewise be stated.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number  150 In the case of disputed liabilities, a suitable provision must be formed according to the likelihood of the liability being asserted.OLG Naumburg, verdict of 24.11.2006 – 10 U 50/06 = DStR 2007, 1220; Hamburger Kommentar/Schröder, InsO, 5th ed. (2015), Section 19 marginal number 41

A liability must be classified on the liabilities side even if a security for the liability had been granted by a third party. The security itself cannot be capitalised, however, since the provider of the security normally has a right of recourse against the debtor. The duty of classification as a liability continues to exist even if the provider of the security waives his right of recourse or subordinates it accordingly, because in these circumstances also the debtor continues to run the risk of direct recourse.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 152; for an alternative view, Hamburger Kommentar/Schröder, InsO, 5th ed. (2015), Section 19 marginal number 42

57(b) Subordinated liabilities

Subordinated liabilities must be shown on the liabilities side of the overindebtedness balance sheet if the subordination applies only to the insolvency proceedings. If subordination outside insolvency proceedings as well is agreed, though, such a subordinated liability does not need to be reported.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 157

58(c) Subordination

According to section 19 (2) clause 2 InsO, claims in respect of the restitution of shareholder loans or claims deriving from legal transactions corresponding in economic terms to such a loan, for which the creditors and the debtor have agreed, in accordance with section 39 subsection (2), that they shall rank lower behind the claims set out in section 39 subsection (1), nos. 1 to 5 in the insolvency proceedings, are not to be considered as liabilities in the overindebtedness balance sheet.

It follows from this that claims to the restitution of shareholder loans for which no subordination has been agreed are to be considered in the overindebtedness balance sheet even if they are lower-ranking insolvency claims pursuant to section 39 (1) nos. 1 to 5 of the Act.Federal Court of Justice, ruling of 01.03.2010 – II ZR 13/09, marginal number 6 = ZInsO 2010, 1069 marginal number 6; IDW S 11, sec. 5.4.3, marginal number 86

Only if the shareholder has expressly declared subordination to the rank of section 39 (2) InsO is the claim for which subordination was declared not to be shown as a liability in the overindebtedness balance sheet. The shareholder must expressly withdraw his claims behind the claims – already subordinated in the insolvency proceedings on the basis of statutory regulations – within the meaning of section 39 (1) nos. 1 to 5 InsO (claims within the meaning of section 39 (1) nos. 1 to 5 InsO include, for instance, current interest claims that have arisen since the opening of the insolvency proceedings, punitive fines, financial penalties and administrative fines, as well as claims to the restitution of shareholder loans for which no subordination had explicitly been agreed). In the event of a distribution, claims for which subordination within the meaning of section 39 (2) InsO has been agreed are only considered immediately before the claims of partners to the restitution of their original contributions, i.e. once all insolvency creditors and all subordinated insolvency claims pursuant to section 39 (1) nos. 1 to 5 InsO have been satisfied.

If the company has reached a subordination agreement with a third party whereby the third party withdraws its claim to the rank of section 39 (2) InsO, such a claim is likewise not to be shown on the liabilities side of the overindebtedness balance sheet.IDW S 11, sec. 5.4.3, marginal number 86

59(d) Provisions

Provisions are only partially considered in the overindebtedness balance sheet:

provisions for disputed liabilities (the dispute may be about the existence of the liability or about its amount) are to be included as liabilities in the overindebtedness balance sheet if it is expected that they will be asserted.Federal Court of Justice, verdict of 22.09.2003 – II ZR 229/02, marginal number 18 = NJW 2003, 3629, 3631; IDW S 11, sec. 5.4.3., marginal number 84 Instead of the cautious estimated value required by the HGB, the expected value is stated in the overindebtedness balance sheet.IDW S 11, sec. 5.4.3, marginal number 84

Since the continuation of business operations is unlikely in the event of a negative going-concern prognosis, provisions for the closure and winding-up of the enterprise must also be included in the overindebtedness balance sheet.See KG Berlin, verdict of 01.11.2005 – 7 U 49/05, marginal number 35 = ZInsO 2006, 437, 439; Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 164; Scholz/Bitter, GmbHG, 11th ed. (2015), before Section 64 marginal number 62 In particular, the costs and tax charges associated with a liquidation (e.g. contract penalties, repayment obligations, costs for a social plan) must be considered.IDW S 11, sec. 5.4.1, marginal number 72 and sec. 5.4.3., marginal number 84 On the other hand, the costs expected to arise due to insolvency proceedings (e.g. the costs of the proceedings including the fees of the insolvency administrator) are not to be considered as provisions, as these costs will of course not arise if there is no overindebtedness.Scholz/Bitter, GmbHG, 11th ed. (2015), before Section 64 marginal number 62; Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 53

Unlike in the commercial balance sheet, provisions for expected losses from executory contracts (section 249 (1) 1 alt. 2 HGB), provisions for deferred maintenance expenses (section 249 (1) 2 no. 1 HGB) and provisions for warranty expenses incurred without any legal obligation (section 249 (1) 2 no. 2 HGB) are not to be reported as liabilities in the overindebtedness balance sheet because, in the event of insolvency, they would not have a negative impact on the insolvency estate.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 160 f.

60(e) Pension obligations

Pension obligations, i.e. current pension obligations and vested pension rights, are to be stated as liabilities at their actuarial cash value.Hamburger Kommentar/Schröder, InsO, 5th ed. (2015), Section 19 marginal number 40; IDW S 11, sec. 5.4.3, marginal number 85 Non-vested claims, on the other hand, are not to be considered if they do not have to be serviced.IDW S 11, sec. 5.4.3, marginal number 85

61(f) Claims of partners

Entitlements of partners to profits must be classified as liabilities if a resolution on the appropriation of net earnings has already been adopted.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 167 Nevertheless, this duty can be avoided if the relevant partner subordinates his claim to the rank of section 39 (2) InsO. Partners are under no requirement to offer such a subordination, however, not even under fiduciary duties in corporate law and not even if other partners have already declared such a subordination.OLG Frankfurt/Main, ruling of 07.10.2013 – 5 U 135/13 = ZIP 2013, 2022, 2023

Settlement claims of partners are likewise to be stated as liabilities if they have already arisen.OLG Hamburg, verdict of 20.06.2013 – 11 U 107/11 = ZInsO 2013, 1517, 1519

62(g) Claims to the restitution of public subsidies

Subsidies received from state aid or other public subsidies must be shown on the liabilities side if there is an obligation to repay them in the event that the enterprise is closed.IDW S 11, sec. 5.4.3, marginal number 83

63(h) Deferred income

Like prepaid expenses, deferred income must be considered if it has the nature of an advance performance.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 195

64cc) Establishment of overindebtedness

The question arises as to when the managing director is first under an obligation to examine whether overindebtedness exists. In smaller enterprises in particular, it is probably not the practice for management to continually produce going-concern prognosis in line with the requirements set out above. Since many enterprises – unless they still have considerable hidden reserves (e.g. if the company owns the land on which it has its premises) – are mathematically overindebted if liquidation values are applied, a positive going-concern prognosis is a prerequisite for not incurring a duty to file a request for insolvency.

The highest courts therefore expect every representative of a corporate institution to ensure that he is aware at all times of the financial position of the enterprise.Federal Court of Justice, verdict 14.05.2007 – II ZR 48/06, marginal number 16 = NJW 2007, 2118, 2120 This particularly includes the duties to check for overindebtedness and illiquidity.Federal Court of Justice, verdict 14.05.2007 – II ZR 48/06, marginal number 16 = NJW 2007, 2118, 2120

It is likewise recognised in the literature that an examination of whether a ground for insolvency exists is one of the general duties of the managing directors.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 47 In order to be more responsive to the requirements in practice, it is recognised – at least in the literature and also by courts of lower instance – that an overindebtedness test must normally be carried out not later than from the date when the ongoing review of the financial position of the company first reveals signs of crisis.OLG Naumburg, verdict of 20.08.2003 – 5 U 67/03 = GmbHR 2004, 361; Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 47 This is in particular to be the case if a shortfall not covered by equity has to be reported.Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 61 Further possible indications of crisis may include a collapse in sales, losses on bad debts, imminent losses, cash flow bottlenecks or a negative operating cash flow.Uhlenbruck/Mock, InsO, 14th ed. (2015), Section 19 marginal number 47

c) Making payments

65aa) Payments

The term "payment" must be interpreted broadly. In light of the purpose of the standard (the duty to safeguard the assets), it is understood to mean any reduction in the value of the realisable assets.Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 65 Thus it covers the giving away not only of money but also of goods, the encumbrance of assets (e.g. through pledging or the granting of other security rights)Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 65 and the negotiation of a debt through set-off or offsetting.Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 65 In the case that money is paid, it is not relevant whether the company actively makes the payment; the passive tolerance of debits is also considered payment within the meaning of this provision.Roth/Altmeppen, GmbHG, 8th ed. (2015), Section 64 marginal number 10 Where actual payments are made from accounts of the company, a distinction must be made between those run in debit or credit and (in the case of debit accounts) whether these are collateralised. Payments from credit accounts reduce the value of the assets of the company and therefore are without a doubt payments within the meaning of section 64. In the case of accounts run in debit, an outgoing payment does not reduce the value of the assets of the company but instead only increases the overdraft liability to the bank. The payment thus constitutes a mere exchange of creditors. Debit accounts are prohibited from receiving payments, however, because a liability (the overdraft owed to the bank) is thereby reduced and the company simultaneously loses the claim underlying the incoming payment. In a crisis situation, therefore, the managing director must in certain circumstances open a credit account in addition to the debit account and instruct the debtors of the GmbH to make payments only to this account in the future.Schmidt/Uhlenbruck, Die GmbH in der Krise, Sanierung und Insolvenz, 5th ed. (2016), marginal number 11.44 f. The managing director would thus have to ensure that a debit account goes increasingly overdrawn and that a credit account opened in parallel remains untouched and constantly increases in value through receipts.Schmidt/Uhlenbruck, Die GmbH in der Krise, Sanierung und Insolvenz, 5th ed. (2016), marginal number 11.45 It may be said, not without some justification, that in such conduct required by past precedent the managing director is not behaving properly towards his bank, which keeps the overdraft facility open on the assumption that payments will continue to flow into the account. This procedure seems questionable, at least if the claims underlying the incoming payments are assigned to the bank e.g. by way of a blanket security assignment (albeit this should not generally constitute a breach of the blanket security assignment). That is why the Federal Court of Justice permits the payment of claims assigned to the bank to a debit account.Federal Court of Justice , verdict of 23.06.2015 – II ZR 366/13 = ZIP 2015, 1480 To ensure that receipts from claims assigned as security cannot trigger a liability of the managing director, however, it is also essential that

1. the assignment by way of security was agreed before the company became technically insolvent and
2. the collected claim also arose and acquired value before the technical insolvency occurred.Federal Court of Justice, verdict of 23.06.2015 – II ZR 366/13 = ZIP 2015, 1480

This past precedent thus helps only over a very short period of time (normally over the three-week period allowed for filing for insolvency).

66Payments received on a debit account that is sufficiently collateralised from the company's assets are generally to be regarded differently. If the value of the securities is sufficient, payment into such an account does not constitute a reduction in the value of the estate because the security is released in the same amount in favour of the amount available for distribution to creditors.MüKo-H. F. Müller, GmbHG, 2nd ed. (2016), Section 64 marginal number 145 Conversely, payments made from collateralised debit accounts trigger a liability of the managing directorMüKo-H. F. Müller, GmbHG, 2nd ed. (2016), Section 64 marginal number 145 because it means the security (and hence an asset of the realisable estate) continues to be encumbered. However, this presupposes that the value of the security at the time of the outgoing payment was not yet fully exhausted by the negative current account balance existing on that date.

67bb) No indemnification in case of consideration

On the other hand, payments, which do not effectively reduce the estate, are permitted (they do not fall under clause 1, even though they are not privileged in the meaning of clause 2). If a reduction of the estate is compensated by a consideration, which is directly connected with the payment, the obligation to pay compensation no longer appliesFederal Court of Justice, verdict of 04.07.2017 - II ZR 319/15 = DStR 2017, 2060. . However, it is not required that the consideration is still part of the estate when insolvency proceedings are openedFederal Court of Justice, verdict of 18.11.2014 - II ZR 231/13 = DStR 2015, 180. . In any event, a direct connection between the reduction of the estate (by effecting the payment) and the corresponding compensation is required. Any other gain can, however, not be considered as sufficient compensation for a reduction of the estateFederal Court of Justice, verdict of 04.07.2017 - II ZR 319/15 = DStR 2017, 2060. . In order to compensate a reduction of the estate (which for itself would be subject to indemnification) a direct economic (not necessarily temporal) connection with the payment is requiredFederal Court of Justice, verdict of 04.07.2017 - II ZR 319/15 = DStR 2017, 2060. . A compensation may be considered as economically direct when payment matches with deliveryFederal Court of Justice, verdict of 04.07.2017 - II ZR 319/15 = DStR 2017, 2060. . This applies in all events when the payment effected by the company precedes the consideration granted to the company. In contrast, if the consideration (e. g. by delivery of goods) in favour of the company is provided before the corresponding payment is effecte by the company, the consideration shall have no compensatory effectHigher Regional Court of Munich, verdict of 22.06.2017 - 23 U 3769/16, marginal number 52 = NZG 2017, 1437, 1438. . The reason for the underlying court decision is the idea that the subsequent payment, after the compensatory consideration has already been provides to the company, leads to a reduction of the estate as the assets had already been increaded before by receiving the considerationHigher Regional Court of Munich, verdict of 22.06.2017 - 23 U 3769/16, marginal number 52 = NZG 2017, 1437, 1438. . However, if the advance delivery is subject to a retention of title (as regularly stipulated by the supplier' terms and conditions, as the case may be, also as "extended" retention of title), the title transfer may be considered as consideration directly connected with the payment rendered as the title transfer is dependent on such payment (thus the delivery for its own - without title - is no genuine "advance perfomance"). 

In addition, a compensating consideration has generally to be suitable for utilization by the creditorsFederal Court of Justice, verdict of 04.07.2017 - II ZR 319/15 = DStR 2017, 2060. . Work performance and other services, for example, can usually not be utilized by the creditorsFederal Court of Justice, verdict of 04.07.2017 - II ZR 319/15 = DStR 2017, 2060. . Therefore, loan payments and payments to service providers have to be indemnified unter cestion 64 clause 1, because the work or service provided in return for the payment is not suitable for utilization by the creditors.

The same applies to payments for energy supply and telecommunication servides as well as internet and cable television fees as such services do not increase the estate that can be used for the settlemant of the creditors and thus, they do not compensate the reduction of the estate by the paymentsFederal Court of Justice, verdict of 04.07.2017 - II ZR 319/15 = DStR 2017, 2060; regarding the question of whether such services may be privileged in therms of maintaining operations, please see lit. cc). .

Payments to legal and restructuring advisors, however, are permitted according to the decisions by the Federal Court of Justice. The prerequisites are, however, that the commissioning of these legal or restructuring advisors is, in the particular situation, both useful and necessary in order to avert disadvantages from the insolvency estate, and that the fees are paid for an appropriate perfomance being in the interest of the entirety of the creditorsFederal Court of Justice, verdict of 05.02.2007 - II ZR 51/06 = NZI 679, 680; Roth/Altmeppen, GmbHG, 8th ed. (2015), Section 64 marginal number 27. .

Any asset (granted to the company, increasing the estate and suitable for utilization by the creditors) has to be evaluated at liquidation values to assess the extent to which it can be considered as value-compensating considerationFederal Court of Justice, verdict of 04.07.2017 - II ZR 319/15 = DStR 2017, 2060. . Thus, low-value consumer goods (like a coffee delivery, as in the underlying case) are regularly not suitable as adequate compensationFederal Court of Justice, verdict of 04.07.2017 - II ZR 319/15 = DStR 2017, 2060. .

68cc) Privileged payments pursuant to section 64 clause 2

According to section 64 clause 2, payments may also be made after the occurrence of technical insolvency if they are compatible with the due diligence of a prudent businessman. Past precedent allows for a limited period of timeBaumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 73 payments that are absolutely essential in order to maintain business operations and to avoid an immediate sollapse of a company which could be restructured in insolvency proceedings, as well aspayments where the managing director would otherwise render himself criminally liable or personally liable to third parties (conflict of duties).

They include the settlement of electricity, water and heating costs,Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 73; Federal Court of Justice, ruling of 05.11.2007 – II ZR 262/06, marginal number 6 = ZIP 2008, 72, 73 telephone costs and insurance premiums.Scholz/Schmidt, GmbHG, 11th ed. (2015), Section 64 marginal number 52  .However, the Federal Court of Justice has recently questioned whether payments for energy supply and telecommunications services are really necessary to prevent an immediate collapse of a company which could also be restructured in insolvency proceedingsFederal Court of Justice, verdict of 04.07.2017 - II ZR 319/15 = DStR 2017, 2060, 2062. .

It is very doubtful whether wage and lease obligations are allowed to be paid. However, see Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 73 In the case of a lease, there is no cause to do so at all after technical insolvency has occurred because only in the rarest of cases would this lead to the immediate vacation of the leased premises. Even the payment of wages may only be continued for a short period, because otherwise the sanctionary character of the provision would be frustrated.Generally on this, Lutter/Hommelhoff/Kleindiek, GmbHG, 18th ed. (2012), Section 64 marginal number 12 Payments to suppliers may exceptionally be allowed in order to safeguard the necessary procurement of raw materials.MüKo-H. F. Müller, GmbHG, 2nd ed. (2016), Section 64 marginal number 154

69A justifying conflict of duties arises when the managing director has to pay the employee's share of social security contributions and the payroll tax and VAT.Federal Court of Justice, verdict of 02.06.2008 – II ZR 27/07 = NZG 2008, 628; Federal Court of Justice, verdict of 14.05.2007 – II ZR 48/06 = NJW 2007, 2118, 2119; Federal Court of Justice, verdict of 25.01.2011 – II ZR 196/09 = NZI 2011, 196 If the managing director fails to pay the social security contributions in time or at all, he commits a criminal act under section 266a of the German Criminal Code (StGB). Although in the eyes of the criminal law the managing director is likewise exculpated on account of his liability under section 64 clause 1 GmbHG, this applies only – which has not yet been finally clarifiedCf. Roth/Altmeppen, GmbHG, 8th ed. (2015), Section 64 marginal number 22 – within the three-week period allowed for filing for insolvency. Within the three-week period for filing for insolvency, then, the managing director has to a certain extent the option of whether or not to pay the social security contributions (employee's share). He can appeal on the basis of a justifying conflict of duties both vis-à-vis the social security institution (or in criminal proceedings under section 266a StGB) and vis-à-vis the insolvency administrator. Outside this three-week period the privilege applies only vis-à-vis the insolvency administrator,Federal Court of Justice, verdict of 25.01.2011 – II ZR 196/09 = NZI 2011, 196, 197 which is why in a crisis situation the managing director can only be advised always to pay the employee's share of the social security contributions. It should be noted that the liability privilege does not apply for the employer's share.

70Furthermore, the managing director runs the risk of being held personally liable to the tax authorities under section 69 of the German Fiscal Code (AO) for a failure to pay payroll tax and VAT, at least if the managing director settles other liabilities. According to past rulings of the Federal Fiscal Court, in the case of tax liability the managing director is not even privileged during the three-week period allowed for filing for insolvency.Cf. Roth/Altmeppen, GmbHG, 8th ed. (2015), Section 64 marginal number 22 Only if the managing director did not make any further payments whatsoever could he avoid his liability towards to the tax authorities. To the insolvency administrator, therefore, the managing director can appeal on the grounds of a justifying conflict of duties in the payment of payroll tax and VAT, even outside the three-week period.Federal Court of Justice, verdict of 25.01.2011 – II ZR 196/09, principle and marginal number 12, 13 = NZI 2011, 196, 197; Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 82; MüKo-H. F. Müller, GmbHG, 2nd ed. (2016), Section 64 marginal number 157 The managing director can likewise plead a justifying conflict of duties in the payment of arrears of payroll tax and VAT after the occurrence of technical insolvency.Federal Court of Justice, verdict of 25.01.2011 – II ZR 196/09, principle = NZI 2011, 196

71d) Subjective element

Liability presupposes the culpability of the managing director, for which simple negligence is sufficient.Federal Court of Justice, verdict of 27.03.2012 – II ZR 171/10 = ZIP 2012, 1174, marginal number 13 If payments are made from the assets of the company after it has become technically insolvent, culpability is generally assumed.Federal Court of Justice, verdict of 27.03.2012 – II ZR 171/10 = ZIP 2012, 1174, marginal number 13 The identifiability of technical insolvency is therefore sufficient, with even the identifiability being assumed as part of the culpability.Federal Court of Justice, verdict of 27.03.2012 – II ZR 171/10 = ZIP 2012, 1174, marginal number 13 The managing director is therefore recommended to obtain advice from a suitably qualified person where necessary.Federal Court of Justice, verdict of 27.03.2012 – II ZR 171/10 = ZIP 2012, 1174, marginal number 13 Anyone who does not obtain necessary legal advice acts culpably.Scholz/Schmidt, GmbHG, 11th ed. (2015), Section 64 marginal number 58 Culpability also extends to the managing director who is not responsible for the financial matters of the company (e.g. the technical director). The internal allocation of duties is in principle immaterial.MüKo-H.F. Müller, GmbHG, 2nd ed. (2016), Section 64 marginal number 145

There is thus a permanent duty of financial self-monitoring.Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 61, 84 If the managing director breaches this duty, he acts negligently.

Since culpability is assumed if the requirements for the objective element are met, it is incumbent upon the managing director to offer evidence in exculpation.Scholz/Schmidt, GmbHG, 11th ed. (2015), Section 64 marginal number 59

72e) Legal consequences

If the requirements of the provision are met, the managing director must refund the payments made without deduction.Federal Court of Justice, verdict of 08.01.2001 – II ZR 88/99 = BGHZ 146, 264 The claim is therefore a claim for compensation sui generis.Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 7; cf. also Schmidt/Uhlenbruck, Die GmbH in Krise, Sanierung und Insolvenz, 5th ed. (2016), marginal number 11.35, 2nd bullet point Accordingly, there is no possibility either of sharing the benefits (by the extinguishing of the liabilities redeemed by the payment) or of restricting the claim to the deterioration in the prospects of satisfaction of the creditors in terms of a quota loss.Federal Court of Justice, verdict of 05.02.2007 – II ZR 51/06 = ZIP 2007, 1501, marginal number 7 This also applies under the parallel provision of section 130a HGB (in conjunction with section 177a HGB) applicable for the GmbH & Co. KG, which speaks expressly of "indemnifying" from the damage caused. The Federal Court of Justice has put the legal consequences of the two provisions on an equal footing and made it clear that the "damage" already exists in the outflow of the funds.Federal Court of Justice, verdict of 05.02.2007 – II ZR 51/06 = ZIP 2007, 1501, marginal number 7 According to the Federal Court of Justice, then, it is immaterial whether one talks of a "claim to compensation sui generis" or a "claim to damages sui generis".

By contrast, Karsten Schmidt holds the claim as a particular embodiment of liability under section 823 (2) BGB in conjunction with section 15a InsO,Schmidt/Uhlenbruck, Die GmbH in der Krise, Sanierung und Insolvenz, 5th ed. (2016), marginal number 11.35; Scholz/Schmidt, GmbHG, 11th ed. (2015), Section 64 marginal number 63 with the significance of section 64 clause 1 lying in a diminution in the burden of presentation and proof. Altmeppen, on the other hand, sees as a legal consequence a duty on the managing director to compensate for the losses suffered during the delay in filing for insolvency.Roth/Altmeppen, GmbHG, 8th ed. (2015), Section 64 marginal number 40 ff. This will in particular entail a consideration of counterperformances,Roth/Altmeppen, GmbHG, 8th ed. (2015), Section 64 marginal number 15 and hence effectively a sharing of the benefits.

73The practical differences of this qualification are considerable. Past precedent has not limited the amount of the claim to the total damage suffered from the delay in filing for insolvency.Lutter/Hommelhoff/Kleindiek, GmbHG, 18th ed. (2012), Section 64 marginal numbers 3, 4

The managing director can further not plead that the return of the prohibited payment from the recipient could have been or could still be demanded by challenging the transaction in insolvency.Federal Court of Justice, verdict of 18.12.1995 – II ZR 277/94 = BGHZ 131, 325 Nevertheless, in analogous application of section 255 BGB the Federal Court of Justice – in this case actually relying on damages law – allows the contested claims to be assigned to the managing director contemporaneously against performance of the claim to compensation under section 64 clause 1.Federal Court of Justice,verdict of 08.01.2001 – II ZR 88/89 = BGHZ 146, 264, marginal number 32 The managing director can thus – at least in theory – mitigate his personal disadvantage by challenging the payments made to the satisfied creditors, assuming that the conditions for contest are met in the first place. Generally, however, such a recourse to challenge will fail on grounds of time alone, because according to section 146 (1) in conjunction with section 195 BGB the right to challenge becomes statute-barred three years after the insolvency proceedings are opened, and at present proceedings for liability under section 64 will often not even be concluded by then. That the managing director could plead, in liability proceedings, that the insolvency administrator had allowed such a right to challenge to lapse has not yet – as far as can be seen – been argued.

74The managing director further retains the right to file the creditor claim that has been satisfied as a result of his (prohibited) payment as an insolvency claim on the schedule once he has met his duty of restitution under section 64.Federal Court of Justice, verdict of 08.01.2001 – II ZR 88/99 = BGHZ 146, 264 The Federal Court of Justice states that the "counterclaim that in rank and amount is equivalent to the sum that the favoured company creditor would have received in the insolvency proceedings after restitution to the estate" could be pursued against the insolvency administrator.Federal Court of Justice, verdict of 08.01.2001 – II ZR 88/99 = BGHZ 146, 264 Such a reservation is to be included in the judgment ex officio.Federal Court of Justice, verdict of 11.07.2015 – II ZR 235/03 = ZIP 2005, 1550

75f) Section 64 clause 3

According to section 64 clause 3, the managing director is also liable for payments to shareholders if these had to lead to the company becoming illiquid, unless this was not recognisable whilst observing the due diligence of a prudent businessman. Whether this clause has any independent significance of its own alongside the prohibition on payments of clause 1 is highly doubtful.Cf. the explanations in Roth/Altmeppen, GmbHG, 8th ed. (2015), Section 64 marginal number 67 ff. The Federal Court of Justice also considers the scope of application "small".Federal Court of Justice, verdict of 09.10.2012 – II ZR 298/11 = BGHZ 195, 42, marginal number 13 Some see in it a liability for causing insolvency,MüKo-H.F. Müller, GmbHG, 1st ed. (2011), Section 64 marginal number 164 ff. because they say it already sanctions payments that are made before illiquidity occurred and in themselves lead to illiquidity, so that the prohibition on payments is brought forward in time and hence the protection of creditors is strengthened.MüKo-H.F. Müller, GmbHG, 1st ed. (2011), Section 64 marginal number 154; Lutter/Hommelhoff/Kleindiek, GmbHG, 18th ed. (2012), Section 64 marginal number 20 An infringement of the priority ranking of the creditors is already partly assumed,Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 94 ff. since clause 3 specifically sanctions payments to shareholders, who are in principle to be settled after the creditors. The clause certainly acquires significance if one assumes, with Karsten Schmidt, that clause 1 is only a particularly codified case (with a lower burden of proof) of liability for a tortious delay in filing for insolvency.Scholz/Schmidt, GmbHG, 11th ed. (2015), Section 64 marginal number 78 According to Karsten Schmidt, clause 3 is actually a complement to the bar on distribution of section 30.Scholz/Schmidt, GmbHG, 11th ed. (2015), Section 64 marginal number 79

The only consequence of clause 3 that is importance for practice is that the managing director has a right to refuse performance vis-à-vis the shareholders,Federal Court of Justice, verdict of 09.10.2012 – II ZR 298/11 = BGHZ 195, 42, principle 3 and marginal number 18; Lutter/Hommelhoff/Kleindiek, GmbHG, 18th ed. (2012), Section 64 marginal number 33; Scholz/Schmidt, GmbHG, 11th ed. (2015), Section 64 marginal number 91; for an alternative view, Roth/Altmeppen, GmbHG, 8th ed. (2015), Section 64 marginal number 81; Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 107 although this does not mean that the mature obligation to the shareholders could be left out of consideration in a liquidity balance sheet.Federal Court of Justice, verdict of 09.10.2012 – II ZR 298/11 = BGHZ 195, 42, principle 3 and marginal number 7; for an alternative view, MüKo-H.F. Müller, GmbHG, 1st ed. (2011), Section 64 marginal number 167

76g) Limitation period

According to clause 4 in conjunction with section 43 (4), the claim becomes statute-barred five years from the date it first arose. The claim arises at the time the payment reducing the value of the estate was made,Federal Court of Justice, verdict of 16.03.2009 – II ZR 32/08 = ZIP 2009, 956, marginal number 20 not only when the insolvency proceedings are opened or their opening is rejected for lack of assets.But see Rowedder/Schmidt-Leithoff/Schmidt-Leithoff/Baumert, GmbHG, 5th ed. (2013), Section 64 marginal number 22; likewise Roth/Altmeppen, GmbHG, 8th ed. (2015), Section 64 marginal number 30, who claims to see in every single payment only an accounting item. Thus every single payment triggers a new limitation period.MüKo-H.F. Müller, GmbHG, 2nd ed. (2016), Section 64 marginal number 153 This effectively means that the claim can only cover payments made within not more than five years of the opening of insolvency proceedings.

77In addition to section 64 liability, which normally only the insolvency administrator can assert (only in the case of rejection for lack of assets does an attachment of the claim by an individual creditor and hence an assertion by him come into consideration), the managing director is also liable to every single creditor under section 15a InsO in conjunction with section 823 (2) BGB.For an extensive explanation, Karsten Schmidt/Uhlenbruck, Die GmbH in Krise, Sanierung und Insolvenz, 5th ed. (2016), marginal number 11.1 ff.; Roth/Altmeppen, GmbHG, 8th ed. (2015), before Section 64 marginal number 121 ff. Accordingly, old creditors (i.e. those who were already creditors at the time technical insolvency occurred) can assert as a loss the deterioration in their insolvency quota brought about by the delay in filing for insolvency (known as the quota loss).Roth/Altmeppen, GmbHG, 8th ed. (2015), before Section 64 marginal number 122 Since in order to assert this claim the disadvantaged creditor would have to present his (hypothetical) prospects of satisfaction in the case that the request for insolvency had been filed in time, a quota loss is not asserted in practice. Of more relevance, on the other hand, is what is known as the new creditor's loss. Creditors who have entered into a contractual relationship with the insolvent GmbH or have continued to perform services for it after technical insolvency has occurred are damaged by the delay in filing for insolvency to the value of their advance performance (negative interestMüKo-Brandes/Gehrlein, InsO, 3rd ed. (2013), Section 92 marginal number 30 ), known as a contracting loss.Roth/Altmeppen, GmbHG, 8th ed. (2015), before Section 64 marginal number 128 Every new creditor can assert this loss individually. Section 92 InsO does not apply in this case.Federal Court of Justice, verdict of 07.11.1994 – II ZR 108/93 = NJW 1995, 398, 399

Section 64 clause 1 GmbHG.

Sections 130a in conjunction with section 177a HGB.

Section 92 (2) in conjunction with section 93 (3) no. 6 AktG.

Section 823 (2) BGB in conjunction with section 15a InsO.

78In litigation it is initially incumbent upon the company or the suing insolvency administrator to show and prove the technical insolvency. Having regard to illiquidity, the insolvency administrator must show and prove either the liquidity shortfall based on a liquidity balance sheet or the suspension of payments based on objective criteria. If the insolvency administrator can only show and prove circumstances for a suspension of payments, the managing director can rebut the statutory presumption of section 17 (2) 2 InsO by presenting a liquidity balance sheet. Having regard to overindebtedness, it is already sufficient for the insolvency administrator to assert and substantiate the mathematical overindebtedness of the company.Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 90 Indeed, it should be sufficient for the insolvency administrator to show mathematical insolvency based on liquidation values.So, at least, Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 90; likewise OLG Celle, verdict of 23.12.2003 – 9 U 176/03 = GmbHR 2004, 568, 569 The insolvency administrator meets this burden of proof by showing mathematical insolvency on the basis of the commercial balance sheet.Federal Court of Justice, verdict of 19.11.2013 – II ZR 229/11, marginal number 17 = NZI 2014, 232, 234 It is then incumbent upon the managing director to show and prove any higher valuations in the overindebtedness balance sheet and/or the existence of a positive going-concern prognosis.Scholz/Schmidt, GmbHG, 11th ed. (2015), Section 64 marginal number 204; Baumbach/Hueck/Haas, GmbHG, 20th ed. (2013), Section 64 marginal number 91

The suing insolvency administrator must also itemise all prohibited payments specifically by amount and recipient. The managing director must then show and prove for every single payment either that it did not lead to a reduction in the value of the estate or that it was compatible with the due diligence of a prudent businessman.

Local competence for a section 64 action rests with the local court at the registered office of the companyMüKo-H.F. Müller, GmbHG, 2nd ed. (2016), Section 64 marginal number 175 and the court of the domicile of the managing director (sections 12, 13 of the German Code of Civil Procedure, ZPO).

79Section 64 is of supreme importance in the practice of insolvency law. To avoid any liability when an enterprise is in crisis, it is absolutely essential that the managing directors seek legal advice.

The above does not claim to be an exhaustive presentation of all the problems that occur in practice and in particular is not a substitute for expert advice in the individual case. Even only a minor change in the circumstances at hand can result in a different legal assessment than the above explanations would suggest, since these tend to be based on typical sets of circumstances.

These explanations are the result of thorough research and are based on the extensive experience of the author in practice. Nevertheless, errors cannot be precluded. No warranty for the correctness and/or completeness of the above explanations is offered.