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A limited liability company is required by law to have sufficient funds to cover its ongoing obligations, such as rent, suppliers, wage claims and public requirements. This is referred to as prudent liquidity. The amount of funds needed to fulfil this requirement will vary greatly between different industries, as well as being affected by the scope and risk of the business. What is relevant is that the cash flow is adapted to the business in question.
A lack of sufficient funds will lead to payment problems for a shorter or longer period. Persistent payment problems can, in the worst case, result in the enforced collection of claims or the board of directors being obliged to dissolve the company. In other words, the board itself is obliged to declare the company bankrupt.
Payment problems in a company can arise from customers' non-payment or late payment, disproportionately high costs or claims against the company.
If the company's liquidity and/or equity becomes too low, the board is obliged to act. The duty to act means that, before the situation becomes critical, the board must hold regular board meetings and have a full overview of the company's financial situation. In such a situation, updated accounting figures will be a good aid. The board must then implement and follow up specific measures to improve the situation. Possible measures could be:
- Cut costs
- Attempts to increase sales
- Negotiate possible payment deferrals
- Evaluate opportunities to inject new capital into the company
- Shut down non-critical and/or loss-making parts of the business
If the measures do not produce the desired result within the given deadline, it must be considered whether other measures can be attempted or whether operations must be suspended and a winding-up petition filed with the district court. It should be noted that the board of directors is not automatically liable if the measures implemented do not produce the desired result. However, this presupposes that there was a realistic hope that the measures would produce the necessary results to improve the company's financial situation.
In this process, it is important to continuously assess whether the board needs assistance from others, such as an accountant, auditor or lawyer.
Finally, it is pointed out that in a critical financial situation, the board's management must continuously make assessments of which obligations the company can pay without favouring individual creditors. It is also pointed out that a company cannot buy on credit or enter into agreements if it is not realistic that the company can settle its obligations at the agreed time. The liabilities that can be covered on an ongoing basis in such a situation are mainly operationally critical liabilities, but this must be assessed specifically in each individual case. If the company's management makes a mistake in such a situation, it may result in board liability.
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