Decision of the Higher Regional Court of Frankfurt dated January 16, 2025 – Ref. 7 W 20/24
Among the duties of a managing director is the timely filing of an insolvency application. If they fail to comply with this duty, they may also lose the protection of their D&O insurance. This was made clear by the Higher Regional Court of Frankfurt in its decision of January 16, 2025 (Ref. 7 W 20/24).
If grounds for insolvency exist, such as insolvency or over-indebtedness, it is the duty of the managing director to file for insolvency without undue delay. Delayed insolvency filing can have serious consequences, according to the commercial law firm MTR Legal Rechtsanwälte, which also advises on insolvency law. These consequences can include the loss of D&O insurance coverage, as demonstrated by the decision of the OLG Frankfurt.
Insolvency application not filed in time
In the underlying case, the managing director did not file the insolvency application in time. Despite a difficult liquidity situation, particularly due to substantial tax arrears, and the imminent insolvency, the managing director allowed the company to continue operating. After the insolvency occurred, the insolvency administrator sought to make a claim on the managing director’s D&O insurance. However, the insurer refused payment, citing the managing director’s breach of duty.
The Higher Regional Court of Frankfurt upheld this view and denied insurance coverage. In its reasoning, the court stated that the managing director had significantly breached his statutory duties. The obligation to file for insolvency in a timely manner is a cardinal duty of the managing director. A breach of duty regularly leads to the managing director’s personal liability. In this particular case, the insolvency status was already obvious because tax debts in the nearly six-figure range were met with an available balance of only 12,000 euros. The fact that the registered managing director allegedly acted merely as a figurehead did not change the breach of duty, the court further clarified.
Duties of the managing director in the event of impending insolvency
As soon as it becomes apparent that a company is encountering financial difficulties, managing directors are obliged to closely monitor the company’s financial situation. It does not matter whether they are actively involved in operations or, as in the case before the OLG Frankfurt, were merely formally appointed. So-called “figurehead managing directors” also bear full legal responsibility and must regularly keep themselves informed about the company’s financial standing.
Assessment of insolvency status
In economically challenging times, it is the duty of the managing director to assess whether the company is insolvent. Insolvency occurs in the event of illiquidity or over-indebtedness of the company. Illiquidity means that the company is no longer able to meet its due payment obligations. Over-indebtedness exists if the company’s assets no longer cover its existing liabilities and there is no positive prognosis for continued existence. If such indicators arise, managing directors must immediately, but at the latest within three weeks, file for insolvency (§ 15a InsO).
A delayed insolvency filing not only worsens the situation for creditors but can also have severe personal consequences for the managing director. A violation of the obligation to file for insolvency can, for example, lead to imprisonment and fines. Furthermore, as the decision of the Higher Regional Court of Frankfurt shows, insurance coverage by the D&O insurance may also be lost in the event of such breaches of duty.
Exclusion clauses in D&O insurance
D&O insurances are intended to protect managing directors and other executive bodies from financial consequences arising from breaches of duty. However, many of these policies contain exclusion clauses if a breach of duty is committed intentionally or knowingly. The Higher Regional Court of Frankfurt confirmed that, in the case of late filing for insolvency, such intent can be assumed – in particular, when there were clear signs of insolvency which the managing director either recognized or should have recognized. In such cases, the insurer may refuse benefits. For managing directors, this means that anyone who disregards their duties cannot expect relief from insurance coverage.
The obligation to file for insolvency in a timely manner should not be underestimated by managing directors. Disregarding this duty can lead to the managing director’s personal liability. In cases of intentional breaches, D&O insurance often provides no protection. Criminal consequences are also possible.
MTR Legal Rechtsanwälte advises financially distressed companies and their executive bodies on insolvency application obligations and other issues of insolvency law.
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