Evaluation of a company’s illiquidity

In evaluating whether a German limited liability company (GmbH) is unable to pay its debts, liabilities which are due to the company’s shareholders have to be accounted for in the company’s balance sheets.

The German Federal Court of Justice (BGH) has held that liabilities towards the GmbH’s shareholders have to be treated like any other liability when evaluating the company’s ability to pay its future debts. The BGH therefore answered a question that had been in dispute among lower courts and German legal scholars. In its reasoning, the court confirmed that a company is insolvent due to illiquidity if for a period of at least three weeks it is unable to pay more than 90% of its debts.

Since section 64 (3rd sentence) German Limited Liability Companies Act (GmbHG) - which prohibits payments to company shareholders which inevitably lead to the company’s illiquidity - does not apply if the company is already illiquid at the time of payment, the court’s decision reduces the scope of the managing director’s liability under that provision. However, as the court points out, a managing director who makes payments after the company has become insolvent (whether by way of over-indebtedness or illiquidity) can still be held liable under Section 64 (1st sentence) GmbHG.

Finally, the BGH held that the managing director is entitled to withhold payment to the company’s shareholders if such payment would result in the managing director being held liable under section 64 GmbHG.

Federal Court of Justice, decision dated 9 October 2012 (II ZR 298/11)

Florian Puschmann