Criminal liability risks and defense in corporate insolvency

If a company becomes insolvent, criminal offences are very often provided. In practice, a very large number of insolvency offences are closed at an early stage as petty crimes. Nevertheless, the consequences of a potential criminal charge are often considerable. For while the accused often “get off with a black eye” in purely criminal law, the extra-judicial side effects can be drastic.

Criminal liability risks and defense in corporate insolvency

1. Good will alone is not enough

The typical insolvency offender does not consider himself a criminal. On the contrary, he often fights to the end using his own resources – including his own assets – and is driven by the hope of being able to avert the loss of control. This mixture of optimism and misjudgement is often reinforced by external consultants who lack the backbone to give their clients a ruthless assessment of the situation.

Insolvency offences in the narrower sense include the delay in insolvency proceedings (§ 15a Paragraph 4 InsO) and bankruptcy offences (§§ 283 to 283d StGB). In addition, there are a number of criminal offences that typically arise in connection with insolvency, such as (credit) fraud, embezzlement and tax evasion.

The delay in insolvency ties in with the concepts of illiquidity (§ 17 InsO) and overindebtedness (§ 19 InsO), i.e. with the definition of the crisis under insolvency law. The facts of the case are fulfilled if an insolvency application is filed “not, not correctly or not in time” in the event of a crisis. The deadline for the application is three weeks. It is often overlooked that even well-intentioned and promising restructuring efforts do not change the 3-week obligation to submit an application in good time.

The at first glance somewhat confusing system of bankruptcy offences (§§ 283 ff. StGB) can be better understood if one keeps in mind that all legal variants should ensure the realisation of the objectives of insolvency proceedings:

2. Fuse of the mass

In order to avoid diminishing the mass, the “shifting”, “squandering”, “disguising” and “hiding” of assets is prohibited. Even risky and speculative transactions that no longer have anything to do with proper business conduct can fulfil the facts of the case.

3. Information security

Especially in the run-up to insolvency, careful documentation of business transactions on the basis of the business and trading books is particularly important. Nevertheless, these obligations are particularly often violated in the heat of battle.

4. Distributive justice

Insolvency proceedings are intended to ensure a uniform distribution of existing assets to creditors. For this reason, it is forbidden to favour individual creditors by shifting assets within the estate.

What all bankruptcy offences have in common is that the actions described there are only punishable if payments are actually stopped or insolvency proceedings are opened or dismissed for lack of assets. This is a so-called objective condition of criminal liability, i.e. the offence is also realised if the offender neither expected it nor had to expect that insolvency proceedings would occur. If, however, there is no connection between the conduct of a managing director and the insolvency that occurs later, it is up to the defense to stress out reasons for a lack of guilt.

5. Nothing remains hidden

Insolvency offences are difficult to conceal. With insolvency, the insolvency administrator takes control of the business and the business documents. Insolvency administrators have an interest in the investigation of criminal offences, because these open ways to increase the mass, for example if earlier payments are contested or claims for damages are to be realized. The insolvency courts are also required to inform the public prosecutor’s office about potential criminal offences in connection with insolvency.

Pursuant to § 97 (1) InsO, the insolvency debtor is obliged to provide the insolvency court and the insolvency administrator with information on all circumstances relating to the proceedings. According to § 97 Para. S. 2 InsO, the duty to provide information also expressly extends to facts that are suitable for bringing prosecution for a criminal offence or an administrative offence. There is a conflict here with the criminal law principle of freedom from self-incrimination (“nemo tenetur se ispum accusare”). The law resolves this conflict by the fact that information provided by an insolvency debtor in fulfilment of his duties to provide information may only be used in criminal proceedings pursuant to § 97 (1) sentence 3 InsO with the consent of the person concerned. This prohibition of exploitation is often overlooked in practice and opens up considerable defence potential.

Insolvency administrators regularly request managing directors of insolvent companies to release them from their duty of confidentiality vis-à-vis former tax advisors and lawyers. Such a declaration should not be prematurely signed against the background of the prohibition of criminal exploitation, among other things. Whether and to what extent an insolvency administrator is authorised in his own right to release professional secrets bearers (laywers, tax advisors etc) from the duty of confidentiality is extremely controversial.

6. Risks and side effects

If there is a conviction for an insolvency offence, the remaining debt exemption may be denied (§§ 290, 297 InsO). In addition, a so-called ban on registering is imposed: anyone convicted of bankruptcy offences, among other things, can no longer be the managing director of a limited liability company in accordance with § 6 GmbHG. Additional professional law risks threaten in particular tax advisors and lawyers who participate in insolvency offences committed by their clients.

Offenders or participants in insolvency offences can also have drastic financial consequences. A managing director is personally liable for liabilities arising after the occurrence of a crisis situation under insolvency law (cf. § 64 GmbHG; § 823 Paragraph 2 BGB in conjunction with § 15a InsO). In addition, a managing director or board member is personally liable for taxes if he participates in the tax evasion of a company (§§ 69, 71 AO).

Under certain circumstances, asset levies may also be levied – for example, on consultancy fees – if they have been charged in connection with a criminal offence. The legal basis for such a confiscation of proceeds of crime (§§ 73 ff. StGB) was revised and significantly tightened in 2017.

Even “small” fines can also have unpleasant consequences in other areas of life. This applies even if no entry is made in the certificate of good conduct – which is the case when sentenced to a fine of more than 90 daily rates, provided it is the first entry. If the accused is the holder of a hunting licence or a pilot’s licence, for example, possible personal consequences must be kept in mind at an early stage.

7. Provision in good times

In family businesses in particular, it happens time and again that private assets are pumped into a company in the run-up to insolvency in the hope of still being able to avert insolvency. If criminal proceedings are instituted, this money is missing for the required qualified legal advice. Good criminal defense comes at a price. For this reason, it is advisable to take out a so-called D&O insurance policy for board members and executive employees (“directors and officers”), which also includes criminal law protection. Although fines and fines are not covered by D&O insurance policies, they can often be reduced through early and efficient criminal defence.