New developments on over-indebtedness under German insolvency law and impact on start-ups

Under German insolvency law, a company is over-indebted when its existing assets do not fully cover its debts and there is no positive going concern prognosis. A positive going concern prognosis is assumed if the company has sufficient liquid funds available for a certain period to satisfy all liabilities at maturity and its profitability will be restored in accordance with a business plan.

Recent court decisions and legislative clarification 

Over-indebtedness remains a ground for insolvency 

The German legislator clarified in 2021 that over-indebtedness is still considered a mandatory ground for insolvency and the forecast period for a going concern prognosis is 12 months.

No elimination of over-indebtedness by soft letter of comfort 

In a recent decision (II ZR 84/20), the German Federal Court ruled that any ‘soft letter of comfort’ containing only declarations of intent is generally insufficient to avoid over-indebtedness. Only a ‘hard letter of comfort’ containing a valid and enforceable claim ensures a positive going concern prognosis and has the required positive effect on over-indebtedness.

No strict application of the principles for start-ups

The Düsseldorf Higher Regional Court has clarified in a decision (12 W 7/21) (see our article here) that the regulations for the determination of a going concern prognosis under insolvency law cannot be applied without restrictions to start-ups.  Restoration of profitability shall not be mandatory for the going concern prognosis of a start-up. The court also stated that a managing director of a start-up may, in a liquidity forecast, rely on existing financiers to cover further financing provided that no deviating statements occur.

Find out more

To discuss the issues raised in more detail, please contact a member of our Restructuring & Insolvency team.