When the adviser recognises the crisis: Liability risks in the event of impending insolvency

1. Starting point: Management remains responsible

A GmbH or other limited-liability company must keep a constant eye on its financial position. The law obliges managing directors to monitor developments that could jeopardise the company’s continued existence. This follows from the general principles of managing director liability, but also from Section 1 of the StaRUG (Act on the Early Detection and Management of Crises).

If a potential ground for insolvency arises, the managing director is subject to far-reaching duties to act and investigate. This responsibility cannot simply be shifted onto advisers. Nevertheless, advisers must not ignore clear signs of a crisis if they are dealing with them as part of their specific mandate.

2. The tax adviser: Not an insolvency practitioner in their own right – but with a duty to warn in the event of clear signs

In a somewhat older judgement of 26 January 2017 (IX ZR 285/14, DStR 2017, 956), the Federal Court of Justice (BGH) clarified the duties of a tax adviser commissioned to prepare the annual accounts. According to this ruling, the tax adviser must examine the documents available to them and the circumstances of which they are aware to determine whether they give rise to serious doubts as to the company’s ability to continue as a going concern. 

Typical warning signs may include, for example:

• repeatedly high losses,
• a deficit not covered by equity,
• liquidity difficulties,
• a very low level of equity capital 

However, the tax adviser is not obliged to carry out an insolvency assessment or prepare a going concern forecast of their own accord without a specific instruction. Nor are they required to ascertain all the necessary facts independently. However, if there are discernible doubts, they must not simply prepare the accounts using so-called going-concern values – that is, values based on the assumption that the business will continue to operate. Rather, they must seek clarification from the client as to whether continued operation is in fact viable, for example through a substantiated going-concern forecast.

In addition, a duty to advise and warn may apply: if there are clear indications of grounds for insolvency and the tax adviser must assume that the potential risk of insolvency has not been recognised, he must draw the company’s attention to the potential grounds for insolvency and the management’s audit obligations. This duty is now expressly regulated in section 102 of the StaRUG for the preparation of annual accounts. 

3. The solicitor: duty to warn only in relation to the client’s instructions

The Federal Court of Justice (BGH) further developed the above-mentioned fundamental principles for legal advisers in its judgement of 29 June 2023 (IX ZR 56/22). According to this, a solicitor may also be obliged to issue a warning in the event of a potential ground for insolvency. However, this does not automatically apply to every client engagement.

The decisive factor is the nature of the engagement: if, in the context of crisis or restructuring advice, the lawyer is dealing with the company’s financial situation, there may be a close link to the managing director’s personal obligations. The situation is generally different if the lawyer is merely enforcing a single claim or handling a legal arrangement that has nothing to do with the company’s crisis.

Here, too, the Federal Court of Justice (BGH) does not require an independent, comprehensive assessment of whether the company is on the verge of insolvency. A warning is only required if the potential ground for insolvency is known to the adviser, is obvious, or must become apparent in the course of the proper handling of the mandate. Mere recognisability is not sufficient. Furthermore, there must be reason to believe that the management is unaware of the risk and its consequences. The boundary is, however, fluid. The legal adviser is therefore well advised to draw the debtor’s attention to a possible obligation to file for insolvency at the very first signs.

4. Special feature: Managing directors may also be protected

The adviser’s contracting party is usually the company – for example, a GmbH. However, in the 2023 judgement cited above, the Federal Court of Justice (BGH) clarified that, under certain conditions, the managing director may also be personally included within the scope of protection of the consultancy contract. In such cases, they may have their own claim for damages if they have been held personally liable due to a delayed insolvency application or due to payments made after the company had become insolvent.

A key requirement is that the managing director must have come into contact with the consultancy services owed in accordance with their intended purpose. In practical terms, this means that the consultancy must specifically serve to enable the management to fulfil their personal duties of care during a crisis and to avoid their own liability risks. This may be the case with crisis-related consultancy; it is generally not the case with an individual mandate that is entirely unrelated to a crisis.

According to the Federal Court of Justice (BGH), this protection may even extend to a de facto managing director – that is, a person who actually manages the business without having been formally appointed. For this to apply, however, their role must at least have been recognisable to the adviser.

5. Practical consequences for advisers

The above judgements show that the Federal Court of Justice has extended the scope of consultants’ liability. Where in doubt, it must be assumed that this liability applies not only to tax and legal advisers but to all the company’s advisers, in particular the auditor and management consultant. The latter, in particular, gain in-depth insights into the company’s net worth, financial position and results of operations as part of their mandate. The liability risk becomes particularly apparent when a management consultant is engaged to restructure the company, as this is likely to have a financial dimension.

However, advisers are not automatically responsible for conducting a comprehensive insolvency review of their client. Nevertheless, they must not remain silent in the face of concrete and recognisable warning signs of a crisis. 

For managing directors, the key message remains: advice from a consultant does not replace their own duty to assess the company’s situation without delay and to take the necessary steps.