Owners and board members in particular should familiarize themselves with the topic underbalance, as non-compliance with the legal provisions can result in a lawsuit and liability with private assets in the worst case. Find out everything you need to know here.
What is an underbalance?
An underbalance is when, due to a balance sheet loss, the equity (including reserves) can no longer be fully covered by the assets. In this scenario, the assets still cover the entire debt capital and more than 50% of the share or company capital including reserves.
What to do if there is an underbalance?
- No legal measures
In case of an underbalance there are no legal measures yet. However, the existence of an underbalance should definitely be recognized by the management and measures should be initiated to make the company more profitable.
What is a capital loss?
Legally, a capital loss is a qualified form of underbalance. In this case, the total assets on the asset side are no longer sufficient to cover both the debt and at least half of the equity.
What to do when there is a capital loss?
- General meeting of shareholders and restructuring measures
If a loss of capital occurs, the board of directors or the management must immediately convene a shareholders' meeting. At this meeting, restructuring measures must be decided upon, which should be documented. Even if restructuring measures are waived, this should be recorded in the minutes.
What remediation measures are there?
The most common restructuring measures to overcome the crisis of a company are:
- Subordination of loans
The creditor (usually a shareholder) agrees to waive his claims in the event of liquidation or insolvency until all other debts have been paid. This subordination must be disclosed in the balance sheet and in the notes. The irrevocability must be at least until the over-indebtedness is eliminated and the debt capital is covered again. In addition, a licensed auditor must confirm that the over-indebtedness has been eliminated.
- Capital increase
There are three types, the ordinary one being carried out in the case of reorganization. It is decided by the general meeting and must be carried out by the board of directors or the management within 3 months. In this case, the share capital is increased to the same extent by the inflow of new funds on the assets side. As the balance sheet extension takes place in equity, the balance sheet situation improves.
- Capital cut
In this restructuring measure, the capital is first reduced nominally (nominal capital reduction), i.e. the equity is reduced by the loss carryforwards. At the same time, however, the capital is increased again (capital increase), resulting in an inflow of funds.
What is over-indebtedness?
By definition, over-indebtedness exists as soon as the assets are no longer able to cover even the borrowed capital. As a rule, this means that a company is insolvent and therefore unable to act.
What should be done if there is over-indebtedness?
Even if there is reasonable cause to believe that over-indebtedness is imminent due to the losses, an interim balance sheet must be prepared and submitted to a licensed auditor for examination.
- Interim balance sheet at going concern/liquidation values to auditor for examination
The interim balance sheet shows the financial situation as of the reporting date, applying going concern values. If this shows over-indebtedness or if the company is to be discontinued, an interim balance sheet at liquidation values must also be prepared. This must also be properly audited.
- Notify judge and file balance sheet
If over-indebtedness appears in this interim balance sheet, the board of directors or the management must also notify the competent judge. In this case, a balance sheet deposit is executed and the insolvency proceedings are initiated.
How can insolvency proceedings be prevented or delayed?
- Reorganization measures, in particular subordinations
The filing of the balance sheet can be delayed by restructuring measures or subordinations that can be implemented at short notice.
- Debt forgiveness / deferral of payments
Another way of providing a short-term remedy is to reach agreements with creditors, such as debt forgiveness or deferral of payments. This can be a promising solution, especially in the case of long-standing business relationships. Nevertheless, sustainable restructuring measures must also be initiated to overcome the crisis.