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Coronavirus - German Federal Government plans legislative package to mitigate consequences of COVID-19 - Germany

  • Germany
  • Banking and finance
  • Corporate
  • Real estate
  • Restructuring and insolvency

24-03-2020

Changes to the insolvency, civil and criminal procedural law

The German Federal Government is currently planning various support measures for entrepreneurs, sole traders, other small, medium and large companies and credit institutions to mitigate the consequences of the Covid-19 pandemic. The draft law provides for temporary adjustments to legal requirements in civil, insolvency and criminal procedural law in order to avoid hardship cases that would otherwise result from the Corona crisis. The aim is to pass the law in the Bundestag (lower house of the German parliament) as well as in the Bundesrat (upper house of the German parliament) this week.

The planned changes are being prepared in addition to the measures already initiated by the federal and state governments in the areas of financing, labour and tax law.

The final version of the law may well differ from the proposal described below so that the further developments will have to be monitored in the course of this week.

Insolvency law

According to the draft of the "Covid-19 Insolvency Suspension Act" (COVID-19-Insolvenzaussetzungsgesetz – COVInsAG) dated 23 March 2020 ("COVInsAG"), the obligation to file for insolvency for companies affected by the Corona pandemic 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 draft law also restricts potential contest rights of a future insolvency administrator.

Suspension of the director’s duties to file for insolvency

The draft 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 the Corona pandemic 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 draft law provides for the legal presumption that the debtor's current insolvency situation is a consequence of the Corona pandemic 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 the Corona pandemic;
  • This is presumed if the debtor was still solvent on 31 December 2019.

The aim of the proposed COVInsAG is to give ailing companies and their directors time to carry out the necessary financing and reorganisation 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 reorganisation plan in order to be able to demonstrate the prospects of a reorganisation.

The suspension only applies in cases in which the obligation to file for insolvency would normally have arisen on or after 01 March 2020.

In line with the suspension of the obligation to file for insolvency, the draft 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 01 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 draft of 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 draft 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 01 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 draft law. This does not apply if the creditor knew that the debtor's reorganisation 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.

Dr. Christian Hilpert

Corporate law

Relaxation of requirements for the holding of general meetings

The Federal Government plans various measures to facilitate the holding of general meetings and thus to protect the participants of general meetings from possible risks of infection when a large number of people gathers in the same place. These measures require a legal basis since, according to the model of the German Stock Corporation Act, general meetings have so far always had to be held as "presence meetings", i.e. with the physical participation of the shareholders or their proxies within the framework of a physically held general meeting. The planned new regulations will apply equally to public limited companies, European Companies (SE) and partnerships limited by shares.

| Purely online general meeting: In future, it will be possible to hold general meetings entirely without the physical presence of shareholders. The management board will be able to decide upon this with the approval of the supervisory board. This requires a video and audio transmission of the entire meeting. This also includes the general debate and the votes. Another requirement of a purely online general meeting is that shareholders are given the opportunity to cast their votes either by electronic absentee voting or electronic participation and cumulatively in any case by traditional proxy voting.

| Easier absentee voting: In future, shareholders will be able to exercise their voting rights by means of written or electronic absentee voting even if the articles of association of the respective company do not contain a corresponding provision - a desirable provision, but of little relevance in practice, as most public companies offer this option anyway and have corresponding provisions in their articles of association.

| Shorter convening periods: In future, general meetings can be convened with a shorter notice period of 21 days. Other deadlines will also be shortened, i.e. in connection with the registration for a general meeting.

| Later date for the general meeting: In principle, the general meeting must take place within the first eight months of a financial year. In view of the upcoming general meeting season 2020, many companies, in light of the present Coronavirus situation, currently think about how to postpone general meetings already scheduled without having to risk a possible compensation liability of the management board. The legislator intends to remedy this situation: General meetings may take place "during the financial year" in the future. In practice, this means that the period in which the general meeting has to be held is extended by four months.

| Advance on the net profit: In future, it will be possible to pay an advance on the net profit to the shareholders, even if the articles of association of the respective company do not contain such an authorisation.

Regulations for the passing of resolutions in German limited liability companies (GmbH)

According to the government draft, provisions to facilitate the passing of resolutions in a GmbH will be included elsewhere within the framework of further legislative measures for the stabilisation of the economy.

Relaxation of requirements for mergers and other transformation measures

The present government draft also provides that mergers and divisions under the German Law Regulating the Transformation of Companies (Umwandlungsgesetz, UmwG), for which a closing balance sheet of the transferring entity must be filed with the commercial register, will be facilitated. So far, it has been possible to use a balance sheet which is dated a maximum of eight months prior to the point in time of the filing with the commercial register. In practice, this has meant that it has been possible to use a final balance with a balance sheet date of 31 December for transformation processes until the end of August of the following year, provided that the financial year corresponds to the calendar year.

This deadline will now be extended: In future, the balance sheet date may date back a maximum of twelve months, so that the final balance may be used as a basis for transformation processes until the end of December of the following year, provided that the financial year corresponds to the calendar year. With this provision, the legislator intends to avoid transformation measures failing for reason of an expiry of the deadline due to an inability to meet. In practice, this results in a period extended by four months during which transformation measures can still be implemented in the present calendar year despite possible delays due to the Covid-19 crisis.

Dr. Christian Mense

Civil law: Law regarding loans

Pursuant to the proposed wording regarding Art. 240 Sec. 3 para. 1 of the German Introductory Act to the German Civil Code (Einführungsgesetz zum Bürgerlichen Gesetzbuch, EGBGB), services under a consumer loan agreement concluded before 15 March 2020 which become due between 01 April and 30 June 2020 will be deferred for a period of three months, provided that the consumer cannot reasonably be expected to make payments as a consequence of the Covid-19 pandemic.

Pursuant to Sec. 3, a termination due to a default in payment, a considerable deterioration of the consumer's financial situation or the value of the collateral provided for the loan is excluded until the expiry of the deferral.

However, these facilitations are only applicable to consumer loan agreements within the meaning of Sec. 491 of the German Civil Code (Bürgerliches Gesetzbuch, BGB) which were concluded between a consumer within the meaning of Sec. 13 BGB as borrower and an entrepreneur within the meaning of Sec. 14 BGB as lender.

For loan agreements between entrepreneurs, the statutory provisions continue to apply. However, pursuant to Sec. 8, the German Federal Government can extend the personal scope of application to micro-enterprises and small and medium-sized businesses under an accelerated co-operation of the Bundestag.

Dr. Stefan Schramm

Civil law: Tenancy law

Within the framework of the legal regulations at the present time, we recommend that you do not simply stop payment of the rent. This would result in the risk that the landlord terminates the lease agreement due to a default in payment (details subject to individual review and further advice).

In addition, there is a danger that the tenant must pay default interest which is significant under German law (base interest rate plus five percentage points for consumers and base interest rate plus nine percentage points for non-consumers).

The German Federal Government initiated a procedure to amend the aforementioned legal regulation. It presented a draft law by which this regulation will be amended so that lease agreements cannot be terminated due to a default in payment in the period from 01 April until 30 September 2020 if the default in payment was caused by the effects of the Covid-19 pandemic. The landlord would then have the burden of proof that the default in payment was not caused by the pandemic.

Dr. Gerhard Molt

Criminal procedural law

The protective measures to avoid the spread of the Covid-19 pandemic also concern defence lawyers, courts and prosecuting authorities. According to reports, courts and public prosecutor's offices are partly working with skeleton staff only.

This circumstance also affects criminal trial proceedings which have already commenced. Trial proceedings under criminal law, in particular corporate criminal proceedings, often last for many months or even for years. Pursuant to applicable law, however, a longer interruption between two hearings is only admissible under rigid time restrictions.

According to applicable law, specifically pursuant to Sec. 229 para. 1, 2 of the German Code of Criminal Procedure (Strafprozessordnung, StPO), trial proceedings may generally only be interrupted for a maximum period of up to three weeks, under certain circumstances up to one month. In addition, Sec. 229 para. 3 StPO provides options to suspend the aforementioned time limits under certain circumstances. According to this section, the running of the time limit will be suspended for two months if a defendant or a judge is unable to participate in a trial due to illness (no. 1), or a judge is unable to participate due to statutory maternity leave or parental leave (no. 2). The aforementioned time limits expire no earlier than ten days after the suspension has ended. If the time limits are exceeded, the trial must recommence; all evidence must then be presented again.

The conditions justifying a suspension pursuant to Sec. 229 para. 3 StPO, however, are not fulfilled by mere protective measures to contain the Covid-19 pandemic. As a consequence, it could be observed in the past weeks that courts have concluded criminal proceedings in late evening hearings with shortened taking of evidence as quickly as possible, which had actually been planned to take place in the upcoming weeks or months. In its much noted first criminal case decision on so called "cum ex" transactions, Bonn Regional Court even refrained from making planned asset recovery decisions worth millions against various banks to avoid further delays of the proceedings.

Now that it becomes evident that the Covid-19 pandemic will lead to massive delays of criminal law trials due to the aforementioned staff shortage in the courts and prosecuting authorities, the draft law of the German Federal Government provides for an additional option to suspend proceedings for up to two months and ten days which permits the courts to suspend main proceedings for a total maximum of three months and ten days if they cannot be held due to measures under the German Infection Protection Act (Infektionsschutzgesetz, IfSG) to avoid the spread of the Covid-19 pandemic. It is intended to apply these provisions mutatis mutandis to the time limit for the pronouncement of judgments which, pursuant to Sec. 268 para. 3 sent. 2 StPO, ends no later than on the eleventh day after the end of the last hearing. The aim is to disburden the courts and the other participants in the proceedings from pending hearings without having to fully recommence trials after the end of the infection protection measures.

This new regulation is intended to apply for one year.

Dr. Joos Hellert and Dr. David Rieks

The draft of the legal text of the "Law on the mitigation of the consequences of the Covid-19 pandemic" is available here.