Weak economy: What managers have to pay attention to

At pre­sent, the eco­no­mic de­ve­lop­ment is ra­ther un­cer­tain for com­pa­nies. The eco­no­mic out­look has be­come gloo­mier world­wide. The trade dis­pute with the USA is smol­de­ring. The con­se­quen­ces of the Brexit are still un­cer­tain. It is also im­pos­si­ble to pre­dict what con­se­quen­ces the spread of the coro­na­vi­rus will have on the glo­bal eco­nomy. There are also sys­te­mic de­ve­lop­ments. Di­gi­tiza­tion is ha­ving a deep im­pact on the busi­ness mo­dels of com­pa­nies. Banks are be­com­ing more cau­tious and ra­ting agen­cies ex­pect more in­sol­vencies. How must ma­na­ging di­rec­tors be­have in the cur­rent en­viron­ment?

© Jan Hendrik Groß, Lawyer and Partner at Ebner Stolz in Köln

The ba­sic prin­ci­ple is that ma­na­ging di­rec­tors must set the right course early on to pre­vent an acute cri­sis. Com­pa­nies al­ways find them­sel­ves in dif­fi­cult wa­ters when they fail to re­co­gnize chan­ges in the mar­ket or in­dus­try or re­co­gnize them too late. Cor­po­rate lea­ders must the­re­fore con­stantly and far­sigh­tedly put the busi­ness mo­del to the test. This is the duty of care of a pru­dent busi­ness­man. They should iden­tify and re­spond to trends in the in­dus­try, such as in the areas of elec­tro­mo­bi­lity, the de­ve­lop­ment towards a plat­form eco­nomy, cli­mate pro­tec­tion and sus­tai­na­bi­lity. If such de­ve­lop­ments are "overs­lept", this can end­an­ger the con­ti­nued exis­tence of the com­pany.

An ef­fec­tive early warning sys­tem is par­ti­cu­larly im­port­ant in this re­gard, so that earnings and li­qui­dity cri­ses can be iden­ti­fied in good time. This in­clu­des at least a rol­ling 13-week plan ba­sed on me­dium-term plan­ning. If li­qui­dity is al­re­ady scarce and in­sol­vency is im­mi­nent, the or­der of the day is to act quickly - but with cau­tion. Now the ma­nage­ment has the duty to re­or­ga­nize. Un­der no cir­cum­stan­ces should we wait un­til all li­qui­dity has been used up. The in­vol­ve­ment of ex­perts is ur­gently re­com­men­ded from this stage at the la­test.

Ac­tive sta­ke­hol­der ma­nage­ment is im­port­ant at all ti­mes. The im­port­ance of ti­mely, open and trans­pa­rent com­mu­ni­ca­tion can­not be over­esti­ma­ted. Share­hol­ders, banks, cre­dit in­su­rers, suppliers and cu­st­omers must be brought on board. If you want to make a dif­fe­rence in an acute cri­sis, this can only be done on the ba­sis of trust in the peo­ple in­vol­ved. Once trust has been lost, it can hardly be res­to­red.

In or­der to re­main ca­pable of ac­ting in an acute cri­sis, it is ad­visa­ble to think about such a sce­na­rio be­forehand. This in­clu­des al­ter­na­tive li­qui­dity pro­tec­tion and ac­tive working ca­pi­tal ma­nage­ment.

All al­ter­na­ti­ves for a re­or­ga­niza­tion should be soun­ded out, in­clu­ding ju­di­cial re­struc­tu­ring forms such as self-ad­mi­nis­tra­tion and pro­tec­tive shield pro­ce­du­res un­der the Ger­man Act to Fur­ther Fa­ci­li­tate the Re­or­ga­niza­tion of Com­pa­nies (Ge­setz zur wei­te­ren Er­leich­te­rung der Sa­nie­rung von Un­ter­neh­men - ESUG), which al­low in­de­pen­dent re­struc­tu­ring un­der the su­per­vi­sion of a tem­porary ad­mi­nis­tra­tor. Ano­ther for­mal re­struc­tu­ring pro­ce­dure will be ad­ded soon. As soon as the so-cal­led "Re­struc­tu­ring Di­rec­tive" (Di­rec­tive (EU) 2019/1023) has been im­ple­men­ted, com­pa­nies in Ger­many will have ac­cess to pre-in­sol­vency re­struc­tu­ring pro­cee­dings. The core of the fu­ture re­struc­tu­ring pro­cee­dings will be the so-cal­led re­struc­tu­ring plan. This is si­mi­lar to the in­sol­vency plan, but does not re­quire the ope­ning of in­sol­vency pro­cee­dings, but is ai­med pre­ci­sely at avo­iding in­sol­vency.

As soon as a com­pany is in trou­ble, the lia­bi­lity risks for ma­na­ging di­rec­tors are high. They must con­stantly check whe­ther the com­pany is in­sol­vent or ove­rin­debted.  The ex­ami­na­tion of over-in­debted­ness re­gu­larly re­qui­res them to think about the pro­gno­sis for the com­pany's con­ti­nued exis­tence. In prin­ci­ple, this is only po­si­tive if the com­pany is fully fi­nan­ced for the cur­rent and the fol­lo­wing fi­nan­cial year.

If the com­pany is unable to pay or is ove­rin­debted, an ap­pli­ca­tion for in­sol­vency must be fi­led wi­thin th­ree weeks. Other­wise, the ma­na­ging di­rec­tor is th­rea­te­ned with ci­vil and cri­mi­nal lia­bi­lity.

In the stage of in­sol­vency ma­tu­rity, the ma­na­ging di­rec­tor is also per­so­nally lia­ble for all pay­ments made by the com­pany - pos­si­bly also for as­si­gn­ments, set-offs or the pro­vi­sion of se­cu­ri­ties. There are only a few ex­cep­tio­nal ca­ses (em­ployee contri­bu­ti­ons to so­cial se­cu­rity, man­datory pay­ments to main­tain busi­ness ope­ra­ti­ons, etc.). But be care­ful: If the ma­na­ging di­rec­tor does not pay the em­ployee's contri­bu­tion, he is lia­ble to pro­se­cu­tion. Howe­ver, if he pays the full so­cial se­cu­rity contri­bu­tion af­ter the in­sol­vency has oc­cur­red, he is per­so­nally lia­ble for the em­ployee's contri­bu­tion.

Gi­ven the high and far-re­aching lia­bi­lity risks, ma­na­ging di­rec­tors should con­sider ta­king out D&O in­surance. Howe­ver, the in­surance con­di­ti­ons should be care­fully ex­ami­ned. Not every in­surance po­licy of­fers suf­fi­ci­ent pro­tec­tion in case of a cri­sis.

Enough of the pes­si­mism: even a cri­sis can bring op­por­tu­nities, such as chan­ges that the work­force might other­wise not be pre­pa­red to make. At the same time, ti­mes of cri­sis are ti­mes of mar­ket shakeout. And per­haps it will af­fect the com­pe­ti­tor. It pays to keep an eye out for take­over can­di­da­tes.