Germany: German startups may rely on borrowed funds

In a recent judgment on directors’ liability, the Higher Regional Court of Düsseldorf (Oberlandesgericht Düsseldorf) held that startup companies are not deemed to be overindebted if they are receiving adequate finance from their shareholders or third parties.

Background

Under German law, the directors of an overindebted company are obliged to file for the commencement of insolvency proceedings without undue delay and may be personally liable to creditors if they fail to do so. A company is overindebted if the value of its liabilities exceeds the value of its assets unless it is highly likely, considering all the circumstances, that the company will continue to exist within the next twelve months.

Decision

The Court held that it was highly likely that the company in this case would continue to exist while it was receiving loans from one of its shareholders to finance its business. It was not required that the company was making sufficient profits to fund itself for the next twelve months. A startup company can rely on funding from its shareholders or third parties provided that its directors are closely monitoring the company's financial requirements and the risks involved. This was the situation here and the directors were held not liable for the payments they made after the company had become insolvent.

Key takeaways

This commercially sensible decision is to be welcomed, but, company directors should seek professional advice to ensure that funding commitments meet the legal requirement to avoid the company’s insolvency and their own personal liability.

Oberlandesgericht Düsseldorf, 20 July 2021, 12 W 7/21