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Duties of the managing directors in times of the COVID-19-pandemic

The COVID-19-pandemic and the government measures taken in this context at federal and state level (such as the closure of facilities and retail stores, the issuing of quarantine orders and exit restrictions) have led to a considerable slump in the German economy, and the financial and capital markets are under considerable pressure.

Companies in many industries are directly affected by these negative economic effects in the form of interrupted supply chains, sometimes significant sales losses and the need for protective measures for employees. It is not uncommon for companies to face a concrete threat to their existence.

In these times of crisis, special demands are made on the management bodies of companies. In the following, an overview of the main legal obligations of the management of German stock corporations (Aktiengesellschaften, „AG„) and German limited liability companies (Gesellschaften mit beschränkter Haftung, GmbH„) in the current situation is given.

1. Allgemeine Sorgfaltspflicht und Haftung

The board members of an AG and the managing directors of a GmbH must exercise the diligence of a prudent and conscientious business man in their management. Managing directors who violate their duties are jointly and severally liable to the company for compensation of the resulting damage, Sections 93 subsec. 1 and 2, 43 subsec. 1 and 2 GmbHG.

As part of its duty of care, the management must avert damage to the company and respond to crises accordingly, in particular by drawing up or updating an individual business continuity plan, which includes the specific crisis scenarios for the respective company and any measures to avert them. The company’s liquidity planning must be continuously adjusted to changing circumstances and appropriate safeguarding measures must be taken. These include, for example, applying for short-time working, tax deferrals and deferrals of social security contributions, the use of (state) subsidies and loans and/or the initiation of reorganisation measures.

2. Pflicht zur Einführung eines Risikomanagementsystems

Irrespective of whether there is an (economic) crisis, but especially in times of crisis such as the COVID-19-pandemic, the board members of an AG must take appropriate measures in accordance with Section 91 subsec. 2 of the German Stock Corporation Act (AktG), in particular to set up a monitoring system so that developments that could jeopardise the continued existence of the company are identified at an early stage. In the prevailing opinion, this provision is in principle also to be applied accordingly to the GmbH, at least to the extent that its size, the complexity of its structure and its business activities make this necessary.

Hence, the management (group-wide) must both take suitable measures for early detection and install a monitoring system in the form of a comprehensive risk management system (see the IDW PS 340 auditing standard formulated by the Institute of German Economics (Institut der Deutschen Wirtschaft)). Essentially, the risks existing for the specific company (i) have to be identified, (ii) analysed with regard to their probability of occurrence and possible extent of damage, and (iii) measures for risk management (in particular through risk avoidance, reduction, transfer and compensation) have to be taken.

On this basis, the management must continuously determine the risks to the company in connection with the spread of the corona virus and the associated (government) measures on an individual basis, subject these risks to a forecast, what the probability of their occurrence is and what economic consequences may result for the company, and finally take the necessary measures to prevent or mitigate them.

The above-mentioned measures of risk analysis and risk management provide the management with entrepreneurial discretionary scope within the meaning of Section 93 subsec. 1 sentence 2 AktG. Accordingly, a breach of duty of the board members does not exist if the board member, when making (i) an entrepreneurial decision, (ii) could reasonably assume (iii) that he/she was acting in the best interests of the company (iv) on the basis of appropriate information. According to the prevailing opinion, this provision also applies to the actions of the managing directors of a GmbH.

On this basis, it is recommended that management should be advised to carry out risk analysis and risk management in relation to the COVID-19-pandemic on the basis of adequate information. Adequacy is assessed on a case-by-case basis. The depth of information must be based on a consideration of time pressure, risks of the decision and a cost-benefit ratio. On this basis, the decision must be in the best interests of the company, i.e. it must be in the company’s interest and free of personal or third-party interests. At this point, a weighing up of the measure taken against its not being taken and the taking of any other measures must be made. In particular, the long-term strengthening of earnings and competitiveness of the company and its products/services must be given priority. Long-term prospects and future business opportunities are of greater importance in this respect and may justify a loss of profits or higher costs in the short term.

3. Pflicht zur Einberufung einer Haupt-/ Gesellschafterversammlung

The catalogue of duties recognised in case law and literature includes the obligation of the management to have an overview of the economic and financial situation of the company at all times. The management should be able to continuously assess the liquidity and profitability as well as the development of turnover and to constantly monitor the solvency of the company.

If the drafting of the annual balance sheet or an interim balance sheet or if it is to be assumed in a dutiful discretion that a loss in the amount of half of the share capital/capital stock exists, the management must immediately convene the general meeting and notify it of this, Sections 92 subsec. 1 AktG, 49 subsec. 3 GmbHG. Irrespective of this, the management is recommended to inform the shareholders promptly about an economically critical development.

4. Überwachung der Insolvenzantragspflichten und Dokumentation

Pursuant to Section 15a oft he Germany Insolvency Act (Insolvenzordnung, „InsO“), the management must file an application for insolvency without culpable hesitation, but no later than three weeks after the occurrence of insolvency within the meaning of Section 17 InsO or overindebtedness within the meaning of Section 19 InsO of a legal entity.

The obligation to file for bankruptcy is in accordance with the law adopted on 27 March 2020 to mitigate the consequences of the COVID-19-pandemic in civil, insolvency and criminal proceedings is suspended until 30 September 2020. The suspension will only not take effect if the insolvency maturity (i) is not due to consequences of the COVID-19-pandemic or (ii) there is no prospect of eliminating an insolvency that has occurred. If the debtor was not insolvent on 31 December 2019, it is presumed that the insolvency maturity is due to the effects of the COVID-19-pandemic and there is a prospect of eliminating an existing insolvency.

In this context, it should be noted that the partial restriction of the obligation to file for insolvency does not release the management from an ongoing examination of whether there is a reason for filing for insolvency. Rather, the obligation to file for insolvency must be constantly monitored to determine whether the COVID-19-pandemic is causal for insolvency or over-indebtedness. The monitoring must be documented.

For the duration of the suspension of the obligation to file for insolvency, the management is granted liability relief in the form that payments are deemed to be compatible with the diligence of a prudent manager (cf. Sections 92 subsec. 2 sentence 2 AktG, 64 sentence 2 GmbHG), which are „made in the ordinary course of business“. Payments which serve to maintain or resume business operations or to implement a reorganisation concept are not to be regarded as contrary to due care.

If you have any questions in this context, we are at your disposal at any time.

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