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Cash Pooling – Part I

  • Germany
  • Banking and finance
  • Corporate
  • Restructuring and insolvency

18-05-2020

COVID-19-related risks for corporate bodies and shareholders of German limited liability companies

II. Civil and criminal liability

1. Civil and criminal liability of the managing directors of the pool subsidiary

Joint responsibility

It is important to point out that all corporate obligations are joint obligations of the managing directors of a German limited liability company (GmbH) (joint responsibility). Therefore, all managing directors will be jointly and severally liable for breaches of such obligations.

A division of business will only exempt the individual managing directors from parts of their responsibility and liability, if at all. If no business division plan is in place, all managing directors remain responsible for all tasks. If a business division plan is in place, it must be ensured that all tasks are clearly and precisely defined and that all managing directors keep each other informed about the situation in the respectively other business sections on a regular basis. Should one of the managing directors fail to comply with his or her duties, the other managing directors must intervene.

Liability based on payments to shareholders and group companies

By way of daily debits from the credit balance on the pool subsidiary's account, funds are (indirectly) paid out to the shareholder. The managing directors of the pool subsidiary will be (jointly and severally, if applicable) fully liable for any payments effected after the company became insolvent or after it was found to be overindebted, and/or for any payments to shareholders insofar as these unavoidably led to the company's insolvency, unless this could not have been foreseen even with due care (solvency forecast).

Any claims based on the above provisions will become statute-barred after five (5) years. In general, the company is not entitled to waive the compensation claim.

Furthermore, managing directors may be held criminally liable for breach of trust if they fail to perform adequate solvency checks and allow set-offs within the cash pool. This may expose managing directors to criminal sentences of up to five (5) years and of six (6) months to ten (10) years in particularly severe cases.

Criminal liability due to failure to pay social insurance contributions and taxes

If the pooling of funds leads to liquidity issues meaning that the employees' social insurance contributions or due taxes can no longer be paid, this may also constitute an additional criminal offence committed by the managing directors which may expose them to an additional prison sentence of up to five (5) years and in severe cases of between six (6) months and ten (10) years.

It is therefore always necessary to ensure that the employees' social insurance contributions are paid, in principle even if the managing directors have already submitted a request to open insolvency proceedings for the company. Insofar, the courts generally give priority to the duty to pay social insurance contributions and taxes.

Liability due to delayed insolvency request

Where a GmbH becomes illiquid or overindebted, the managing directors must file a request for the opening of proceedings without culpable delay, at the latest, however, three weeks after the commencement of the insolvency or overindebtedness. If the company is without leadership, i.e. in a period in which it does not have a managing director, each shareholder is also obliged to file the request unless the shareholder is unaware of the insolvency or overindebtedness or lack of leadership. If the request is filed too late or incorrectly, or not at all, a prison sentence of up to three years or a fine may be imposed on the individuals obliged to file the request.

2. Liability of the pool parent's managing directors

The pool parent is subject to a prohibition of discrimination regarding the pool subsidiaries. If the pool parent demands that the pool subsidiary participate in the cash pool and if this results in a breach of capital maintenance rules by the pool subsidiary, the managing directors of the pool parent will be liable for damages vis-à-vis the pool subsidiary.

In addition, the pool parent will also be responsible for any treasury companies which may be used; i.e. if the pool is managed by a treasury company rather than by the pool parent, any cash outflows from a pool subsidiary to a treasury company will nevertheless be deemed as an interference with the capital maintenance rules by the pool parent.

If the managing directors of the pool parent fail to comply with their monitoring duty and/or if they do not perform a solvency check themselves or maybe even cause a subsidiary to engage in harmful conduct, they may also be held personally and/or criminally liable. Prison sentences of up to ten (10) years are possible also in this respect.

3. Liability of supervisory board members

The supervisory board members of the pool parent and of the pool subsidiary are subject to information, consultation and monitoring duties. They must therefore ensure that an appropriate organisational and control structure is established in the companies, and they should also make sure that solvency checks are regularly performed on all levels. Supervisory board members may have to be proactive and check the financial situation of the respective company themselves if the managing directors or shareholders fail to perform a check (to the required standard).

If they fail to comply with these duties, they may become personally and/or even criminally liable vis-à-vis the respective companies. Prison sentences of up to ten (10) years are possible also in this respect.

4. Shareholders' direct liability

In general, shareholders aim to avoid personal liability by using a GmbH. Nevertheless, shareholders are also in principle subject to a prohibition of discrimination so that in individual cases (e.g. in case of severe interferences to the detriment of the company assets which lead to the company's insolvency), shareholders may also be directly and criminally liable.

5. D&O insurance

Many managing directors or even supervisory board members wrongly believe that a D&O insurance would protect them from a personal liability. In principle, however, D&O insurances only cover claims for damages under civil law but do not prevent a criminal liability.

Moreover, D&O insurances generally only cover financial losses; the high courts, however, do more often than not consider violations against the payment prohibition under insolvency law not as financial losses within this meaning.

Managing directors and supervisory board members should in any case have any existing D&O insurances reviewed to clarify the scope of their protection against claims for damages in connection with violations of obligations to maintain the capital and file an application for the opening of insolvency proceedings. It should be considered to have policies adjusted to the current circumstances.

III. Recommended actions

Group relationship agreement

If not yet in place, group relationship agreements should be concluded binding any and all managing directors of the companies participating in the cash pooling:

| to conduct/have regular and requested meetings/communication to exchange information, consult and coordinate and ensuring that the key financial data is not only disclosed by the pool subsidiaries to the pool parent (or treasury company) but also by the pool parent to any and all pool subsidiaries;

| establishing that the pool parent can terminate the cash pooling on its own accord as soon as it becomes aware of a lack of value;

| if not yet established, granting a right of termination for convenience (or for cause) to the pool subsidiaries' managing directors in case of a lack of value.

Contract clauses in case a bank manages the cash pool

If the cash pooling is managed by a bank, it is advisable for each company participating in the cash pooling:

| to agree specific credit limits and terms;

| to agree to conduct/have regular and requested meetings/communication to exchange information, consult and coordinate while ensuring that the key financial data is not only disclosed by the pool subsidiaries to the pool parent (or treasury company) but also by the pool parent to any and all pool subsidiaries;

| to grant a right of termination for convenience (or for cause) in case of a lack of value of the cash pool.

For managing directors

| regular solvency forecast;

| written documentation of the decisions by the managing directors;

| introduction of a monitoring and compliance system or review of existing systems;

| introduction or adjustment of existing group relationship agreements;

| possibly, change from a physical to a virtual cash pooling;

For shareholders and supervisory board members

| monitoring and control of the managing directors;

| monitoring and control regarding the implementation of regular solvency forecasts;

| monitoring and control of the monitoring and compliance system;

| omission of instructions which may lead to a violation of the capital maintenance rules of the companies participating in the cash pool;

| possibly, instruction to terminate the existing cash pooling system and, as the case may be, change to a virtual cash pool system.