In 2021, the German legislator changed the rules of conduct by inserting a further section into the German Insolvency Code (InsO).

Background

Previously the law prohibited a managing director from executing any payments on behalf of a company in a state of over-indebtedness or insolvency (both reasons to apply for an insolvency proceeding) unless these payments were conducted with the care of a 'prudent and conscientious' manager. The problem was that the standard of care was quickly questioned by insolvency administrators and was difficult to prove. It became customary, therefore, to advise managing directors to restrain from making payments when the company was insolvent until such payments were consented to by the preliminary insolvency administrator.

What's new? 

A new exception has been added to the rules of management conduct according to which payments, made in the ordinary course of business, in particular payments made to maintain business operations, will be considered to be made with the due care and diligence of a prudent and conscientious manager.

This potentially clarifies managing directors' duties, allowing them to maintain business operations as long as creditors’ interests are not harmed. However, the German Federal Court has not yet given its opinion on how this new exception will be applied.

Key takeaway

Until this happens the advice to restrain from non-essential payments and seek the consent of preliminary insolvency administrators will most likely remain the standard practice.