Legal violations in cases of delay in filing for insolvency are a main area of manager liability litigation. In particular, claims for reimbursement of payments made after management should have filed for insolvency proceedings („insolvency maturity“) are attractive from the point of view of the insolvency administrator: The law generally makes managers liable for all payments made by the company after insolvency maturity; this goes a long way and leaves insolvency administrators little choice in pursuing the claims, especially if the claims are covered by D&O insurance. [i] For this reason, on our Blog we will from time to time make legal forays into practical aspects of directors' liability under section 15b InsO (prohibition of payments after insovelcy maturity) and section 15a InsO, section 823 BGB (delay in filing for insolvency), which can be important in court and in settlement discussions. The following article is the second of these forays. It deals with the concept of insolvency pursuant to section 17 (2) sentence 1 of the German insovency act (Insolvenordnung; „InsO“). This notion is central and one would think that enough time has passed to clarify the details since January 1, 1999, when the InsO came into force and replaced the former Bankruptcy Code, Composition Code and Integrated Enforcement Code. In fact, the Federal Court of Justice (Bundesgerichtshof, „BGH“; IXth Senate for Civil Matters) issued a fundamental ruling in 2005[ii], according to which illiquidity, not just a “short term stagnation of payments”, is to be affirmed if (1) there is a liquidity gap on the relevant calcualtion date examined, which (2) cannot be foreseeably eliminated within the next three weeks and (3) comprises 10% or more of “the total liabilities due” of the debtor. Correspondingy, illiquidity is determined from a combination of the static (reporting date-related) figures of the status with the dynamic (period-related) figures of a cash flow calculation. According to more recent rulings by the BGH, a series of financial status is also sufficient to “prove” illiquidity under certain circumstances. So does a change of the requriements of “proof” change what has to be proven? The question is a serious one, as the calculation of the three-week period as a prognostic and period-related component of illiquidity has both legal and calculatory weight. The calculation of the liquidity gap based solely on a series of financial status leads to significantly different results. It is worthy of note that the new IDW S 11 standard of the Institute of Public Auditors in Germany (Institut der Wirtschaftsprüfer) also uses financial status (rather than cash flow calculations for the three week period following the relevat reporting date) to calculate the illiquidity. This substantially increases the percentage “liquidity gap” on this basis compared to the BGH and warns that a calculation according to the BGH entails a risk of liability. This is a strong statement, because economic “standards” (not only in the case of § 17 InsO) have to follow the law, not the other way around. The combined calculation of static and dynamic figures according to the BGH is based on legal valuation aspects. The evidence must therefore be based on what is to be proven, not the other way around. Therefore, the warning in IDW S 11 that the application of the above-mentioned formula of the BGH entails liability risks for the appraiser can be reversed. All of this is reason enough to take a closer look at the issues raised in practice.

1. 1. § 15b InsO: Starting Points

[See Forray 1 of 20.08.2024].

1. 2. Questions Relating to Illiquidity: Legal „Tomograhies“

Solvency is of central legal importance: it triggers the obligation to file for insolvency in accordance with sections 17 and 15a InsO. It is a prerequisite for the liability of the management under section 15a InsO, section 823 BGB for delay in filing for insolvency and for liability under section 15b InsO for payments in the event of illiquidity. It is an important element in the right of avoidance under sections 129 et seq. InsO. And it ultimately determines whether restructuring proceedings are still possible under StaRUG: such proceedings are only possible in the event of imminent illiquidity, no longer in the event of actual illiquidity. Many judgments therefore revolve around solvency.

1. 1. 1. Starting Points

According to Section 17 (2) InsO, a debtor is insolvent if it is unable to meet its due payment obligations. Insolvency is therefore the inability of the debtor to meet its due payment obligations due to a lack of funds. [iii] According to the BGH, it must be distinguished from mere payment arrears, i.e. a merely temporary inability to pay the due obligations in full; the period within which the payment arrears must be eliminated is three weeks according to the BGH. [iv] Against this background, a two-step approach must be taken to the delimitation: [v] First, a “financial status” (the BGH also refers to this as a “liquidity status”) must be prepared as at the reporting date.This must compare the financial resources available on a reporting date with the liabilities due on that date.

If the financial status shows that the debtor can meet its due payment obligations, illiquidity is to be denied on the reporting date in question. If the financial status shows the opposite, the financial status must be supplemented by a forecast for the next three weeks and the two accounts must then be combined in a “liquidity balance sheet”.[vi] The term “liquidity balance sheet” used by the BGH is unfortunate because it fills the static (balance sheet date-related) term “balance sheet” with an additional dynamic (time period) consideration: On the assets side of the “liquidity balance sheet”, in addition to the funds available on the reporting date (assets I), the funds that are expected to be received or can be made liquid within three weeks (assets II) must be included and then related to the payment liabilities due and claimed on the reporting date (liabilities I) and the payment liabilities that are expected to be due and claimed within three weeks (liabilities II), i.e. assets I + II : liabilities I + II. [vii] If the numerator is 90%[viii] or less of the denominator, illiquidity is to be assumed as a rule according to the BGH, unless “it is to be expected with a probability bordering on certainty that the liquidity gap in question will soon be completely or almost completely closed and the creditors can reasonably be expected to wait according to the particular circumstances of the individual case”. This further period following the end of the three-week period may, in exceptional cases, be three to, under certain circumstances, a maximum of six months. [ix] The managing director must present and prove appropriate evidence for this. [x]

1. 1. 1. 1. Financial Status

The financial status records and compares the company's available cash and cash equivalents and its liabilities due. All due payment obligations must be taken into account, not just those demanded by reminder or asserted by legal action. It is necessary and sufficient that the creditor demands payment. [xi]

1. 1. 1. 2. “Liquidity Balance Sheet” in the Sense of the BGH

If the financial status reveals a liquidity gap, this must be supplemented by presenting the expected cash inflows and outflows in a sufficiently detailed financial plan on the basis of a financial plan to be drawn up in accordance with business management principles and derived from the company planning. [xii] The inflows of funds must take into account the inflows from the planned sales transactions as well as other cash-generating transactions. [xiii] In the case of cash outflows, existing and future liabilities must be taken into account insofar as they fall due within the forecast period. [xiv]

If this “liquidity balance sheet” (in business terms, a “financial plan” based on an initial financial status) shows that the initial liquidity gap will be closed, there is a mere cash shortfall and therefore no illiquidity. In this case, it is not necessary to extend the financial plan in terms of time; from the point of view of the time of assessment, liquidity gaps to be expected in the future are not to be qualified as having occurred, but as imminent illiquidity. [xv]

1. 1. 2. BGH: Demonstration of Illiquidity by Means of “Tomographic” Financial Status

The requirements of the BGH for a “liquidity balance sheet” are complex and not always easy to fulfill in practice. Different calculations are therefore also submitted in (avoidance and liability) proceedings, in particular series of financial statuses for successive reporting dates, as it were, as mentioned, legal “tomographies”, which are intended to provide a picture of the property by means of a layer-by-layer presentation. The BGH has repeatedly accommodated plaintiffs in this respect. Admittedly, these procedural facilitations of evidence do not affect the substantive requirements of illiquidity. [xvi]

1. 1. 1. 1. Starting Point: Procedural Burden of Substantiation

Hardly any BGH decision on illiquidity can do without the introductory remark that a party satisfies its burden of presentation in civil proceedings if it presents facts which, in conjunction with a legal proposition, are suitable to make the asserted right appear to have arisen in its person.

1. 1. 1. 2. Distinction Between Prognostic Assessments and Retrospective Assessments

On this basis, the IXth Senate on Civil Matters of the Federal Court of Justice (BGH) initially considered a liquidity balance sheet to be unnecessary in avoidance proceedings in a 2006 decision[xvii] if it can otherwise be established that the debtor “could not pay” a substantial part of its due liabilities. A “liquidity balance sheet” is only necessary if a forecast is required, i.e. when considering whether to file for insolvency. In the (retrospective) avoidance proceedings, according to the BGH, “it can also be determined in another way whether and what the debtor was able to pay”. Where there were liabilities due during the critical period that were no longer settled by the time the proceedings were opened, illiquidity at the time in question should generally be assumed. Something different only applies in avoidance proceedings if, due to specific circumstances that have subsequently changed, it could be assumed at the time that the debtor would be able to meet the liabilities in good time. The fact that there was not merely a delay in payment was therefore easily ascertainable in retrospect. There was therefore “no need for a forecast in this respect”.[xviii]

In 2022, the IXth Senate on Civil Matters supplemented this - again for the avoidance proceedings - by stating that it was sufficient for the plaintiff to submit “a financial status drawn up by himself” on the relevant calcualtion date and “a financial plan” for the following three weeks with a “day-by-day” comparison of incoming and outgoing payments and, on this basis, to submit “that the liquidity gap was not less than 77% on any of the individual days during this period”.[xix] The use of the term “financial plan” is incorrect here, as the plaintiff insolvency administrator had submitted the actual payments, i.e. a retrospective, day-by-day cash flow statement and not a financial “plan” that forecast expected cash inflows and outflows ex ante. [xx]

The vague terminology corresponds with a factual deficiency in the ruling: The fact that a liability has not been paid by the time proceedings are opened does not necessarily indicate insufficient funds. The debtor may have financial reserves to be capitalized within three weeks, which he does not redeem because he does not yet see the time for this, e.g. quick sales from a (rolling) warehouse, financial reserves to be capitalized at short notice (e.g. building society savings contracts) or performance reserves (use of cash discounts, short-time working, etc.). These financial reserves are not included in a financial status. However, they must be taken into account in accordance with the basic ruling of the IX Civil Senate of the of 2005, according to which a financial shortfall on one day does not lead to illiquidity, but the threshold value of 10% and, above all, the financial inflows and outflows of the following three weeks must be taken into account. [xxi] This requires a “plan” (to be drawn up from the perspective of the reporting date). Presumably, there were no planned inflows in the two decisions of the IX Civil Senate of 2006 and 2022, so that the judgments do not address this issue. However, the unfounded and cursory findings of the 2006 and 2022 rulings do not represent a departure from the detailed explanations in the 2005 ruling. However, the discrepancy that led to the aforementioned departure of the IDW S 11 from the BGH concept of the “liquidity plan” is already apparent here.

1. 1. 1. 3. Eligible Methods to Demonstrate Illiquidity in Civil Proceedings Under § 15b InsO
            1. Limitation to Retrospective Assessments

The easing of proof requirements does not apply to forecasts within the framework of § 15a InsO. This was outlined by the IX. Civil Senate in its 2006 ruling and was not questioned in its cursory judgment of 2022. It is important to emphasize that this distinction does not violate the aforementioned principle that § 17 para. 2 sentence 1 InsO must be assessed "solely based on the objective circumstances," [xxii] nor does it contradict the principle that the concept of illiquidity in § 15b InsO cannot be understood differently than in § 17 InsO, as "the existing insolvency maturity" is sufficient for the commencement of the payment prohibition "in objective terms." [xxiii] The outlined easing of proof requirements does not pertain to the facts of illiquidity itself but is limited to the procedural burden of substantiation and proof. Since the easing of proof requirements granted by the IX. Civil Senate for avoidance proceedings does not apply to the (ex ante to be made) forecast within the context of the obligation to file for insolvency under §§ 17, 15a InsO, it also cannot apply to the liability proceedings under § 15a InsO, § 823 BGB due to delayed insolvency filing. Because even in such liability proceedings, the ex ante perspective is assessed—therefore "objectively" not retrospectively, but prognostically within the framework of the three-week financial plan from the perspective of the relevant calcualtion date of the financial status. This must also fundamentally apply to proceedings under § 15b InsO; because even with the payment prohibition upon insolvency maturity, the ex ante forecast is crucial (as with § 15a InsO).

1. 1. 1. 1. 28. Jurisprudence of the IInd Senate on Civil Matters of the BGH

However, the Federal Court of Justice (IInd Senate on Civil Matters) has also opened up other methods to demonstrate illiquidity in addition to a liquidity balance sheet for the prohibition of payments in case of illiquidity:

In a ruling dated June 28, 2022, the IInd Senate on Civil Matters assessed a case (according to Section 64 of the Limited Liability Companies Act, GmbHG) in which the plaintiff, the insolvency administrator, had demonstrated "a significant liquidity gap for a period of three weeks starting from December 31, 2012." The BGH reiterated that illiquidity can be demonstrated not only through a liquidity balance but also by other means, without limiting this to avoidance proceedings. According to the II Civil Senate of the BGH, it is also permissible to present:

(1) a "liquidity status as of the reporting date in connection with a financial plan for the three weeks following the reporting date, where daily incoming and outgoing payments are compared";[xxiv] here, the IInd Senate on Civil Matters refers to the above-mentioned decision of the IXth Senate on Civil Matters from 2006 (in which the use of the term "financial plan" is incorrect; see above); and

(2) "several daily liquidity statuses in a meaningful number, where based on the status indicating a significant underfunding as of the reporting date, the liquidity gap cannot be significantly closed on any of the balance sheet days within the forecast period"; here too, it concerned a series of statuses that had been created retroactively. [xxv] On this basis, the IInd Senate on Civil Matters concluded that the plaintiff (i) submitted a report from an auditor for the underfunding of 54.8% of the available funds compared to the due liabilities as of the reporting date, and (ii) reported underfundings of 44.3%, 62.7%, and 45.7% for January 7, 2013, January 16, 2013, and January 21, 2013, respectively, which were also substantiated by the auditor's report.

Therefore, the plaintiff would have three methods of proof for Section 15b of the Insolvency Act (InsO) according to the IInd Senate on Civil Matters: (1) "liquidity balance," (2) liquidity status as of the reporting date in connection with a schedule for the three weeks following the reporting date, where daily actual incoming and outgoing payments are compared and the liquidity gap is significant on all days in this period (in this case, not less than 77% on any day), and (3) several daily liquidity statuses "in a meaningful number," in which, based on the status indicating significant underfunding as of the reporting date, the liquidity gap cannot be significantly closed on any of the balance sheet days within the "forecast period." [xxvi] The methods addressed by the IInd Senate on Civil Matters (2) and (3) are therefore retrospective. Methods (2) and (3) practically differ only in the number of statuses

1. 1. 1. 1. 55. Inconsistency of the Jurisprudence of the IInd Senate on Civil Matters

The IInd Senate on Civil Matters fundamentally relies on the avoidance jurisprudence of the IXth Senate on Civil Matters in its ruling from 2022. However, it has already been noted above in 2 b) that the relevant rulings of the IXth Senate on Civil Matters do not signify a departure from the requirement to consider the cash flows of the three-week period. In transferring methods (2) and (3) to Section 15b InsO, the IInd Senate on Civil Matters also overlooks that, while a process under Section 15b InsO—like an avoidance process—is conducted retrospectively, it pertains (as in the process under Section 15a InsO, Section 823 of the German Civil Code (BGB)) to the retrospective assessment of whether illiquidity could be assumed during the payment period (ex ante). This question contains prognostiv elements. It is therefore questionable whether the retrospective methods (2) and (3) can truly apply to Section 15b InsO.

Crucially, the presented calculation method of the "liquidity balance" (AI + AII : PI + PII) [xxvii][xxviii] yields significantly different coverage ratios than methods (2) and (3), which rely on series of financial statuses, even when the ex post figures from the retrospective methods (2) and (3) align with the ex ante figures. This will be elaborated on in detail in the next blog post (Survey 3). Methods (2) and (3) are not intended to materially alter the conditions for illiquidity but merely to facilitate their proof in the proceedings. The evidence should be aligned with what needs to be proven, not vice versa. They would fail to achieve this purpose if the liquidity gap calculated with their assistance deviates from the liquidity gap according to the "liquidity balance." Moreover, methods (2) and (3) deviate from the liquidity gap calculations that the BGH itself has extensively specified. Therefore, they are not tenable, especially if they are not viewed merely as means of easing the burden of proof.

1. 1. 1. 4. Burden of Proof Situation

From a procedural standpoint, even if one were to accept the evidence methods (2) and (3) of the IInd Senate on Civil Matters, it must at least hold true what the IXth Senate has stated regarding (retrospective) avoidance law: The defendant can argue that "due to specific circumstances that have subsequently changed, it could have been assumed at that time that the debtor would be able to meet the obligations in a timely manner."

In light of the substantive discrepancies between methods (2) and (3) on the one hand and the "liquidity balance" on the other, this objection holds not only procedural significance for the burden of substantiation and proof in the plaintiff's presentation according to methods (2) or (3) in liability proceedings under Section 15a of the Insolvency Act (InsO), Section 823 of the German Civil Code (BGB), and Section 15b InsO. If the objection is upheld, it rather corrects the results of methods (2) and (3) substantively. It is also important to note the secondary burden of proof for the plaintiff: If, in the liability process, the defendant is burdened with presenting exculpatory or contradictory facts that are no longer known to him or that require unreasonable efforts to clarify, while the company (here typically: the insolvency administrator) can reasonably provide information, it must do so; to the extent this is the case, it cannot merely accuse the opposing party of a lack of substantiation or contest it with a lack of knowledge, but must present its case; otherwise, Sections 138 (2) and the presumption of confession in Section 138 (3) of the Code of Civil Procedure (ZPO) apply. [xxix] In the proceedings in question, this leads to the obligations of the insolvency administrator to secure documents, particularly accounting records, of the debtor. [xxx] These are not up for discussion here.

All of this is not only a question of negligence but also of the conditions for illiquidity. [xxxi]

1. 1. 3. Interim Conclusion

There is no departure from the detailed statements of the rulings of the IXth Senate on Civil Matters from 2005 and the IInd Senate on Civil Matters from 2017, which state that a liquidity plan must be established for the three-week period following the relevant reporting date, in the easing of proof established by the BGH. It must still be considered, for example, that if the debtor has financial reserves that could be activated within three weeks, which he does not resort to because he does not yet see the time to be ripe, the proof must follow what needs to be proven, not the other way around. Therefore, IDW S 11 should not be followed either. This will be elaborated on in more detail in our next blog post (Legal

[i] BGH, Decision dated 18.11. 2020 - IV ZR 217/19.

[ii] BGH Decision dated 24.05.2005 - IX ZR 123/04, unter II 3 der Gründe.

[iii] Standard S 11 of the Institute of Auditors "Assessment of the Existence of Grounds for Opening Insolvency Proceedings," revised version dated May 20, 2024 ("IDW S 11"), para. 13, IDW Life 2024, pp. 673 ff. This IDW standard replaces IDW Auditing Standard: Recommendations for Auditing Existing or Imminent Insolvency in Companies (IDW PS 800) in the version of March 6, 2009, and the IDW statement of the Legal Committee 1/1996: Recommendations for the Examination of Over-Indebtedness in Companies (IDW St/FAR 1/1996).

[iv] BGH, Decision dated 24.05. 2005 - IX ZR 123/04, see II 2a of the opinion, BGHZ 163, 134, 138 ff.; Decision dated 21.06.2007 - IX ZR 231/04, ZIP 2007, 1469 para. 37; Decision dated 19.12.2017 – II ZR 88/16, para. 32 f.; IDW S 11 para. 14, 15.

[v] BGH, Decision dated 24.05. 2005 - IX ZR 123/04, unter II 2b der Gründe, BGHZ 163, 134; IDW S 11 Tz. 23 ff.; BGH, Decision dated 18.07.2013 - IX ZR 143/12, ZIP 2013, 2015 para. 7; BGH, Decision dated 28.04.2022, IX ZR 48/21, para. 18; IDW S 11, para. 13, IDW Life 2024, 673 ff.

[vi] BGH, Decision dated 19.07.2007 – IX XB 36/07, para. 18; IDW S 11, para. 26 ff.

[vii] BGH, Decision dated 19.12.2017 – II ZR 88/16, para. 34, 41 ff., 62.

[viii] Zur Herleitung der 10%-Grenze BGH, Decision dated 24.05. 2005 - IX ZR 123/04, unter II 4b der Gründe, BGHZ 163, 134, 138 ff.

[ix] BGH, Decision dated 24.05. 2005 - IX ZR 123/04, see II 4b of the opinion, BGHZ 163, 134, 138 ff.: „überschaubare Zeit“; BGH, Decision dated 28.06.2022, II ZR 112/21, para. 12; IDW S 11 para. 16, 25.

[x] In respect of the differeing requirements cf. IDW S 11, para. 17 f.

[xi] BGH, Decision dated 19.07.2007 – IX ZB 36/07, para. 18; IDW S 11 para. 26.

[xii] For more details see IDW S 11, para. 34.

[xiii] IDW S 11 para. 37.

[xiv] IDW S 11 para. 38

[xv] IDW S 11 para. 39.

[xvi] BGH, Decision dated 28.06.2022, II ZR 112/21, para. 11; BGH, Decision dated 21.05. 2007 - II ZR 266/04, ZIP 2007, 1524 para. 8; std. Rspr.

[xvii] BGH, Decision dated 12.10.2006 - IX ZR 228/03, para. 28.

[xviii] BGH, Decision dated 12.10.2006 - IX ZR 228/03, para. 28.

[xix] BGH, Decision dated 28.04.2022 – IX ZR 48/21, para. 18, 39

[xx] So auch IDW S 11, para. 25, Fn. 60.

[xxi] BGH Decision dated 24.05.2005 - IX ZR 123/04, unter II 3 der Gründe.

[xxii] BGH, Decision dated 12.10.2006, IX ZR 228/03, para. 28.

[xxiii] BGH, Decision dated 24.05. 2005 - IX ZR 123/04, unter II 1 der Gründe mit Hinweis auf BGHZ 143, 184, 185.

[xxiv] BGH, Decision dated 28.06.2022 – II ZR 112/21, para. 14, unter Verweis auf BGH, Decision dated 28.04.2022 - IX ZR 48/21, para. 18, 39, WM 2022, 1287, para. 18.

[xxv] BGH, Decision dated 28.06.2022 – II ZR 112/21, para. 14.

[xxvi] In this proceeding, the submitted statuses also reflected the actual figures of the past in the relevant three-week period; the term "forecast period" is therefore evidently not intended to indicate that it pertains to a prediction made from an ex ante perspective, but only to denote the assessment period of three weeks.

[xxvii] BGH, Decision dated 19.12.2017 – II ZR 88/16, para. 34, 41 ff., 62.

[xxviii] BGH, Decision dated 12.10.2006, IX ZR 228/03, para. 28; Decision dated 24.05.2005, IX ZR 123/04, BGHZ 163, 134, 138.

[xxix] BGH, Decision dated 05.05.2016 – II ZR 311/14, NZG 2016, 783, para. 19; Decision dated 11.04.2013, - I ZR 61/12, VersR 2014, 726, para. 31; Lange, Die prozessuale Sachverhaltsaufklärungsobliegenheit der Gesellschaft im Managerhaftungsprozess, Festschrift für Reuter, 2021, 209, 219.

[xxx] See Runkel in: FS Heinz Vallender, 2015, 555, 560; Ruchatz, AG 2015, 1, 3; BeckOGK/Traut, 01.10.2020, § 238 HGB, para. 56. These duties extend to both the time before and after the opening of insolvency proceedings, LG Frankfurt/Oder NZI 2007, 294, 295; MüKo InsO/Jaffé, 4. Auflage 2019, § 155 InsO, para. 4.

[xxxi] As regards negigence and intent (fault/Verschulden) cf. BGH Decision dated 24.05.2005 - IX ZR 123/04, under II 2 b of the opinion; BGHZ 143, 184, 185; BGH, Decision dated 01.03.1993 - II ZR 61/92, WM 1994, 1030, 1031.