In a Nutshell | 1/3/25
Over-indebtedness
Over-indebtedness occurs when the assets of a company or person no longer cover the existing liabilities. However, such a situation does not necessarily lead to insolvency. In accordance with Section 19 (2) InsO, a positive going concern forecast can avert insolvency.
The most important facts in brief:
In addition to insolvency, over-indebtedness is a mandatory reason for opening insolvency proceedings for corporations and GmbH & Co KGs. Managers are legally obliged to file for insolvency immediately in order to protect themselves and their creditors. But how do you recognize over-indebtedness? What obligations do you have as a manager? And what measures can you take to avert or remedy over-indebtedness? In this article, you will learn everything you need to know about over-indebtedness.
Definition of overindebtedness
Over-indebtedness exists if the debtor's assets no longer cover the existing liabilities. However, this does not apply if there is a positive forecast of continued existence under insolvency law (Section 19 (2) InsO).
Checking the requirements
Over-indebtedness is determined in a two-stage process:
- Preparation of the going concern forecast: A positive going concern forecast exists if the company's continued existence is predominantly probable under the circumstances. This requires an overall assessment of the company's ability to meet its liabilities as they fall due at any time. The forecast period is 12 months. A liquidity gap occurring after this period does not constitute overindebtedness, even if the net assets are negative. If the liquidity gap occurs after 12 months but within the next 24 months, there is only imminent illiquidity (Section 18 InsO).
- Preparation of an overindebtedness status: Only if there is no positive going concern forecast is it necessary to check whether the company is arithmetically overindebted. To this end, the assets and liabilities must be compared in a balance sheet as at the reporting date. If the net assets are negative, the company is overindebted
Preparation of the going concern forecast
The forecast is prepared on the basis of liquidity planning for the relevant forecast period. This can be derived from the corporate planning . In the liquidity plan, all due payment obligations and the debtor's financial resources available to meet them on that day are recorded on a daily basis. The respective cash and cash equivalents of the previous day are included. Liquidity for the next 10 to 20 days must be recorded on a daily basis. For the period thereafter, rough and statistically based assumptions are sufficient.
Creation of the over-indebtedness status
The overindebtedness status is prepared if there is no positive going concern forecast. To this end, assets and liabilities are compared in financial statements as at the reporting date. Assets and liabilities are determined at liquidation values. Any existing hidden reserves and encumbrances must be identified. The realization possibilities must be sufficiently concrete and, in case of doubt, the assets must be valued rather cautiously.
Legal consequences of over-indebtedness
In the event of over-indebtedness, the legal representatives are obliged to file for insolvency immediately, but at the latest within six weeks (Section 15a (1) InsO). If the legal representatives fail to file for insolvency in good time, they face liability and penalties for delaying insolvency. They are liable internally to the company or the insolvency administrator for the resulting damage and can also be held liable to the creditors.
Measures to prevent over-indebtedness
Measures affecting liquidity
To ensure solvency during the forecast period, measures can be taken to inject liquidity. These include
- Shareholder loans to bridge liquidity bottlenecks.
- Increase in equity through additional contributions from shareholders or third parties.
- Restructuring loans: taking out loans to finance restructuring measures.
- Realization of non-operating assets: e.g. sale of real estate, sale-and-lease-back transactions, factoring.
Measures to reduce the liabilities side
The liabilities side of the balance sheet can be reduced by the following measures:
- Debt-to-equity swap: Conversion of liabilities into equity.
- Subordination agreements: Agreements with creditors that their claims will be subordinated in the event of insolvency.
- Cancellation and offsetting: Negotiations with creditors on the cancellation of debts or the offsetting of claims and liabilities.
Restructuring measures
- Restructuring concepts: Preparation and implementation of restructuring concepts for the sustainable improvement of the earnings and liquidity situation.
- Restructuring plans in accordance with StaRUG: Use of the stabilization and restructuring framework for companies (StaRUG) to implement restructuring measures outside of insolvency proceedings.
This article provides a non-binding overview of the subject area covered and does not replace legal advice. For further information or personal advice, please do not hesitate to contact us:
Expertise
Restructuring & Insolvency Law