COVID-19 challenge – When a GmbH brings a claim against its directors

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Wiener Zeitung, 25 June 2020

With the number of Covid-19 infections finally (temporarily) declining the focus increasingly shifts to Covid-19 related managing director’s liability.

Covid-19 harbors an increased liability potential for GmbH managing directors. Failure to implement legislation can lead to liability, as can faulty crisis management or insufficient adaptation of business operations. Hence, with the number of Covid-19 infections declining the focus shifts to Covid-19 related managing director’s liability.

Civil law liability:

In addition to claims for criminal or administrative law relevant behavior, the focus is on civil law liability of managing directors towards the GmbH. Under certain conditions, companies can sue their director (s) for non-compliance, disregarding their specific duties of care.

Important duties of care relevant to liability in connection with Covid-19 include, in particular, the obligation to efficient risk management: The timely identification and analysis of corporate risks is essential for the correct handling of adverse changes in business conditions. In crisis situations, managing directors must pay particular attention to the recognition and analysis of company risks. Knowledge of the applicable law is essential. Acting on the basis of adequate information can also mean that directors must seek external advice.

Increased shareholder involvement in the decision-making process:

The COVID-19 situation can make it necessary to involve shareholders more intensively. Management measures must be made subject to shareholder consideration – for example in the context of an (extraordinary) shareholders’ meeting – if the company’s interests demand that. Even if no resolution is passed, it may be necessary to convene a general meeting to exchange information. To facilitate the holding of general assemblies in connection with Covid-19, these can also be held virtually.

Distribute profits with care:

The distribution of profits generated in the previous year can also cause liability. Especially if the managing directors become aware of a significant loss in the period between the balance sheet date and the adoption of the annual financial statements. Specifically, profits are excluded from the distribution to the shareholders in the corresponding amount if it is likely that the financial position of the company in the period mentioned has not just temporarily deteriorated due to Covid-19. When adopting a resolution regarding annual financial statements, managing directors must draw the shareholders’ particular attention to losses that have occurred in the meantime and, if necessary, even refuse to pay out the profit to the shareholders.

In order to obtain state financial aid (COFAG-Finanzierungshilfe), withdrawals from company owners or profit distributions for the period of the financial measure must be adapted to the economic situation in return for the use of financial aid. Reserves to increase the balance sheet profit may not be released either.

Duties of care in times of crisis:

In the event of a corporate crisis and depending on the stage, special duties of care apply which may entitle the GmbH to take legal action against its managing director (s). If half of the share capital is lost, the managing directors are obliged to call a general meeting. Under no circumstances should one wait until a crisis actually occurs.

If no positive prognosis can be provided, failure to initiate a reorganization procedure by the managing director will cause liability. If the company is over-indebted or insolvent, their representatives must apply for insolvency proceedings to be opened without undue delay, but no later than 60 days after the company becomes insolvent or over-indebted.

Delayed filing for insolvency makes directors liable towards the company for the increase in over-indebtedness of the company caused by the delay in filing for insolvency. In light of COVID-19 the the period for insolvency filing has been extended to 120 days.

Here you can find what you need to know about directors’ liability in connection with COVID-19.

Article (in German)

Anton Fischer

Anton Fischer

Anton Fischer gained valuable practical experience at several top business law firms in Austria and abroad, most notably in the United Kingdom and Singapore.