German Court Rules on How to Demonstrate Illiquidity

A company is illiquid if it is unable to meet its payment obligations when due (Art. 17 (2) sentence 1 of the German Insolvency Code (InsO)). Directors must file for insolvency without undue delay and at the latest within three weeks of illiquidity and failure to do so may result in severe civil and criminal liability. Illiquidity is usually assumed if a debtor's liquidity gap, the amount its liabilities exceed its assets, is 10% or more, and cannot be remedied within three weeks.

Decision

In a recent claim by insolvency administrators against directors for delay in filing for insolvency, the German Federal Court considered the evidence required to prove illiquidity. It held that this is not limited to a balance sheet for the three-week period but can also be shown by a liquidity status report and a financial analysis of the daily incoming and outgoing payments during this time.

Alternatively, the court will presume that a company is illiquid on a specific day if the administrator submits several daily liquidity status reports for the three-week period, showing that the significant liquidity gap existing on the relevant date could not be closed on any of those days. The court did not prescribe the number of daily liquidity status reports required, but it considered four to be sufficient in this case.

Key takeaways

This judgment shows that it is key that at the first signs of financial distress, a managing director continuously monitors and assesses the financial situation of the company and records this.

While this decision makes it easier for insolvency administrators to prove illiquidity, directors, in turn, can prove that there was no illiquidity, but merely a temporary delay in payments, by showing that on several days within the three weeks there were sufficient funds to pay the liabilities due.

BGH v. 28.06.2022 - II ZR 112/21

Here to help

To discuss the issues raised in this article in more detail, please contact a member of our Restructuring & Insolvency team.