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Management responsibility prior to the bankruptcy particularly with regard to the financial resources

Management responsibility prior to the bankruptcy particularly with regard to the financial resources

A natural consequence of the financial crisis is an increased focus on companies’ sustainability with regard to continued operations and thus the management’s responsibility to ensure that the company’s financial resources are sufficient and justifiable at all times.

1. Management’s responsibility

It may be very difficult to distinguish between justifiable and unjustifiable managerial dispositions at the time of a bankruptcy as it is necessary to weigh on the one side the consideration for the stakeholders in the cliffhanging company against on the other side the consideration for the management’s performance in the cliffhanging company.

When assessing whether a company’s management has handled the company’s interests with due consideration to its financial resources in the period leading up to the bankruptcy. It is most essential to evaluate the management’s duty to act, its duty to acknowledge the financial problems and to act on this knowledge. It is imperative for the company’s management to ensure the availability of the necessary liquid resources to fulfil the company’s current and future obligations as they become due. The term liquid resources cover the relationship between the company’s assets and liabilities as well as potential loan possibilities with financial institutions. At the same time it is important to review the time frame for the company’s planning, including budgets, operational considerations etc. In the opinion of the advisories behind the companies act in 2009, the liquid resources are considered to be of great importance to the company’s continued operations.

2. The new companies act in 2009

The basis of liability is almost the same after the adoption of the new companies act in 2009. However, following the enactment the expected actions in a given situation have been specified and it therefore appears easier to establish managerial omissions. There appears to be more focus on the management’s duty to act, cf. the wording in the act regarding the duty to supervise, ensure, consider and secure etc. However, the expectations for the standard action is still extended as it must be seen in light of the ”Business Judgment Rule”. A company’s management has a certain freedom to make business assumptions about what it believes serves the company’s interest best. This also seems to be supported by the conclusion in the advisory opinion.

The requirements to secure the company’s financial resources have been aggravated and specified in the relevant provisions of the companies act of 2009. The management responsibility thus appears to be more evident and thus perhaps greater.

The courts still consider the point of no return to be the time where the management ”should have known” that the company’s financial situation was so overstretched that it was not realistic to continue operations without lender incurring a loss. Prior to the point of no return the primary consideration is to the company’s continued operations whereas after the point of no return, the primary consideration is to the risk of incurring a loss.

3. Stakeholders

The creditor appears to be in a considerably better position since the enactment of the companies act in 2009, as creditor obtains protection through specific requirements to secure the financial resources. The minimum capital requirement for a danish private limited company “ApS” was in 2013 reduced to DKK 50,000 as yet another step and an approximation towards the international trend. This step is a consequence of the fact that the management must secure sufficient and justifiable financial resources and there is confidence in this being an effective instrument.

The requirements to the management to continuously secure sufficient and justifiable financial resources contain a very significant protection of the stakeholders, particularly the creditors. However, the requirement does not contain the same objectivity as the auditor’s verification of the management’s evaluation of the Going Concern premise as this is still the management’s evaluation.

4. The auditor

The auditor is not directly liable for continuously ensuring that the management complies with the company law requirements to the financial resources and financial losses, but there is an indirect liability through the auditor’s liability under the Act on Approved Auditors and Audit Firms to evaluate and verify the management’s evaluation of whether the activity is a Going Concern at the time of the auditor’s report and during the entire auditing process.

If a company is declared bankrupt, it is not only important to evaluate whether the company’s management has observed the company law requirements to the financial resources and the accounting law requirements to a Going Concern, but also whether the auditor has observed his liability under the Act on Approved Auditors and Audit Firms when issuing the auditor’s report and during the entire auditing process in relation to the Going Concern premise, including securing the company’s financial resources.

You are most welcome to contact us for any further queries and you may contact the author by e-mail.

By Louise Rosenskjold

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