Pauliana and directors' liability in restructuring: what startups should pay attention to

Why this topic is especially relevant to startups and scale-ups

For startups and scale-ups, restructuring is rarely a theoretical exercise. The runway is getting shorter, suppliers want to get paid faster, financiers are asking for extra comfort, and management is trying to buy time to stabilize the company or make it possible to restart. In this phase, existing obligations continue, new ones are entered into and painful choices often have to be made about who will and will not be paid first.

At Startup-Recht, we see that it is precisely young growth companies that face an accumulation of interests in such a phase. Creditors want a redress, employees want clarity, customers count on continuity and investors want to prevent the company from losing value unnecessarily. This makes restructuring legally sensitive. What seems like a wise rescue attempt on Monday can suddenly be assessed from the perspective of harming creditors after a bankruptcy on Friday.

This field of tension is not new, but it is extra relevant for tech companies. They often operate quickly, contract internationally and are highly dependent on ongoing services, financing and trust in the market. Especially then, there is a great risk that directors will act too defensively, while too much caution can also destroy value.

When a rescue attempt becomes legally exciting

Restructuring takes time. During that period, selective payments are often made, new financing is raised, securities are provided or parts of the company are divested. All these actions, if things ultimately go wrong, can result in the estate being smaller or that creditors have less recourse than would have been the case without them.

That's where the crux of the problem lies. It is precisely in difficult circumstances that the board should try to save the company or at least limit the damage for those involved. At the same time, every director knows that a trustee will subsequently check whether actions performed before bankruptcy can be affected, and whether there is reason to hold directors personally liable. That ex-post assessment is often stricter than the decision-making process at the moment, if only because it is known afterwards how it ended.

In practice, this causes tension. If the legal frameworks are unclear, there is a risk that directors will move too quickly towards filing for bankruptcy, while there may still be real opportunities to restructure or limit damage to employees, customers and others involved. This is a serious issue for startups and scale-ups, because timing is often the deciding factor in this phase.

Pauliana, when transactions may be affected later

The pauliana is essentially about whether a legal act can be affected because creditors are thereby disadvantaged in their redress options. This is a powerful tool, precisely because it is not just about compensation afterwards, but about affecting the transaction itself.

Unmandatory legal acts

In the case of compulsory legal acts, the focus is on three elements: there must be a legal act, creditors must be disadvantaged by that act and there must be knowledge of disadvantage. That science is rigorously assessed. The main issue is whether, at the time of the act, the bankruptcy and the shortfall therein were foreseeable with a reasonable degree of probability, for both the debtor and the other party.

This is an important point of attention for startups. The closer the company gets to an insolvent situation, the harder it becomes to defend transactions that are not strictly necessary or that primarily favor one party. Examples include providing additional securities, transferring assets or making structures that visibly weaken the position of other creditors.

That does not mean that every rescue act is automatically suspicious. However, it means that the legal risk increases the deeper the company is in the danger zone and the disadvantage of creditors becomes more foreseeable.

Payments and other mandatory actions

In the case of mandatory legal acts, such as payment of due debts, the assessment framework is different. A payment is not necessarily touchable just because other creditors therefore have less left over. This is where more stringent conditions apply to encroachment, such as familiarity with a bankruptcy petition or collusion.

Selective payments, in particular, are a recurring theme for startups. In practice, it is understandable that a company continues to pay crucial parties, for example to keep the operation running. At the same time, the law distinguishes between mandatory actions and mandatory obligations on this point. As a result, when it comes to selective payment, the analysis is often less straightforward than entrepreneurs think.

The lesson is mainly that the label on a transaction does not say enough. A payment may feel necessary and yet lead to discussion later. Conversely, not every disadvantage suffered by creditors automatically leads to impairment.

Directors' liability, not every failed choice is immediately personally culpable

In addition to the pauliana, directors' liability plays a major role. That is a different instrument, with a different approach. The focus here is not on the annulment of a transaction, but on whether a director can be personally made a sufficiently serious accusation.

That standard is open. There is a well-known line that a director can be liable if he enters into obligations on behalf of the company when he knew, or should reasonably have understood, that the company would not be able to meet those obligations and would not offer redress. But that's not all there is to say. Other circumstances may also lead to the assumption of a personal serious accusation.

For startups and scale-ups, it is particularly important that this assessment should not be mechanical. In restructuring, a director must weigh more than just the interests of creditors. The interests of employees, customers and other stakeholders can also weigh heavily. In some situations, it can even be irresponsible to stop abruptly, for example because orderly dismantling takes time or because the damage for third parties will increase.

Nevertheless, the creditor's interest in the vicinity of a possible bankruptcy weighs heavily. As the risk of bankruptcy becomes more concrete, the risk that actions that reduce creditors' redress options will later be charged to a director personally. The risk of bankruptcy therefore plays an important role in assessing what is still allowed.

At the same time, the threshold for directors' liability should be high. This is not only in the interests of directors themselves, but also socially. If directors only act defensively out of fear of personal liability, serious rescue efforts are aborted too quickly. For young companies, this is a real danger.

The tension between pauliana and directors' liability

In practice, there is a conflict between these two regimes. The pauliana is often approached as if applicability mainly depends on checking off legal requirements. In fact, directors' liability is an open standard, where all circumstances of the case can play a role. That difference in systematics makes the outcome less predictable.

In addition, both doctrines are often about the same facts. A payment, security or transfer of assets can be viewed simultaneously as a potentially paulianous legal act and as conduct that was personally culpable for directors. This makes the legal pressure in restructuring greater than many founders estimate in advance.

For startups, this isn't a purely dogmatic discussion. When the space between lawful restructuring and culpable harm is unclear, directors will naturally wonder whether it is safer to do nothing at all. Especially in a scale-up that still has operational value, that can be the worst outcome.

In international startups, there is another layer on top

Many tech companies work across borders. Contracts are governed by foreign law, financiers are in other countries, and assets or securities affect multiple legal systems. Then an additional question comes to the table: which law actually determines whether a transaction is touchable?

Out of bankruptcy

Outside of bankruptcy, that question cannot always be answered with one simple reference line. In practice, therefore, it is very important which law applies to the legal act in question. That right can also determine whether and under what conditions a creditor can affect a transaction outside bankruptcy.

For startups, this means that a cross-border contract structure does more than just establish commercial agreements. The applicable law can also become relevant if a discussion later arises about harming creditors. A choice of law is therefore not only a contractual detail, but can influence the risk profile of the transaction.

In bankruptcy

The main rule in insolvency proceedings is that the question whether a legal act that is detrimental to creditors can be annulled is governed by the law of insolvency proceedings, the lex concursus. This brings clarity, because the insolvency law of the procedural state is, in principle, leading.

At the same time, not everything has been said. The debtor's other party can defend itself under circumstances by invoking the law that governs the transaction itself, the lex causae. If, in the specific case, that right offers no possibility to affect the action, this may be a blockade for the annulment action. The combination therefore works rigorously: insolvency law prevails, but the law applicable to the transaction can provide a decisive counter-argument.

In practice, it is also important that this protection covers actions taken before the opening of insolvency proceedings. In fact, for actions after opening, the emphasis is much more strongly on insolvency law itself.

Payments, securities and choice of law

In international restructuring, it becomes even more technical as soon as payments, deliveries or security rights come into view. In property law actions, such as transfer or establishment of security, the law applicable to property law plays a major role. When it comes to payments, it is precisely the law that governs the payment obligation that is particularly important.

This has practical consequences. Anyone who provides extra security, transfers assets or makes payments through a foreign contract structure in the run-up to a possible bankruptcy should be aware that different legal systems can play a role. This makes the analysis more complex, not necessarily more beneficial.

A choice of law also deserves attention. In principle, the chosen right may be relevant to the assessment of violability. But an artificial choice that seems primarily intended to make a transaction less susceptible to corruption does not offer an obvious safe haven. Especially where the choice is considered deceptive or unlawful, that defense can fail.

For international startups, the message is therefore clear: cross-border structuring can have commercial advantages, but it does not eliminate insolvency risks. Sometimes it just adds an extra layer of uncertainty.

What founders, directors and investors should take into account

The first lesson is that restructuring requires legal discipline. As soon as bankruptcy becomes seriously imaginable, important transactions must be assessed not only commercially but also in terms of insolvency law. This certainly applies to selective payments, guarantees, new financing agreements and transactions with parties that are already close to the company.

The second lesson is that directors must make their assessment broadly and be able to explain that consideration. Not only does the creditor interest count, but other legitimate interests can also weigh heavily in restructuring. That is why it is important that decision-making does not remain implicit. The more concretely it is visible which interests were taken into account and why a certain route was chosen, the more defensible that choice is later.

The third lesson is that cross-border setups deserve extra attention. In the case of foreign contracts, securities and payments, it is necessary to consider early which law applies to which link in the transaction. That is not an issue to address until a curator comes forward.

Finally, it is important for investors and other stakeholders that a rescue attempt is not necessarily suspicious. The law should leave room for serious restructuring. But that space is not limitless. Whoever tries to maintain value must at the same time prevent the position of joint creditors from being eroded without good ground.

Conclusion

Together, Pauliana and directors' liability form a difficult playing field for companies in trouble. For startups and scale-ups, that playing field is even more complex, as speed, dependencies and international contract structures further increase the pressure.

The point is not that directors are no longer allowed to do anything in a crisis situation. The core is that they must act thoughtfully, with an eye for the interests of creditors and other stakeholders, and with a keen eye for the legal vulnerability of transactions. Anyone who acknowledges this too late runs the risk that a rescue attempt will be read as a disadvantage afterwards.

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