Germany: Start-ups in a crisis - what to watch out for? Evaluation of recent German court decisions

In brief

German start-ups quite rightly promote an improved culture of failure, as exemplified in the US start-up environment. In fact, most start-ups fail: depending on the statistics, there is talk of a failure-rate of between 80% and 90% in the first five years after founding the company. The implementation of an innovative idea in one's own company is necessarily risky - but nothing ventured, nothing gained.



However, the risk of the founders should ideally be limited to the invested equity and the work expended, which are often irretrievably lost in the event of failure. Founders are aware of this risk and consciously accept it. What many people are less aware of is that in Germany there are very strict legal obligations to file for insolvency, the violation of which may lead to a personal liability of the managing directors - a late filing for insolvency is even punishable under criminal law. It is particularly problematic that German law - unlike other legal systems - not only requires the managing directors to check that the company is solvent at all times and, if this is no longer the case (i.e. in the event of illiquidity), to "pull the plug" in good time. Rather, due to the second existing mandatory insolvency reason of over-indebtedness (in addition to illiquidity), the management must assess in the form of a forecast whether the company is likely to be "financed through" for the next 12 months, which means: whether it will remain liquid during that timeframe. Such a liquidity forecast is naturally more difficult for start-ups than it is for other companies.

Accordingly, there are some calls for the concept of over-indebtedness, and in particular its component of the so-called "going concern forecast", to be interpreted differently in the case of start-ups than in the case of established companies. "Different" meaning "milder", namely in the sense that the uncertainties inherent to a start-up do not become a permanent threat of liability due to insolvency delay for the managing directors. Most recently, important German courts have ruled on this issue in a number of decisions, which is reason for us to summarize the status quo to hopefully shed some light for interested founders or managers of start-ups. To anticipate the essential result: Contrary to a promising decision of the Higher Regional Court of Düsseldorf (an important regional court), the yet more important Federal Court of Justice  ("BGH") has (unfortunately) not decided on a relief for start-ups.

Click here to access the full alert in English. 

Click here to access the German version: Deutschland: Start-Ups in der Krise - worauf ist zu
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Contact Information
Joachim Ponseck
Local Partner at BakerMcKenzie
Artur Swierczok
Counsel at BakerMcKenzie
Anja Moser
Senior Associate at BakerMcKenzie

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