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Strategies to avoid insolvency

Strategies to avoid insolvency

The coronavirus crisis presents companies with an enormous economic challenge, and it is impossible to foresee its consequences in the short, medium or long term. But in the current situation, what should an entrepreneur do to prevent becoming insolvent and to ensure they can come out of the coronavirus crisis as unscathed as possible?

Securing a company’s liquidity is currently one of the most urgent tasks faced by any entrepreneur. Why? Because, as is well known, an inability to pay leads to insolvency. The basic requirements incumbent upon entrepreneurs have not changed that much: it is merely the leverage that came with the coronavirus crisis that is really rather different. Typically, an entrepreneur should first and foremost ensure that their accounting system is up-to-date and that their liquidity situation is always visible. This is the only way to identify an emerging problem, and then deal with it. Even in ‘pre-coronavirus times’, experience showed that companies ‘suddenly’ facing a crisis had generally not paid heed to undertaking this kind of watchful monitoring.

Even if insolvency is unavoidable, the liability and criminal consequences of failing to file a petition for insolvency or delaying this process can usually be avoided if the following points are taken to heart in good time:

  • The accounting system should be kept up to date and liquidity should be monitored.
  • A financial plan for the next one to two years should be drawn up on the basis of the company’s liquidity, taking into account the best-case and worst-case scenarios, with a realistic version being developed. Any potential subsidies and possible measures to be taken must be considered, as well as possible lines of credit from the bank must be explored.
  • This planning must be updated if special circumstances arise that impact the financial plan. This includes positive events as well as negative events, such as an unavoidable crisis like the one we are currently mired in.
  • Expert knowledge or support may be required for individual questions concerning accounting, liquidity planning and the preparation of the financial plan, but the focus lies squarely on the entrepreneur’s commercial and economic ideas and concepts.
  • After the financial plan has been drawn up (at the latest), it should be reviewed by a sympathetic third party, with lawyers and tax advisors also being consulted in this regard. This is all the more important if the entrepreneur has already determined that action needs to be taken.
  • If there is an acute need for action, speed is of the essence. This is because an insolvency petition must always be filed without delay, and within the legally prescribed periods at the latest.

At the risk of it sounding like a truism: if there is a fear that an economic crisis is imminent, it is important not to lapse into lethargy. Instead, it is critical to analyse the situation relentlessly and to do what is necessary, should action be needed. Experienced tax and legal advisors are available to offer assistance in this regard. In the present crisis, companies are primarily receiving help in the form of government measures designed to secure liquidity, such as subsidies, loans, deferrals, reduced working hours and much more. However, caution is called for, particularly in the event that the coronavirus crisis and its negative economic effects on the company become persistent and last longer than currently hoped. While deferrals and loans do offer liquidity relief for the moment, payment obligations that arise at a later point in time are, conversely, a sword of Damocles hanging over a company. They must be taken into account in financial planning because they will have a significant impact on future liquidity. Planning must also bear in mind that certain measures (e.g. terminations of employment or reduced working hours) only begin to take effect after a certain lead time. In other words, not every type of measure has an immediate effect on the liquidity situation. In order to steer the company through the coronavirus crisis in good shape, it is key to review and secure liquidity in the short term and adjust financial planning in the medium term for the period after the coronavirus crisis. After all, there should, of course, be sufficient liquidity even if deferred liabilities have to be paid. Ideally, sufficient liquidity reserves should be created to cover the most important payments (e.g. salaries) for one to two months, regardless of the company’s performance. Even if this cannot be achieved in the short term for companies in crisis, this is something to put in place in the medium term. In the event that there is not sufficient liquidity and the company becomes insolvent, filing a timely petition for insolvency is an unavoidable last step, otherwise there is a risk of consequences in terms of liability and criminal law. 

The same applies in the case of over-indebtedness as a further reason for insolvency, in the case of registered partnerships where none of the partners with unlimited liability is a natural person, in the case of legal entities or in the case of estates. Over-indebtedness exists if a negative forecast for the company’s continued existence is made alongside its arithmetical over-indebtedness, i.e. the assessment that it is probably no longer possible to prevent insolvency. Safeguarding, monitoring current liquidity and undertaking the medium-term financial planning described above enable over-indebtedness to be detected in good time, with the option of attempting to restructure the company at an opportune point.

If an insolvency petition is necessary, it is imperative that the petition be filed in due time. The application must be made without undue delay, and no later than 60 days after the occurrence of insolvency, in principle. Given the coronavirus crisis, the provisions relating to the obligation to apply for insolvency or the deadline for filing a petition in the event of an epidemic or pandemic have been amended: in the event of insolvency, the basic maximum period of 60 days applies, unless the insolvency is due to the pandemic. This period is then extended to a maximum of 120 days.

In the event of over-indebtedness (without an inability to pay occurring simultaneously), a petition for the opening of insolvency proceedings must still be filed without delay if the over-indebtedness had already occurred before 1 March 2020. The only way that the obligation to file a petition immediately is not currently applicable is if the over-indebtedness occurred in the period between 1 March 2020 and 30 June 2020. If you have any questions regarding undertaking liquidity planning and designing a financial plan or if you have concrete actions that need to be taken, the authors will be happy to assist you with putting them into practice. 

Dr. Oliver Ginthör
business economist, lawyer and tax advisor

Mag. Valentin Neuser, Managing Partner and Head of German Desk at LANSKY, GANZGER + partner

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