The duty to notify losses under German Company Law – a case of liability for managing directors!
German legislators extended the suspension of the obligation to file for insolvency, such as for limited liability companies (GmbHs) that have filed a claim for financial aid due to the impact of the corona pandemic. This obligation was suspended until 31 January 2021 but has now been extended retroactively from 1 February until 30 April 2021. However, managing directors of companies must still comply with their duty to notify losses under German Company Law.
Contrary to the obligation to file for insolvency, the duty to notify losses under company law has not been suspended due to the COVID-19 pandemic. A managing director who fails to comply with this duty may not only be found liable for the resulting damages but may even be criminally liable.
What does the duty to notify losses under German Company Law mean?
For limited liability companies, the duty to notify losses is established in § 49 para. 3 of the German Limited Liability Companies Act (GmbHG). This requires managing directors to inform the shareholders without undue delay and to convene a meeting of shareholders if half of the share capital has been lost.
What time limits apply to the duty to notify losses under German Company Law?
“Without undue delay” generally does not mean immediately. The managing director should have the possibility of combining the notification of losses with proposals for restructuring or even initiating some measures. There is no rigid deadline. However, in light of § 121 para. 1 German Civil Code (BGB), waiting two weeks to notify the losses and convene a meeting of shareholders will generally not be considered “without undue delay”, unless there are special circumstances.
From a practical perspective, it should be noted that this period begins when the loss first appears based on a prudent judgment of the circumstances. In other words, when preparing the annual, monthly or quarterly reports, this period starts when the first figures already indicate that the duty to notify has been triggered and not first when the final financial reports are adopted and the exact amount of the losses is ascertained. Where there are doubts as to whether the losses exceed the thresholds to trigger the duty to notify, an interim statement must be prepared on the basis of the figures for the next month or quarter.
“Without undue delay” also applies to setting a time for the shareholders meeting. The law is designed to enable shareholders to take a swift decision. A managing director must therefore ensure that the shareholder meeting takes place as soon as possible in light of the notice periods.
Are there any special rules that apply in light of social distancing rules due to the COVID pandemic?
In light of the current social distancing rules due to the Coronavirus, there is some dispute as to whether there is still an obligation to convene a traditional meeting of shareholders (face-to-face meeting) or whether, exceptionally, resolutions can also be adopted by written procedure. As long as there is no legal certainty in this respect, in order to ensure that they fulfil their legal obligations under § 49 para. 3 German Limited Liability Companies Act, managing directors should state in the invitation to the shareholder’s meeting (face-to-face meeting) that the meeting may be held virtually and resolutions adopted by written procedure if all shareholders declare that they would prefer this approach.
What happens when the managing director breaches their duties?
If the managing director breaches their duty to convene a shareholder’s meeting, the managing director shall be liable towards the company for damages that could have been avoided had the managing director convened the shareholder’s meeting without undue delay.
If the managing director fails to inform the shareholders without undue delay or at all of the loss of half of the share capital, the shareholder can face criminal prosecution. A negligent breach of the duty to notify losses can result in a fine or imprisonment of up to a year imposed on the managing director; in the case of a willful breach of the duty, the managing director may face imprisonment for up to three years.
In light of the serious criminal and liability consequences, managing directors are well advised to constantly monitor the economic position of the company and to obtain an overview of the asset value if there are signs of critical developments (e.g. such as through the establishment of an efficient early warning and crisis management system). This is the only way for managing directors to guarantee that they can fulfil their duty to notify losses in good time.