Selling a GmbH with Debts: Routes, Deadlines and Liability

A GmbH carrying debt can be sold — but the process follows different rules from an ordinary share sale. The decisive boundary is the duty to file for insolvency under § 15a InsO (the German Insolvenzordnung, or insolvency code). An ongoing sale process does not suspend that duty, and a managing director who breaches it is personally liable. This article sets out the realistic routes and warns against offers that appear to make the problem disappear but in fact make it larger.

For the sale of an Austrian limited company, our approach to selling a GmbH covers the process from valuation to the notarial deed.

The starting point: not all debt is the same

Before a sale is even discussed, the economic position has to be classified properly. "Debt" is not a legal category.

Balance-sheet over-indebtedness (bilanzielle Überschuldung) exists where equity has been consumed in accounting terms. On its own, this is not yet a ground for insolvency.

Over-indebtedness within the meaning of § 19 InsO is defined more narrowly: assets no longer cover liabilities. However, under § 19 para. 2 InsO there is no duty to file on grounds of over-indebtedness where, on the facts, continuation of the business over the next twelve months is predominantly likely. This going-concern forecast (Fortführungsprognose) is the pivot of every restructuring: it must be documented, plausible and carried by numbers.

Imminent illiquidity (drohende Zahlungsunfähigkeit) under § 18 InsO entitles the company to file on its own initiative but does not oblige it to. In practice it is the window in which an out-of-court restructuring still has the best prospects.

Illiquidity (Zahlungsunfähigkeit) under § 17 InsO is the hard boundary — and it triggers the filing duty immediately.

Before any figures are negotiated, there is the company valuation.

The hard boundary: § 15a InsO

In a GmbH, § 15a InsO obliges the managing director to file for insolvency within three weeks at the latest in the case of illiquidity and within six weeks at the latest in the case of over-indebtedness, in each case from the moment the condition arises. Both periods are maximum periods — they may only be used in full where there are serious prospects of restructuring.

Two points are routinely underestimated in sale discussions:

An ongoing sale process does not suspend this deadline. The prospect that a buyer will take over the company "within a few weeks" is no justification. If the filing duty arises during the sale process, the filing must be made — the sale may then continue out of the opened proceedings.

Breach carries criminal sanctions. § 15a para. 4 InsO makes intentional delay of insolvency filing (Insolvenzverschleppung) punishable by imprisonment of up to three years or a fine; negligent breach is also punishable. In civil law, the managing director is liable to creditors for the loss caused by the delay.

Payment prohibition once insolvency-ripe: § 15b InsO

Alongside the filing duty, the payment prohibition in § 15b InsO applies from the moment the company becomes insolvency-ripe. The managing director is personally liable for payments made after illiquidity or over-indebtedness has arisen, to the extent they are not compatible with the care of a prudent business manager. Only payments necessary to maintain business operations remain permissible — for example ongoing wages, VAT, and supplier invoices necessary for continued existence.

This payment prohibition is the second point at which a managing director's personal liability regularly becomes acute in a crisis. Anyone who keeps the business running at full speed despite being insolvency-ripe quickly accumulates substantial personal repayment obligations.

Route 1: share sale with a restructuring contribution

If the going-concern forecast is still positive, or can be established with a restructuring contribution, selling the shares is a realistic route. The buyer takes over the company together with its liabilities; the purchase price is symbolic, frequently one euro. The economic value to the buyer lies not in the price but in the loss positions assumed, the customer base or the market position.

For such a sale to hold, several conditions have to be met: a robust restructuring concept, the consent of the main creditors (typically the house bank and the trade credit insurer), a subordination (Rangrücktritt) on shareholder loans in order to establish a positive going-concern forecast, and frequently a fresh equity tranche from the buyer. Without these building blocks the going-concern forecast tips over shortly after completion — with the familiar consequences for the new managing director.

Route 2: transferring restructuring as an asset deal

The second route is the transferring restructuring (übertragende Sanierung): the viable business passes to a new legal entity by way of an asset deal, while the liabilities remain behind in the old shell. For buyers this is often the cleanest route, because it limits exposure to legacy risk.

Two legal side effects deserve attention:

§ 613a BGB — transfer of employment relationships. On a transfer of undertaking, employment relationships pass across. This cannot be contracted out of. The acquirer steps into the existing employment contracts with all rights and obligations; dismissals on account of the transfer are ineffective.

§ 75 AO — liability of the business acquirer. Anyone taking over a business is liable, outside opened insolvency proceedings, for business taxes (Betriebssteuern) attributable to the period since the beginning of the last calendar year preceding the transfer. Within opened insolvency proceedings this liability does not apply — a key reason why many buyers will only accept a transferring restructuring structure once insolvency proceedings have been opened.

Route 3: sale out of opened insolvency proceedings

The third route is a disposal out of opened insolvency proceedings by the insolvency administrator (Insolvenzverwalter). For the outgoing shareholder this route usually produces no proceeds — the realisation proceeds belong to the body of creditors. For the business itself it is often the orderly continuation route, because it switches off § 75 AO and legacy contracts can be cleaned up under the administrator's authority.

For the outgoing managing director the decisive point is this: where the filing duty exists, this route is not an option but an obligation. Anyone who holds out for a private-treaty sale until the last moment and misses the deadlines in § 15a InsO loses not only the sale proceeds but also attracts criminal and civil consequences.

A warning: Firmenbestattung

At the fringe of the market there are providers who offer to "take over" indebted GmbHs. For an upfront fee the shares are transferred to an acquiring entity, management and registered office are moved to persons who are hard to reach — frequently abroad — records disappear, and the insolvency filing is never made. The German term for this is Firmenbestattung, literally the burial of a company.

For the departing shareholder-managing director this construction brings no relief. Responsibility for acts and omissions during his term in office remains attributed to him: delay of insolvency filing under § 15a para. 4 InsO, bankruptcy offences (Bankrott) under § 283 StGB, and breach of accounting duties under § 283b StGB. Where a Firmenbestattung is recognised for what it is — and this happens regularly — the criminal proceedings are directed precisely at the former managing director, because the straw-man successors cannot be reached.

Warning signs of disreputable offers:

• An upfront fee for the takeover, frequently in the four- to five-figure range.
• Immediate relocation of the registered office abroad or to a hard-to-reach region.
• A change of managing director to obvious straw men — persons with no sector experience, often with addresses at letterbox premises.
• No examination of the numbers. A serious buyer, even at a symbolic purchase price, looks at the books. Anyone taking over without due diligence has no interest in the company, only in its orderly disposal without an insolvency filing.
• Marketing by cold calling directed at visibly distressed businesses.

Where any of these features is present, going to an insolvency or restructuring adviser is regularly the better route — even if it feels less comfortable.

What sellers should actually do

In the order in which the steps are usually taken:

Keep the numbers current. Short-term, day-current liquidity planning and a monthly rolling interim statement are the precondition for being able to judge at all whether and when the filing duty arises.

Have the going-concern forecast documented. Not as a formality, but as a robust set of numbers. Ideally by an adviser who can also defend the forecast to creditors and to a later insolvency administrator.

Bring in insolvency and restructuring advisers early. Not once the filing duty is already in view. The earlier the course is set, the more options remain.

Run the sale process in parallel, not sequentially. Restructure first and sell later, and you lose time; sell first and leave the restructuring to the buyer, and you lose negotiating position. Running both processes in parallel is demanding but realistic.

Owners who wish to sell the indebted GmbH as a whole will find the regular framework under selling a GmbH. The tax mechanics of a share sale — relevant even at a symbolic purchase price — are dealt with separately in selling a GmbH: tax.

FAQ

When must the managing director of a GmbH file for insolvency?

Under § 15a InsO the managing director must file for insolvency within three weeks at the latest in the case of illiquidity, and within six weeks at the latest in the case of over-indebtedness, in each case from the moment the condition arises. Both periods are maximum periods and may only be used in full where there are serious prospects of restructuring. An ongoing sale process does not suspend the deadline.

Can an over-indebted GmbH still be sold at all?

Yes. Under § 19 para. 2 InsO there is no duty to file on grounds of over-indebtedness where continuation over the next twelve months is predominantly likely. The realistic routes are a share sale with a restructuring contribution, a transferring restructuring as an asset deal, and a disposal out of opened insolvency proceedings by the insolvency administrator.

What does § 75 AO mean for the buyer of a distressed business?

Anyone taking over a business is liable, outside opened insolvency proceedings, for business taxes attributable to the period since the beginning of the last calendar year preceding the transfer. Within opened insolvency proceedings this liability does not apply — a key reason why many buyers will only accept a transferring restructuring structure once insolvency proceedings have been opened.

What does § 15b InsO impose on the managing director?

§ 15b InsO contains the payment prohibition that applies once the company is insolvency-ripe. The managing director is personally liable for payments made after illiquidity or over-indebtedness has arisen, to the extent they are not compatible with the care of a prudent business manager. Only payments necessary to maintain business operations remain permissible.

Why is a Firmenbestattung no solution for the seller?

Transferring the company to straw-man buyers and moving the registered office abroad does not relieve the former managing director. Responsibility for acts and omissions during his term in office remains attributed to him: delay of insolvency filing under § 15a para. 4 InsO, bankruptcy offences under § 283 StGB, and breach of accounting duties under § 283b StGB. Where the Firmenbestattung is recognised, the criminal proceedings are directed precisely at him, because the successors cannot be reached.

What is the difference between balance-sheet over-indebtedness and over-indebtedness under § 19 InsO?

Balance-sheet over-indebtedness means equity has been consumed in accounting terms; on its own it is not a ground for insolvency. Over-indebtedness within the meaning of § 19 InsO is narrower: assets no longer cover liabilities. Even then, no filing duty arises where continuation of the business over the next twelve months is predominantly likely.

Why is a purchase price of one euro realistic in these transactions?

Because the buyer takes over the company together with its liabilities. The economic value to the buyer lies not in the price paid but in the loss positions assumed, the customer base or the market position. What makes such a sale hold together is a robust restructuring concept, the consent of the main creditors, a subordination on shareholder loans and, frequently, fresh equity from the buyer.

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This article is a factual overview and does not replace legal, tax or insolvency advice on an individual case. Where there are signs of illiquidity or over-indebtedness, expert advice must be obtained without delay.

On the special case of the dormant company, see selling a GmbH shell.