Going-Concern Forecasts and Over-Indebtedness

Why going concern forecasts matter for over-indebtedness

Going concern forecasts decide whether a German company with a negative balance sheet must file for insolvency. Over-indebtedness (Überschuldung) is an insolvency ground for legal entities and for partnerships without a natural person as personally liable partner. It exists if the debtor's assets no longer cover its existing liabilities, unless continuation of the business over the next twelve months is predominantly likely in the circumstances (§ 19(2) InsO). A company whose liabilities exceed its assets at liquidation values is therefore not over-indebted as long as a positive going-concern forecast exists.

If the forecast is negative, management must file without culpable delay and at the latest six weeks after over-indebtedness occurs (§ 15a(1) InsO).

In practice, the forecast is the central element of the test. Many companies, particularly in growth phases, after losses or with high leverage, show a balance sheet deficit; their survival as going concerns, and the legal position of their directors, depends on whether management can show, with documented and plausible planning, that the company will remain able to pay its debts for the next twelve months. Going concern forecasts are therefore a core governance task, not an accounting formality.

The two-stage over-indebtedness test

The test under § 19(2) InsO has two stages, which can be examined in either order. The going-concern forecast asks whether the company is predominantly likely to continue in business over the next twelve months, which essentially means whether it will remain liquid throughout that period. If the forecast is positive, the company is not over-indebted, whatever its balance sheet shows. If the forecast is negative, an over-indebtedness balance sheet (Überschuldungsstatus) must be prepared, valuing assets at liquidation values and including all liabilities; if the liabilities exceed the assets, the company is over-indebted.

The over-indebtedness balance sheet differs from the commercial balance sheet. Hidden reserves, for example in real estate, investments or intellectual property, can be included at realistic disposal values, while assets that have no value in a liquidation, such as capitalised development costs without a market, are excluded. Liabilities include provisions for obligations triggered by liquidation, such as social plans, contractual penalties and the costs of winding down operations. Shareholder loans are included unless a qualified subordination has been agreed: claims for which subordination behind all other claims under § 39(2) InsO has been agreed are not taken into account (§ 19(2) sentence 2 InsO).

Building going concern forecasts that stand up

A going-concern forecast is a liquidity forecast based on an integrated business plan. It should combine a profit and loss plan, a balance sheet plan and a cash flow or liquidity plan, typically monthly for twelve months, with assumptions that are explained and consistent with the company's history, order book and market. The forecast must show that the company can meet its payment obligations as they fall due throughout the period, taking into account existing financing, available credit lines, covenants and maturities.

The decisive question is plausibility. Courts and administrators reviewing going concern forecasts after an insolvency ask whether management, at the time, had a reasonable basis for its assumptions. Measures that the forecast relies on, such as a capital increase, a refinancing, cost reductions or the sale of a business unit, must be sufficiently concrete and likely to succeed; a mere hope that a bank will extend a facility or an investor will step in is not enough. In practice, a forecast is "predominantly likely" only if the probability of continuation is higher than that of failure, assessed on objective facts.

The Institute of Public Auditors in Germany (IDW) publishes a professional standard on the assessment of insolvency grounds, known as IDW S 11, which many advisers and courts use as a reference for how going-concern forecasts and over-indebtedness balance sheets should be prepared. It is not law, but following its methodology helps directors demonstrate that they acted with due care. Restructuring opinions prepared under the related IDW standard S 6 often contain a going-concern forecast as one of their components.

Going concern forecasts and the role of financiers

Most going-concern forecasts depend on the continued support of lenders. Maturities within the twelve-month period must be refinanced or extended in the forecast, and covenant breaches that would allow lenders to accelerate must be addressed through waivers or standstills. Lenders, in turn, often make their support conditional on a restructuring opinion and on the forecast being positive, which can lead to circular reasoning. Directors should break the circle with binding commitments: signed term sheets, credit committee approvals or standstill agreements that run beyond the critical dates in the forecast.

Shareholders can stabilise the forecast and the balance sheet through capital contributions, debt waivers, qualified subordination of shareholder loans, letters of comfort with a hard commitment to provide funds or loss absorption agreements. Soft comfort letters that merely express an intention to support do not normally carry sufficient weight, and support commitments should cover the full forecast period rather than ending shortly after the balance sheet date. Our insight on shareholder loans in insolvency explains qualified subordination and its insolvency consequences.

Consequences for directors and supervisory boards

Directors of German corporations must continuously monitor developments that could endanger the company's existence, take suitable countermeasures and report to the supervisory body without delay (§ 1(1) StaRUG). Preparing and updating going concern forecasts is a central part of this early-warning duty. If the forecast turns negative and the over-indebtedness balance sheet shows a deficit, the six-week filing period begins; it may be used only for serious efforts to remove over-indebtedness or to prepare a filing. After over-indebtedness occurs, payments are restricted under § 15b InsO, and directors face personal liability and criminal sanctions for late filing.

Supervisory boards and advisory boards should request the forecast, question its assumptions and record their review. Auditors examining annual financial statements apply their own going-concern assumption under § 252(1) no. 2 HGB, which is related but not identical to the insolvency law forecast; a qualified audit opinion or a reference to material uncertainty about the going concern is an important warning signal for directors and lenders. Our page on directors' duties in a crisis explains the wider framework, and our insight on the illiquidity test under § 17 InsO covers the liquidity ground.

Going concern forecasts in special situations

Some business models make going concern forecasts particularly demanding. Start-ups and scale-ups financed by venture capital often show balance sheet deficits for years. Their forecast depends on the next financing round, which is rarely certain twelve months in advance. Directors should document the runway based on existing cash, the status of fundraising, binding commitments from existing investors and the measures available if the round fails, such as cost reductions that extend the runway. A forecast that only works if a new round closes at the planned valuation is vulnerable.

Seasonal businesses, project companies and companies with large one-off payments need monthly or even weekly granularity in the forecast, because a liquidity trough in a single month can make continuation unlikely even if the annual result is positive. Companies with significant guarantees, warranty claims or litigation risks must include realistic estimates of these contingent liabilities. Group companies must assess their own forecast, taking into account only intra-group support that is legally enforceable, such as a domination and profit transfer agreement with a parent that is itself solvent, or a hard letter of comfort.

Real estate and infrastructure companies face a further issue: their forecast often depends on refinancing maturities at a time when property values have fallen. Where loan-to-value covenants are breached or refinancing is uncertain, the forecast must reflect realistic terms, including higher interest costs and equity injections required by lenders.

How forecasts are reviewed after an insolvency

When a company becomes insolvent, the administrator examines when over-indebtedness or illiquidity occurred in order to assess claims against directors and avoidance claims. Directors who relied on a positive forecast must then show that the forecast was prepared with due care on the basis of the information available at the time.

Courts do not judge with hindsight whether the forecast turned out to be correct, but whether a prudent manager could have regarded continuation as predominantly likely. Missing documentation, unexplained assumptions and forecasts that were never updated despite deviations are the main weaknesses in such disputes. Directors should keep the forecast, the underlying data and the board's deliberations together in a way that can be reconstructed years later.

Restructuring options when forecasts turn negative

A negative forecast does not necessarily mean liquidation. If the company is not yet illiquid but imminently illiquid, it can use the StaRUG to restructure financial liabilities, or protective shield proceedings to prepare an insolvency plan; see our page on the StaRUG restructuring framework and our insight on protective shield proceedings. Note, however, that over-indebtedness already triggers the filing duty, and a StaRUG process requires notification of insolvency to the restructuring court, which may then terminate the matter. Timing is therefore critical in every case: going concern forecasts that are prepared early and honestly preserve more options than forecasts that are adjusted repeatedly to postpone the inevitable.

How TRW & Co helps

We advise management boards, managing directors, supervisory boards, shareholders and lenders on over-indebtedness and going-concern assessments. We review forecast methodology, assumptions and documentation together with financial advisers, draft board resolutions and subordination agreements, assess filing obligations and structure financing measures that stabilise the forecast. When disputes arise, we defend directors against liability claims or advise administrators on asserting them. This page is general information, not legal advice. To discuss a company's position, please contact us.