Vol 9 (2012) - Issue 5

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How the New Director Liabilities for Causation of Insolvency under MoMiG Drive the Need for Solvency Opinions in Germany

1. Introduction
Leveraged transactions of differing size and volume are executed on a continuous basis, regardless of the state of the financial markets. In the most recent recession, as with prior recessions, a number of companies that carried a substantial amount of debt from prior leveraged transactions have become financially distressed and even faced insolvency. The last financial crisis contributed, at least in part, to a change in German corporate law, known as the Law for the Modernisation of the German Limited Liability Company Law and the Prevention of Misuse ('MoMiG'). As a result of MoMiG, the question of liability for causation of insolvency is more important for management than ever. Managing directors must now consider what steps they can take to protect themselves from potential challenges to decisions taken with regard to leveraged transactions.
As proposed in the official commentary to MoMiG (the 'Commentary'), managing directors are advised to use a solvency test which typically will be prepared by an independent financial advisor. A solvency opinion, which summarises the solvency test, is a financial opinion stating that, pro forma for the leveraged transaction, (i) the fair market value of the assets of the company exceeds the value of the stated liabilities and identified contingent liabilities of the company (the 'Balance Sheet Test'), (ii) the company should be able to pay its debts as they become absolute and mature (the 'Cash Flow Test'), and (iii) the company should not have an unreasonably low capital level for the business in which the company is engaged (the 'Reasonable Capital Test'). The opinion itself is supported by rigorous financial analysis, a summary of which is typically presented to and discussed with the managing directors. This instrument is used to support corporate decisions and protect management directors from claims of a fraudulent transfer (fraudulent conveyance) of assets.

2. Overview of liability standards
Before discussing solvency opinions further, the existing creditor protection standards need to be outlined. The revisions contained in MoMiG affect the following German creditor protection rules:
– Rules for capital protection: (Sec. 30, 31, 43 III GmbH; Sec. 57, 62, 93 II and III no. 1 AktG; the special case of the leveraged transaction is regulated by Sec. 71a AktG);
– Liability for causation of insolvency: (Sec. 64 III GmbHG respectively Sec. 92 II, III, Sec. 93 II and III no. 6 AktG);
– Liability for destruction of existence of a company: (Sec. 826 BGB); as well as
– Rules for contesting insolvency, especially intended contesting: (Sec. 133 I InsO).

Liability arising from a withdrawal which destroys the capital of a company and the rules for contesting insolvency can impose a duty to reimburse transaction proceeds upon a recipient of illegal transfers. Conversely, liability for causation of insolvency obligates management to reimburse payments made to shareholders.

3. Liability for causation of insolvency
Prior to MoMiG, company management could in general only be held liable for payments to shareholders that were made post-insolvency or after a determination of company 'over-indebtedness'. Under the revised law, the liability of management has been extended by making them responsible for payments to shareholders that consequently resulted in the company’s insolvency.