Call-to-action: The supervisory board in a corporate’s crisis

Increased advisory and monitoring duties upon the occurrence of an insolvency event

For years, the rules imposing the risk of personal liability of supervisory board members in a corporate’s crises have been increasing. This has now reached its current climax in the judgment recently handed down by the Berlin Court of Appeal (Kammergericht). It held that not only the operational management may be liable for all payments from the onset of the crisis but, in some circumstances, the supervisory board, too.

Particularly in times when government support is tapering off, the global supply chain is experiencing significant problems and zombie companies are increasing in numbers, supervisory bodies are called upon more than ever. A close supervision of the company's management is required, not only to support the company's crisis management but also to minimise the board members’ own exposure to risk.

As a general rule, the board of directors or the management of a company is under a firm statutory obligation to file for the commencement of insolvency proceedings without unreasonable delay as soon as an insolvency event has occurred. A maximum period of three weeks from failing the statutory cash-flow test or, alternatively, a period of six weeks if failing the balance-sheet test may be exhausted. During this time, however, no payments may be made by the management unless they are privileged. If the executive board or the management is in breach, they are exposed to personal liability for the damage incurred by creditors which may include all payments made by or on behalf of the company from this point on.

This personal liability also extends to the supervisory board following the ruling of the Kammergericht Berlin of 29 April 2021, Case No. 2 U 108/18. The court ordered two supervisory board members to pay millions in damage. The decision of the Kammergericht Berlin is in line with precedent set by Germany’s Supreme Court (BGH) on 16 March 2009 and the Düsseldorf Court of Appel's order dated 31 May 2012 and continues to tighten the rules for supervisory board members and their personal liability.

The cardinal duty of the supervisory board is always the appointment of an efficient executive board and its ongoing supervision. However, the supervisory board member's monitoring duties are increased by law in special circumstances, namely in the crisis of the company. In particular, the supervisory board must exercise the rights pursuant to section 90 (3) and section 111 (2) of the German Companies Act (AktG). If the supervisory board recognises, or had to recognise, that the company is insolvent and if it has reasons to assume that the executive board is making payments contrary to the statutory prohibition pursuant to section 15b of the German Insolvency Code (InsO), then it must work towards ensuring that the executive board immediately refrains from making such prohibited payments. The burden of proof for such action lies with the supervisory board. Pursuant to sections 116, 93 (2) sentence 2 AktG, the supervisory board members must demonstrate and prove that they have discharged of their duties or that they are in any case not at fault for the failure to discharge. According to the Kammergericht, the supervisory board cannot simply rely on the board's assertion that there are no grounds for insolvency.

The decision of the Kammergericht Berlin of 29.04.2021 is not yet legally binding, as the BGH still has to decide whether to allow an appeal, file no. II ZR 103/21. However, for the past years the general trend in case law has been to hold company management and its supervisory bodies strictly accountable to their obligations. Based on the applicable principle of prudence, the supervisory board is therefore well advised to take appropriate measures at an early stage in the event of any emerging crises of the company and to obtain detailed and continuous information from the management about the company's economic situation.

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