“The crisis of the company is the
hour of the supervisory board.”
v. Schenck
While legal literature is unanimous on the catalog of duties of the supervisory bodies, especially in a corporate crisis, rulings by higher courts in this area remain sparse and are mostly of an older nature. In view of the recent scandals, such as Wirecard or RBB (for the latter see here), which are currently being dealt with by the courts, it is probably only a matter of time before the courts also start to ask questions about the respective responsibility of supervisory bodies again and in greater depth. The following article therefore outlines the current status in theory and practice and derives some practical tips from current cases.
Basics
The core task of the supervisory board of a stock corporation is to monitor the “management”, i.e. the Executive Board, cf. § 111 of the German Stock Corporation Act (AktG). This monitoring task must in any case always be performed in the interest of the company and take into account the requirement for efficient supervision. This means that in particular the reporting and information duties imposed by law on the Executive Board vis-à-vis the Supervisory Board are at the same time a duty to request such information on the part of the Supervisory Board, which is why the Supervisory Board cannot exculpate itself by referring to a negligent information policy on the part of the Executive Board. It is true that the German Stock Corporation Act only requires a minimum of two meetings per calendar half-year as a minimum, in the case of non-listed companies, it even allows the conclusion that only one meeting per calendar half-year might be enough. In times of crisis, the supervisory board must intensify its activities, i.e. it must meet at much shorter intervals.
A graduated monitoring obligation applies, as the type, scope and intensity of monitoring must be adapted to the current situation of the company in each case. The classification into three levels of monitoring intensity as described in the legal literature can serve as a guideline. In this gradation, the supervisory board can content itself with accompanying monitoring if business is proceeding normally; in this case, it only needs to exercise the competences provided for in the law for ongoing monitoring. At the first signs of deterioration in the company’s situation, the supervisory board shall switch to supportive monitoring. This includes, for example, the request for additional reports and special meetings dealing specifically with the situation and development of problem areas. Only after a crisis has become apparent does the so-called formative monitoring take effect on the third level, which should primarily consist of considerations about the reorganization of the management competencies and about the suitability of the management board and, if necessary, lead to a decision about its replacement.
Specification of duties
In the 200s, the courts have in a number of well-known decisions further concretized these duties. For example, the Munich Regional Court decided in the “Kloster Andechs“-case: “In the situation of a crisis or the possibility of a crisis, the chairman of the supervisory board is obliged to convene a meeting of the supervisory board. If he fails to do so and measures to remedy the crisis would have been resolved at the meeting, he shall be obliged to compensate for the resulting damage. This applies especially if the management board and/or another member of the supervisory board demands that a meeting of the supervisory board be convened.“
In a 2009 ruling, the Federal Court of Justice (BGH) explicitly commented on the duties of the supervisory board when the company is insolvent – i.e. towards the end or after the third stage – and stated that the supervisory board must obtain a precise picture of the company’s economic situation and, in particular in a crisis situation, must exhaust all sources of information available to it under the German Stock Corporation Act. If the Supervisory Board determines that the Company is ripe for insolvency, it must work to ensure that the Executive Board files for insolvency in good time and does not make any payments that are incompatible with the due care and diligence of a prudent and conscientious manager. If necessary, the Supervisory Board must remove a member of the management board who appears to him to be unreliable. The BGH confirmed its line with a decision in 2010, stating that if “the supervisory board [recognizes] or it [must recognize] that the company is ripe for insolvency, if there are indications for it to assume that the management board will make payments contrary to the prohibition of § 92 (2) Sentence 1 AktG, the supervisory board must work to ensure that the management board refrains from making the payments contrary to the prohibition.“
Compensation
If the Supervisory Board breaches its supervisory duty, it is liable to the Company or the insolvency administrator – in addition to the Executive Board – for damages. According to § 15a (3) InsO introduced by the MoMiG-Bill in 2008 , the individual members of the supervisory board of an AG or cooperative (“Genossenschaft“) are themselves obliged to file any necessary insolvency petition in the event of “lack of management of a company” and are liablefor payments made after the company is ready for insolvency pursuant to § 15b InsO. However, these liability rules only apply to a facultative supervisory (or advisory) board to a limited extent, as the BGH ruled in the “Doberlug” case: “The members of the facultative supervisory board of a GmbH are only liable to pay compensation to the GmbH pursuant to § 93 (2), § 116 AktG, § 52 GmbHG in the event of a breach of their supervisory duty with regard to compliance with the payment ban under § 64 sentence 1 GmbHG if the company has suffered damage to its assets within the meaning of §§ 249 et seq. BGB (German Civil Code). In contrast, the members of the Supervisory Board are not liable if the payment – as is usually the case – has only led to a reduction in the insolvency estate and thus to damage only to the insolvency creditors.“
In this context, each individual member of the Supervisory Board is required to perform his or her supervisory duties in the best interest of the company. In the event of a breach of their duties, the individual members of the Supervisory Board members are liable to the Company for damages. In a subsequent liability dispute, the company or the insolvency administrator over its assets only have to show that the Supervisory Board may have breached the aforementioned duties and that the aforementioned duties and that this infringement has led to damages. The Supervisory Board must then provide counter-evidence that it has properly fulfilled its duties properly or that it was not at fault for a failure to do so. In In this context, the BGH ruled that a Supervisory Board member who does not have the necessary expertise can only fulfill his duties “if, giving a comprehensive account of the circumstances of the company and disclosing the necessary documents, s/he obtains advice from an independent professional qualified in the matter to be clarified and subjects the legal advice given to a careful plausibility check.” In contrast, a “supervisory board member who has professionally acquired specialized knowledge is subject to a heightened standard of care insofar as his or her area of expertise is concerned.“
Conclusion: For the supervisory board, these statements mean above all that it must focus its attention on the implementation by the management board of an early warning system within the meaning of § 91 (2) AktG so that the causes of a crisis can already be identified and combated in order to ultimately prevent its occurrence. If the occurrence of the crisis cannot be prevented, the Supervisory Board must work towards ensuring that the Executive Board constantly monitors the status of the company by preparing a going concern forecast / over-indebtedness balance sheet and a liquidity plan and, if necessary, that restructuring concepts are developed and implemented. If the restructuring and reorganization efforts fail, the supervisory board shall work towards the management board filing for insolvency without delay.
If one looks at the Wirecard case mentioned at the beginning, it proves true in view of the letter at the time, with which a supervisory board member threw in the towel at the scandal group back in 2017 (here, in German) once again proving the bomnot that “with a good board of directors the supervisory board [is] powerless, with a bad board of directors on the other hand helpless.” In the Bundestag investigative committee, she explained that the Supervisory Board of Wirecard had indeed failed to control the Management Board (here, in German). Accordingly, of course, there were calls for the Supervisory Board to be held liable (here, in German). If the statements of the former Supervisory Board member are measured against the catalog of duties outlined above, then the liability of the Supervisory Board members cannot be dismissed out of hand. In view of the amounts involved, these proceedings are also likely to occupy Germany’s highest civil court. The BGH, which has already steadily tightened the scope of duties and liability standards in its previous rulings, is likely to “tighten up” further in case of doubt in the relevant decisions. Accordingly, supervisory board members are advised to take a close look at their duties now and to examine the reporting channels within the company (for more information on the lessons learned from the RBB case, see again here ), to assess the relevant reports in a timely manner – and, if necessary, with the involvement of appropriately specialized consultants – and to critically support the management board.
LG München, Urt. v. 31.05.2007 – 5 HK O 11977/06 – „Kloster Andechs“
BGH, Urt. v. 16.03.2009 – II ZR 280/07
BGH, Urt. v. 20.09.2010 – II ZR 78/09 – „Doberlug“
BGH, Urt. v. 20.09.2011 – II ZR 234/09
All decisions are in German