New restructuring law – new duties for the BoD

To be in a position to recognize an imminent insolvency in good time, the BoD is now required to monitor the company's solvency on a permanent and ongoing basis. Continuous monitoring is key to being able to implement a timely response.

Appropriate measures must be taken in the event of imminent insolvency, whereby the BoD must act with required urgency. Priority must be given to measures that have a direct impact on the company's solvency. 

Loss of capital is now regulated in Article 725a CO. Alongside the unchanged duties of the BoD to restructure, a new audit requirement in the event of a capital loss has been introduced in para. 2 CO, according to which the BoD must have the last annual financial statements audited with at least a limited audit. Where a company has not elected an auditor (so-called opting-out), the last annual financial statements are still subject to a limited audit prior to their approval by the general meeting. In this case, it is up to the BoD (and not the general meeting) to appoint a licensed auditor.

In the event that there is even a justified concern of overindebtedness, the BoD must immediately prepare interim financial statements at going concern and sale values. These interim financial statements must also be audited (even if the company has decided to opt out). Where the audited interim financial statements reveal the existence of over-indebtedness, the BoD is obliged to notify the court of this by filing the balance sheet (notice of overindebtedness). 

A notification of overindebtedness can only be omitted if there are subordinations in the amount of the overindebtedness or if there is a reasonable prospect of eliminating the overindebtedness within 90 days at the latest.

The 90-day period for out-of-court restructuring begins when the audited interim financial statements have been submitted. It could therefore be tempting to artificially extend the deadline by delaying the preparation of the annual financial statements or, in the absence of an auditor, by delaying the search for a licensed auditor. It is important to note, however, that such behavior could be qualified as a breach of the duty to act with required urgency.

Following the entry into force of the new restructuring law, the inclusion of interest in the corresponding subordination has to be ensured; failing this, the subordination would not be considered sufficient. This raises the question of how to treat “old” subordination agreements that do not meet the new requirements, i.e. do not include interest. Under the transitional provisions, existing agreements must be adapted to the new legislation within two years (i.e. by 31 December 2024). Whether this transitional provision applies to subordination agreements is, however, legally controversial, which is why the BoD should always conclude an addendum to the subordination agreement with the relevant creditor in order to create legal certainty. In light of the legal uncertainties, this should be resolved as quickly as possible, at the latest by 31 December 2024. 

According to prevailing doctrine, a subordination does not exempt the company from taking further restructuring measures, as subordinations are not considered to have a restructuring effect. A subordination with the sole aim of delaying a notification of overindebtedness and artificially keeping a company alive will therefore not release the BoD from the obligation to notify the court of the overindebtedness. This type of institutionalized subordination (without taking further restructuring measures) can be classified as an abuse of rights, in which case the auditors may have to notify the court themselves.

In principle, the BoD is required to continuously monitor solvency at all times. Should insolvency be imminent, suitable measures must be taken with the required urgency. Any subordination agreements must meet certain requirements. Specifically, interest must be included in the subordination and, in the case of "old" subordinations, an addendum should be concluded to record the interest in order to minimize any legal uncertainties and (liability risks).