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Update regarding the changes to insolvency law

  • Germany
  • Coronavirus
  • Coronavirus - Country overview
  • Restructuring and insolvency

08-09-2020

1. Limited extension of the suspension of the obligation to file for insolvency

The German Federal Government intends to extend the extensive suspension of the obligation to file for insolvency, which has been in effect since March 2020, albeit in a more limited capacity than the current regulations. According to the Federal Government's drafting aid on the draft bill for an amendment to the COVID-19-Insolvenzaussetzungsgesetz (COVInsAG) of 2 September 2020, the suspension of the obligation to file for insolvency due to an over-indebtedness will be extended from 1 October through 31 December 2020 for companies affected by the COVID 19 pandemic.

The goal of this limited extension is to continue to provide these companies with the opportunity to make use of offers of governmental aid and extrajudicial negotiations (independently of insolvency proceedings) to restructure and secure financing.

It should be noted that the obligation to file for insolvency of companies which are already illiquid will once again apply in full from 1 October 2020 onwards. This will affect the statistically most common reason for corporate insolvency in Germany – according to the credit agency Creditreform, 90 percent of all insolvency proceedings in Germany list illiquidity as the reason for insolvency.

Furthermore, the suspension of the obligation to file for insolvency does not apply if the over-indebtedness was not caused by the impact of the COVID-19 pandemic. According to the currently applicable version of the COVInsAG, the suspension also takes no effect if there are no prospects of eliminating the illiquidity. On both counts there is a legal presumption of a suspension of the obligation to file for insolvency in favour of the company, insofar as it was not yet illiquid on 31 December 2019. This presumption, however, can be refuted.

In this context there are two possible liability risks not yet conclusively clarified by the courts that should be taken into account:

| Firstly, the management of a company must not wait until 1 October 2020 to file for insolvency if there is currently no prospect of eliminating an illiquidity that has already occurred.

| Secondly, the management should also not rely on the applicable maximum period of three weeks to file for insolvency. If the company in question is in fact illiquid on 1 October 2020, the application should be filed without further delay in order to avoid civil and criminal liability for a delayed filing for insolvency.

2. Plan to extend liability privileges

Pursuant to the currently applicable version of the COVInsAG, payments that are made during period of suspension, i.e. until and including 30 September 2020, and which are made in the interest of maintaining the company’s business operations are deemed to have been performed with the diligence of a prudent manager (Sec. 64 sentence 2 GmbHG, Sec. 92 para. 2 sentence 2 AktG, etc). In this way, management’s liability for ongoing payments such as rent and lease payments as well as salaries can be largely avoided. For the period from 1 October through 31 December 2020, this liability privilege shall, however, only take effect for payments made after over-indebtedness has been determined. In cases of illiquidity, the aforementioned privilege shall no longer apply. The same shall apply to the privileged treatment of potential claw back actions, especially with regard to restructuring loans and associated collateral, as well a shareholder loans for which no subordination of claims applies to the detriment of the financing shareholder until the end of the year in cases of over-indebtedness without illiquidity.

3. Summary and recommended action

| In cases of illiquidity on 1 October 2020, the legal regime which was applicable prior to the introduction of the COVInsAG in March 2020 will apply again. Therefore, especially corporations and associations will again be obliged to submit an application for insolvency.

| A rolling 13-week liquidity forecast should be prepared proactively in order to monitor the company’s liquidity status.

| In cases of insolvency due to a pandemic-caused over-indebtedness, the obligation to file for insolvency is still suspended until and including 31 December 2020. The fact that the over-indebtedness was caused by the pandemic should be well documented.

| In cases of insolvency due to over-indebtedness it is recommended to start drawing up a positive continuation prognosis before the end of 2020, and to document this prognosis very precisely.

| Finally, it should be noted that illiquidity can often exist alongside over-indebtedness so that greater caution may be required with regard to the prolonged suspension of the obligation to file for insolvency, due to its limited scope.