Germany - An international perspective – Views on key issues from around the globe

Supply chain disruption

According to German law, frustration (“Störung der Geschäftsgrundlage”) is a legal term which can excuse a party from non performing a contract. The courts are very reluctant to concede this consequence. It is considered as the ultima ratio. The parties have firstly to see whether an adaption of the contract to the new circumstances is possible or not. By the end of March 2020, the German legislator had passed a new law recognizing in favor of consumers in some cases of retention rights provided that the consequences of COVID-19 prevent them from rendering an owed service.

Insolvency and restructuring

According to the COVID-19 Insolvency Suspension Act (COVID-19-Insolvenzaussetzungsgesetz – COVInsAG), the obligation to file for insolvency for companies affected by COVID-19 will be suspended at least until 30 September 2020 (at the latest until 31 March 2021). This also affects the liability of managers associated with this obligation. Furthermore, the law also restricts potential contest rights of a future insolvency administrator.

Suspension of the director’s duties to file for insolvency

The law provides for a suspension of the director’s obligation to file for insolvency until 30 September 2020. A suspension will not be possible if the current insolvency situation of the debtor is not a consequence of COVID-19 and if there is no prospect of remedying the debtor’s current illiquidity. If the debtor is currently insolvent but was still solvent on 31 December 2019, the law provides for the legal presumption that the debtor’s current insolvency situation is a consequence of COVID-19 and that there is a prospect of remedying the debtor’s current inability to pay.

The conditions to be met are as follows:

• the current illiquidity is due to the effects of COVID-19
• this is presumed if the debtor was still solvent on 31 December 2019

The aim of the COVInsAG is to give ailing companies and their directors time to carry out the necessary financing and reorganization negotiations to avert insolvency in this particularly tense situation.

However, since the directors must in any event prove that the company was still solvent on 31 December 2019 (as the legal presumption applies only in this case), the companies must in any event establish a liquidity status and prove that the insolvency did not occur before 31 December 2019 and continued thereafter. The majority of companies will probably rely on an auditor and should in this case also instruct the auditor to prepare a reorganization plan in order to be able to demonstrate the prospects of a reorganization.

The suspension only applies in cases in which the obligation to file for insolvency would normally have arisen on or after 1 March 2020. In line with the suspension of the obligation to file for insolvency, the law also restricts the creditors’ right to apply for the opening of insolvency proceedings over the assets of a debtor. For a period of three months from a date at the end of March (which is to be determined in the course of the legislative process), a creditor’s application will only be successful if the debtor was already insolvent on or before 1 March 2020.

Suspension of liability

The suspension of a director’s liability for payments after the occurrence of insolvency has also been included in the COVInsAG and will be consistently implemented - in accordance with the regulations on the suspension of the obligation to file for insolvency.

At the same time, it is becoming apparent that payments made during the suspension period which serve to maintain business operations are considered to be effected with the diligence of a prudent director (Secs. 64 sent. 2 of the German Act on Limited Liability Companies (“GmbH-Gesetz - GmbHG”)/92 para. 2 sent. 2 of the German Stock Corporation Act (“AktG - Aktiengesetz”), which means that liability of the directors for ongoing payments for rents, leases, salaries and other necessary payments is largely avoided.

Restrictions on the contesting of debtor’s transactions in insolvency proceedings

In line with the suspension of the duties to file for insolvency, the law also restricts the rights to contest the debtor’s transactions of a future insolvency administrator in the event of insolvency proceedings. If new loans are granted to the debtor during the suspension period (i.e. from 1 March 2020 to at least 30 September 2020) or if new securities are provided to the creditor for his loan, repayments on these loans made up until 30 September 2023 and the provision of these securities are not regarded as disadvantageous to creditors and are therefore not contestable by a future insolvency administrator. This applies in particular also to shareholder loans. Payments or the delivery of goods or provision of services to a creditor during the suspension period, which the creditor was entitled to claim in that manner and at that time, are also not intended to be subject to any contesting of the debtor’s transactions under the law. This does not apply if the creditor knew that the debtor’s reorganization and financing efforts were not suitable to eliminate the illiquidity. For the latter, the future insolvency administrator bears the burden of proof and of producing evidence.

Health and Safety issues

In Germany, the advice to employers is quite comparable. They should narrowly follow the recommendations of the RKI (Robert Koch Institute, https://www.rki.de/EN/Home/ homepage_node.html) and of the ministries of the respective “Bundesland” as well as the local communities. Specific attention should be paid to the adequate deployment of risk groups such as older employees or employees with pre-existing conditions.

Restrictive covenant enforcement

In Germany, this topic is covered with respect to key employees who have special skills or know-how by post-contractual non-compete covenants in the aim to protect business interests. These provisions require, however, a well-prepared contract design. In principle, the following conditions have to be met:

• it must be in writing. A document signed by the employer containing the agreed provisions must be handed over to the employee
• the employer must undertake to pay a compensation which, for each year of the non-competition obligation, amounts to at least half of the total remuneration last received by the employee
• the non-compete obligation must be limited insofar as it has to cover a legitimate business interest of the employer and cannot extend two years following the termination of the employment relationship
• in addition, the geographical scope must be limited to the company’s field of activity

Employment tribunals and employee relations

In Germany, businesses which intend to terminate an employment agreement for operational reasons due to COVID-19 will have to prove that there have been no less drastic means than a termination (such as short-time work allowance or comparable state subsidies). In order to facilitate procedures at the labor court, the Government has passed a law enabling video conferences instead of oral hearings.

Impact on your insurance

In Germany, there is currently a real wave of lawsuits pending re: business shutdown insurances. The decisive question is whether the GTC of the insurance policy refer to an enumerative catalogue of infectious diseases (where COVID-19 is not mentioned as the policy was signed before the outbreak of COVID-19) or whether they refer to the Infection Protection Act (IfSG) – so-called dynamical reference. In the first case, coverage would be generally excluded, in the latter case, coverage could be included. There is no general answer, it has to be decided on a case-by-case basis.

Increasing risk of fraud

In Germany, very soon after the establishment of simple and unbureaucratic state subsidies for companies that have fallen into economic difficulties due to the lockdown, the first cases of subsidy frauds became public. This experience will certainly lead to an increase in spot checks on beneficiaries of subsidies.

Class actions

In Germany, we have not seen so far specific class actions due to COVID-19. There will certainly be an accumulation of lawsuits with respect to similar issues, for example against insurers re business interruption policies for hotels and restaurants (interpretation over the scope of coverage according to the general insurance conditions).

Construction issues

According to the cooperation requirement (“Kooperationsgebot”) established by the Federal Court of Justice (BGH), the parties to a construction contract are required to jointly and severally adjust the concluded construction contract as a result of the crisis that has occurred.

However, this possibility of adjustment is not a “one-way street”, but applies to both parties. If the contract was concluded before 11.03.2020 - the date of the official recognition of COVID-19 as a pandemic - a claim for an adjustment of the contract can be considered. If such an adjustment of the contract is not possible, which is likely to be the case only in absolutely exceptional cases, the termination of the construction contract may also be considered. However, it is recommended that the parties openly and honestly address the threatening negative effects on the construction contract so that the contracts can be processed to the satisfaction of both parties even in this crisis. The concrete effects of the construction process should be agreed in the form of a written addendum. In any case, the parties should not use the current crisis as an “excuse” for other shortcomings in the project.

When concluding a new construction contract, each party must examine the contract to see what effects the COVID-19 crisis may have on the terms of the contract. Often construction contracts that are about to be signed will have to be almost completely renegotiated, as in particular agreed deadlines and also the remuneration can hardly be calculated reliably. Corresponding regulations for an appropriate distribution of risk should also be considered.

Real estate

In Germany, if the lessee is in default with a substantial part of his rental payments, the lessor may terminate the rental agreement by extraordinary notice.

The law to mitigate the consequences of the COVID-19 pandemic (“COVID-19 Act”) creates an exception from this legal principle to protect tenants:

If the tenant did not pay any rent in the period from April 1, 2020 to June 30, 2020 despite the fact that it was due, the landlord may therefore not terminate the lease (until the end of June 30, 2022) if the non-performance is due to the effects of the COVID-19 pandemic. This period has not been extended beyond June 30, 2020.

The connection between the COVID-19 pandemic and the non-performance must be substantiated by the lessee. Mere non-payment is therefore not sufficient.

If the tenant is affected by an officially-ordered closure of the business, this can be an indication that the non-payment of the rent is “based” on this. The purpose of the COVID-19 Act is to secure tenancies as a (business) livelihood. This indicates that the non-payment of rent is only “based” on the pandemic in the sense of the law if the tenant is therefore not able to pay the rent. This is the case, for example, if a business closure results in a considerable drop in turnover and there are not sufficient liquid funds to pay the rent.

In this respect, caution should be exercised in the event of non-payment of the rent, because if the special conditions of the COVID-19 Act are not met, the landlord could effectively terminate the lease. The COVID-19 law does not affect the tenant’s obligation to pay the rent. Even if a termination is excluded, the landlord can still demand the rent, enforce it in Court if necessary and also claim interest on arrears in case of default. Depending on whether a consumer is involved in the rental relationship, this amounts to five or nine percentage points above the base interest rate. In some cases, it is argued with different legal justification that due to the effects of the COVID-19 pandemic the rent is reduced or the obligation to pay the rent is not applicable at all. However, these views are not legally certain and should therefore be weighed up against the specific wording of the lease. Overall, we recommend that the tenants carefully examine both the requirements of the COVID-19 Act and the temporary prohibition of termination regulated therein, as well as any rights to reduce the rent. In order to master the crisis in a spirit of partnership and to minimize legal risks, an amicable solution can be advantageous for both parties. Such an agreement can combine components of deferral, repayment, a temporary waiver of termination and, if necessary, rent reductions or investment subsidies. In this context, it is particularly important to bear in mind the tax implications.

Operational resilience

From a German point of view, it should be mentioned that the German Federal Government has made acquisitions of businesses in the health sector by foreign purchasers subject to the same regime which applies to companies operating critical infrastructures. It has also clarified and tightened certain general aspects of that regime, irrespective of the sector concerned. This results in new hurdles for foreign purchasers against acquiring shareholdings in companies (not only) in the health sector. In this context, it is interesting to know that German Economy Minister Peter Altmaier confirmed Monday that the Government is investing in biotech firm CureVac. The move follows attempts by the US in March to acquire a stake in the company. Germany will pay €300 million ($337.4 million) for a 23% share.

“The German Government has decided to invest in this promising company because it expects that this will accelerate development programs and provide the means for CureVac to harness the full potential of its technology,” Altmaier said at a news conference. He added that Germany wants to strengthen its sectors in life sciences and biotech and that the Government would not have any authority over CureVac’s business strategy.