In a corporate crisis, the involvement of external specialists is essential

Leaders League: Are the current economic difficulties in Germany driving higher insolvency rates?

Thomas Helck: “Insolvencies will increase in 2025” or “Further rise in the number of insolvencies” - these and similar-sounding headlines can currently be read more frequently in the business media. In view of high energy costs, rising interest rates and, in some cases, sharp wage increases in many sectors of the economy, economists expect the number of company insolvencies to continue to rise in the coming year.

In addition to the economic and administrative challenges that those responsible for the company have to overcome, insolvency proceedings also entail an increased risk of criminal liability. In Germany, information on insolvency proceedings is automatically passed on to the office of the public prosecutor, which then starts preliminary investigations and requests further information from the authorities, courts and banks in particular.

If the evaluation of this information reveals a suspicion of criminal offences, an ‘official’ investigation is initiated and further investigations are carried out, often involving searches of the insolvent company and the homes of the managing directors.

Which are the common criminal risks in insolvency cases?

In the event of a financial crisis at a company, management is confronted with increased duties of care. Failure to comply with these duties can not only lead to personal liability of the responsible people for financial losses, but can also land the management in prison, even if criminal offences are often ‘only’ punished by imposing a fine.

A key criminal provision is the delay in filing for insolvency, which is punishable by a fine or imprisonment of up to three years (Section 15a of the German Insolvency Code). According to this provision, if the company is insolvent, an effective application for insolvency must be filed immediately (within three weeks). If the company is overindebted, the deadline for filing for insolvency is six weeks.

The obligation to file an application primarily applies to the managing directors. However, the shareholders may also be obliged to file for insolvency, for example if the company is without management due to the (often very short-term) resignation of the management.

Another criminal offence that is regularly committed during a corporate crisis is the withholding and embezzlement of wages (Section 266a of the German Criminal Code). This penalizes employers who fail to pay social security contributions to the relevant collection agency (usually a health insurance fund) on time or at all.

In turn, management is responsible for the fulfilment of this obligation and in the event of a breach ‒ in addition to personal liability for the amounts not paid ‒ there is also the threat of a fine or a prison sentence of up to five years.

Some of the most important offences in insolvency criminal law are summarized under the term bankruptcy (Section 283 of the German Criminal Code). This criminal provision criminalizes the breach of formal obligations in a company crisis, such as failure to keep (or the manipulation of) commercial books or failure to prepare balance sheets. At the heart of the criminal offence, however, are acts by which the debtor in a crisis removes or conceals parts of the company’s assets or unfairly destroys, damages or renders them unusable.

Once again, the management of a company is exposed to these risks of criminal liability and the penalty for this is a fine or imprisonment for up to five years.

Other important criminal offences that regularly play a role in a corporate crisis include the preferential treatment of creditors (Section 283c of the German Criminal Code) and the preferential treatment of debtors (Section 283d of the German Criminal Code). The first offence prohibits a debtor from preferentially satisfying individual creditors and is punishable by a fine or imprisonment of up to two years. In the case of debtor favoritism, a perpetrator outside the company removes or conceals parts of the assets of a company in crisis and can be punished with a fine or imprisonment of up to five years.

Finally, the offence of fraud (Section 263 of the German Criminal Code) can also play a role in a corporate crisis, for example because products are purchased or liabilities entered into without informing the contracting party of the financial crisis in the knowledge that a company is insolvent. This can result in a fine or a prison sentence of up to five years.

Tell us about the risks for “De Facto” company directors.

The obligations of the aforementioned offences, which are punishable under criminal law, generally apply to managing directors who are formally appointed and entered in the commercial register.

However, individuals who do not hold a formal managing director position but play a significant role in the management of the company may also be subject to the same criminal liability risks. Under certain circumstances, these persons are categorized by the investigating authorities and courts as so-called de facto managing directors, even if there is also a formally appointed managing director.

However, the criminal liability of such persons for any insolvency offences committed during the crisis requires that they have assumed managing director functions to a significant extent, i.e. that they have a predominant position or have outsized importance in the running of a company. According to the so-called ‘six out of eight rule’, this should be the case if the de facto managing director is significantly involved in six of the following eight business areas of a company: (1) determining company policy, (2) company organization, (3) hiring employees, (4) shaping the business relationship with contractual partners, (5) negotiating with lenders, (6) raising salaries, (7) deciding tax matters and (8) managing the accounts.

Even if the requirements for the assumption of de facto management are very high, there is an increased risk in a crisis for individuals who are actively involved in the management of a company that they will become defendants in official investigations into insolvency offences.

 What should the primary goal of a company under criminal investigation be?

The primary goal is to defend yourself comprehensively against the accusations made by the public prosecutor’s office without losing the line of communication with the investigating authorities. Only with the appropriate tact and sensitivity can, for example, the investigation proceedings be discontinued due to insignificance (Section 153 of the German Code of Criminal Procedure) or, if necessary, discontinued against payment of a fine (Section 153a of the German Code of Criminal Procedure) and the case be settled ‘quietly’.

If the allegations are too serious and the public prosecutor’s office cannot be persuaded to discontinue the proceedings, it may also be possible to have the public prosecutor applying for a summary penalty order (Section 407 of the German Code of Criminal Procedure). In such a case, the conviction would take place in purely written proceedings without the public being informed. In any case, an indictment should be avoided, as this would lead to a public trial in court and there is a high risk that the allegations made would be picked up by the media to the detriment of the person concerned.

In a corporate crisis, it is important to quickly gain an overview of which obligations are subject to penalties and therefore have to be fulfilled as a top priority. If necessary, this should be done with the involvement of competent advisors. The involvement of external specialists is essential, particularly for business decisions that have a significant impact on the economic situation of the company.

Interview with: Dr. Thomas Helck, Founder, Helck Legal