What does insolvency mean?
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What does insolvency mean?

Due to Corona, for the reason of insolvency of inability to pay, the obligation to file for insolvency was abolished for several months. Since October 1, 2020, it is applicable again. In concrete terms, this means that insolvent entrepreneurs must report their insolvency. However, what does insolvency or illiquidity by definition mean? In most cases, companies only report their insolvency when they have used up all their liquidity. Legally speaking, however, this is wrong – and can have serious consequences. That is why we would like to answer the questions „When is a liability due“ and „What does insolvency mean“?

What does insolvency mean and when is there a liability?

According to current case law, a liability in the civil law sense exists if:

  • one of the contracting parties has provided its services in accordance with the contract
  • the service has been invoiced in accordance with the contract and
  • The payment target stated in the invoice has been reached.

Note on payment terms: If the contract does not specify a payment term, the invoice amount is due immediately. This due date can be eliminated by separate agreements between the invoice recipient (client) and the invoicing party (contractor, supplier, service provider). These can be, for example, agreements on deferrals or payment by instalments.

Liability due according to § 17 Insolvency Code (§ 17 InsO)

A liability is also due if it is within the meaning of § 17 of the German Insolvency Code (§ 17 InsO). In principle, this refers to the usual due date under civil law – i.e. the point in time from which the creditor can demand payment. The BGH makes an exception in insolvency law to this principle: Receivables, which are not seriously demanded (for this purpose, a clear statement by the debtor is required) are considered as not due within the meaning of § 17 InsO.

What does insolvency mean? Liquidity on the reporting date

Insolvency exists if the own liquidity is not sufficient to cover payment on the day on which payment is due. Therefore, if it is foreseeable for an entrepreneur that he or she will not be able to pay an invoice on the day on which it is due at the latest, insolvency exists.

What does insolvency mean? The cover ratio

If – as described – liquidity on the payment date is not sufficient to settle an invoice, the company must prepare a liquidity plan for the next three weeks. If the planning shows that liquidity has been restored after the end of the three weeks, the only condition is „payment stagnation“. To explain: full liquidity is present when the liquidity ratio is 100 percent or more. In concrete terms, this means that sufficient liquidity is available or is flowing in to enable a company to pay all its invoices.

The presumed insolvency

If a liquidity plan is prepared and it turns out that the coverage ratio is below 100 percent but above 90 percent, there is a „presumed insolvency“. If the cover ratio is below 90 percent, this is an actual insolvency. In both cases, the liquidity planning that has been started must be continued. The period for this is three to six months. If, at the end of the analysis, it turns out that it is not possible to (re)establish full coverage of liquidity with a probability bordering on certainty, insolvency exists. If this is successful, the reverse conclusion is that there is solvency. This planning and consideration is extremely important. If insolvency occurs, this assumption has a major influence on the distribution of the burden of proof in court.

Our conclusion

Since October 1, 2020, there is again an obligation to file for insolvency for the reason for insolvency of the inability to pay. This means that companies in particular, which find themselves in a difficult economic situation because of the Corona crisis, must keep a close eye on their liquidity planning for the next three weeks. The criteria presented here must be taken into account. In order to avoid later personal liability of the company managers, they should record their planning and control mechanisms precisely.

If you have any questions as to whether in your case an insolvency exists, or if we may assist you in planning and controlling your liquidity, please contact us.

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Rechtsanwalt in Düsseldorf and Krefeld, Marcus Büscher
Marcus Büscher
Tel.: +49 211 – 9 0867 677