Company in crisis

What it means

A company is in crisis if it is insolvent or insolvency is imminent. Imminent means the ratio of equity to liabilities has fallen below the statutory threshold.

The consequence is concrete: funding that substitutes for equity, typically shareholder loans and related-party loans, may not be repaid while the crisis lasts.

Crisis is wider than insolvency. A company in crisis can pay invoices on time and have money in the bank, because the threat of insolvency is judged by a ratio in the balance sheet, not by a lack of cash. Owners therefore often learn of it from their accountant rather than from experience.

How it works in practice

The state is read from the books, so they need to be current. A company that sees its balance sheet once a year in March learns of a crisis months after it began.

The remedy is to strengthen equity: a capital increase, a contribution to the capital fund, or setting a shareholder loan off against a contribution.

In interim financial statements for a half-year or quarter we watch the ratio of equity to liabilities and warn the managing director as it nears the threshold. They then have time to decide on strengthening capital while the crisis is still only in the figures, not in the ability to pay.

What to watch out for

Repaying a shareholder loan during a crisis breaches the law and the money must come back. The director who made the payment is personally liable for the loss.

The second risk is missing the moment when crisis turns into over-indebtedness. The statutory body then has a duty to file for bankruptcy, and a managing director who delays while the firm keeps taking deliveries on credit is liable to creditors for the loss this causes.