Following several insolvency cases of high-flying start-up companies, a helpful recent ruling by the Higher Regional Court of Düsseldorf (Oberlandesgericht Düsseldorf) has specified the requirements for going concern forecasts for start-up companies.
Background
In cases of over-indebtedness, companies must file for insolvency under German law. The test for over-indebtedness requires a going concern forecast for the company, which – if positive – helps avoid an insolvency filing. Generally, only “hard” financial commitments by investors lead to a positive going concern forecast. “Soft” letters of comfort from investors, that are not legally binding, may only support a positive going concern forecast in exceptional cases.
Decision
Unlike the German Federal Court of Justice (Bundesgerichtshof), the Higher Regional Court of Düsseldorf has in the past adopted a start-up friendly approach (see our alert here) . In this recent ruling, the Court was willing to accept “soft” financial commitments by investors as a relevant factor in determining positive going concern forecasts where (a) the relevant start-up company can demonstrate a promising business development forecast and (b) that financial commitments have been made by an existing financially viable investor based on an up-to-date, realistic business plan.
Key takeaways
The Court is right to say that a start-up's ability to generate profits in the short term shall not be a prerequisite for a positive going concern forecast. However, the requirement for a “promising business development” forecast should take account of relevant market conditions, as investors' financial commitments to start-ups can depend on various factors not limited to the start-up's ability to self-finance its operations in the near future.
Find out more
To discuss the issues raised in this article in more detail, please contact a member of our Restructuring & Insolvency team or Venture Capital team.
Oberlandesgericht Düsseldorf, 9 February 2022, 12 U 54/21
