Everything about insolvencies and their early detection

What is insolvency?

Essentially, a company must have sufficient liquid funds to meet its payment obligations, including wages, rent, liabilities, and invoices. If a company cannot guarantee its ability to pay, or if it experiences cash flow problems, it then faces insolvency. From this point, the duty arises for the entrepreneur or the managing director to initiate insolvency proceedings.

The 3 reasons for insolvency

The so-called reasons for insolvency oblige directors to file for insolvency. In the insolvency regulations, a distinction is made between general and specific insolvency reasons. The general reason for insolvency refers to the state of illiquidity (§ 17 InsO). The term "general" means that the inability to pay is an opening reason regardless of the type of proceedings and the debtor. Over-indebtedness (§ 19 InsO) is a special opening reason for legal entities and equivalent legal bodies. In addition to these two reasons, there is the impending illiquidity (§ 18 InsO) as a "voluntary" reason for insolvency, enabling the debtor to file an application voluntarily.

Illiquidity (§ 17 InsO)

Illiquidity exists when a company can no longer meet its due payment obligations and is expected to be permanently unable to do so. The liquidity status is determined by offsetting available liquid assets against due liabilities. If the result from this calculation is less than 0.9, i.e., less than 90%, it speaks of illiquidity.

Subsequently, it is assessed whether the company can overcome the illiquidity within the coming three weeks. This step is based on forecasts and reads: liquid assets + future incoming payments (three weeks) / due liabilities + becoming due liabilities (three weeks). If the quotient is also less than 0.9, i.e., less than 90%, illiquidity according to the BGH (Federal Court of Justice) is confirmed, and an insolvency application must be filed.

Over-indebtedness (§ 19 InsO)

A legal over-indebtedness exists when there is a negative continuation forecast and an over-indebtedness balance is established. For this balance, both the over-indebtedness status and the forecast about the continuation of this entity must be established.

Impending Insolvency (§ 18 InsO)

Impending insolvency occurs when the debtor foreseeably will not be able to meet their payment obligations. It gives the debtor the right to file for insolvency proceedings early.

Duties of the Managing Director

Managing directors must fulfil increased duties within the scope of their business management to plan, monitor, and control effectively. This includes ensuring sufficient liquidity. In the case of illiquidity and over-indebtedness, managers of a capital company (e.g., GmbH or AG) are obligated to file for insolvency; if impending insolvency exists, they have the right to initiate insolvency proceedings within three weeks. Failure to meet this obligation can make them liable for delaying insolvency.

Triggers for Corporate Insolvency

Insolvency can be triggered by many different factors, often a combination of several:

• Poor or inadequate management in cash flow management, controlling, or accounting
• External challenges such as restrictions from the Corona pandemic or other internal developments (like lack of competitiveness)
• Insufficient liquidity, e.g., due to suboptimal invoice and receivables management
• Increased costs with the same income, e.g., due to increased personnel or rental costs

Early Detection through Liquidity Management

The triggers show that insolvency can threaten anyone if control instruments do not function properly. Declining sales coupled with rising costs should be seen by every entrepreneur as an increasingly serious signal of adverse developments. If a company still has sufficient liquid assets, this misstep need not necessarily lead to insolvency. Therefore, it is crucial to always keep an eye on one's own liquidity and to accurately assess it.

For this, a functioning and precise liquidity planning as well as its management are indispensable: costs must be precisely controlled and, if possible, reduced; overdue receivables must be collected and sales increased. Tidely enables exact and holistic liquidity planning and supports the CEO as a central tool for crisis monitoring and management.

Tidely showcases smart tools that provide a glimpse into liquidity bottlenecks, but also offers opportunities for liquidity insurance and enhancement. The possibility of a comprehensive liquidity report in real-time displays the insolvency risk for the company using an understandable traffic light model. Based on benchmarks, the radar compares today’s liquidity with that in three weeks, providing the entrepreneur with the necessary foresight for future liquidity developments. For the most accurate estimation, a diligent monthly planning is required. Thus, the insolvency radar functions as a feature for early detection of impending insolvency and supports the entrepreneur in fulfilling their business obligations.

Always keep an eye on your finances with Tidely and recognize, thanks to intelligent planning mechanisms, the risk of impending insolvency early on.