German supervisory boards' duty to actively supervise distressed companies

With insolvencies on the rise in Germany both the executive and supervisory boards of public companies need to be aware of their legal responsibilities in times of financial distress.  

When a company becomes insolvent the executive board is prohibited from making payments that do not align with the care of a prudent and conscientious manager. In practice, this is often misjudged. In the case of illiquidity or over-indebtedness, the executive board of a public company must promptly file for insolvency and are personally liable for any breach.

Supervisory board

The supervisory board has certain supervisory duties. Case law has emphasised that it must use all available resources to understand the company's economic situation. In cases of insolvency, the supervisory board is obliged to actively contribute to the filing of an insolvency application by the executive. Where the company or the insolvency administrator investigates breaches of duty, the supervisory board must prove that it fulfilled its duties properly.

Key Takeaways

• A high standard of diligence is expected from supervisory board members, especially in assessing the economic situation of the company.
• To avoid liability, it is advisable to establish a separate control structure alongside the executive board, possibly involving external consultants.
• This structure contributes to monitoring, transparency, and compliance with legal regulations.

Find out more

Our team is specialised in advising boards in times of financial distress. To discuss the issues raised in this article in more detail, please contact a member of our German Restructuring & Insolvency team.