Authors
Leonard Szabo

Dr. Leonard Szabó

Senior Associate

Read More
Tobias Rhode

Tobias Rhode, LL.B.

Senior Associate

Read More
Authors
Leonard Szabo

Dr. Leonard Szabó

Senior Associate

Read More
Tobias Rhode

Tobias Rhode, LL.B.

Senior Associate

Read More

9 March 2022

R&I Update - March 2022 – 1 of 4 Insights

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

  • Quick read

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.

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