On 25 March 2020, the Federal Parliament resolved the “Act to mitigate the impact of the COVID-19 pandemic in civil, insolvency and criminal procedural law” (Gesetz zur Abmilderung der Folgen der COVID-19-Pandemie im Zivil-, Insolvenz- und Strafverfahrensrecht). This Act is to be confirmed by the Bundesrat (Upper House of the Federal Parliament) on 27 March 2020 and will then enter into force (in part) retroactively as of 1 March 2020.
Statutory relief
Companies that are now facing, or may soon face, economic difficulties due to the coronavirus pandemic which threaten their existence should be able – at least temporarily – to continue their business operations. In order to achieve this objective, the following temporary changes to the German insolvency law will be implemented by the “COVID-19 Insolvency Suspension Act” (COVID-19-Insolvenzaussetzungsgesetz – "COVInsAG"):
- The legal obligation to file for insolvency will be suspended until 30 September 2020: The obligation to file for insolvency will generally be suspended until this date. However, this does not apply to companies whose illiquidity or over-indebtedness is not due to the consequences of the coronavirus pandemic or if there are no prospects for the company to eliminate an existing illiquidity in the future.
- The payment prohibitions for managing directors are temporarily restricted to some extent: As long as the obligation of an illiquid or over-indebted company to file for insolvency is suspended, the management must observe restrictions in the conduct of its business. Without the COVInsAG, illiquid or over-indebted companies would be largely restricted from making payments, and the managing directors would be personally liable for not complying with these restrictions of payment. The COVInsAG will not change the personal liability of the managing directors for any violation of the restrictions of payment. However, COVInsAG extends the scope of exceptions of permissible payments: as an exception all payments that are made in the ordinary course of business are permitted. The managing directors bear the burden of proof to demonstrate that these requirements are met.
- New financing will temporarily be privileged: If new loans are made available until 30 September 2020, repayments of such loans and the securities granted for such loans can be avoided in potential subsequent insolvency proceedings only to a limited extent. This also applies to some extent for new shareholder loans, and the repayment of new shareholder loans may be avoided in potential subsequent insolvency proceedings only to a limited extent as well. Moreover, new loans that are made available until 30 September 2020 shall not be deemed to cause an unlawful delay of insolvency proceedings which usually gives rise to creditors’ liability in certain situations. Accordingly, such loans can be made available by banks and other financing parties with legal security, even without the (usually necessary) restructuring opinion. This privileged treatment of loans made available by the Kreditanstalt für Wiederaufbau (KfW), a state owned bank, and its financing partners, or by other institutions within the framework of the governmental coronavirus aid programmes, will apply without limitation and independently of whether the loan was made available before or after 30 September 2020.
- Temporary restriction of rights of avoidance in insolvency proceedings: Contracting partners of companies in crisis shall be motivated to continue their business relationships. The risk that ordered goods and services or granted securities may be avoided in potential subsequent insolvency proceedings will therefore be reduced. Securities or satisfactions to which the recipient was entitled “in the manner and at the time” are therefore generally not avoidable. An avoidance shall only be possible in an exceptional case, i.e. if the recipient of a payment or delivery is aware that the debtor’s restructuring and financing efforts have not been suitable for eliminating an illiquidity of the debtor.
Consequences: Obligations to act in accordance with German insolvency law and liability risks continue to exist, but there are also structuring options and opportunities
Obligations to act in accordance with German insolvency law and substantial liability risks continue to exist. Therefore, a duly conducted coronavirus crisis compliance review is paramount. A component of such coronavirus crisis compliance is the appropriate documentation of these compliance measures. The reasons for filing for insolvency still have to be examined and monitored continuously, since they determine whether the restricted prohibitions of payment must be observed. Moreover, the obligations to file for insolvency – with the associated civil and criminal liability – are not generally suspended, but merely restricted to some extent. If an obligation to file for insolvency is suspended, the restricted prohibitions of payment must be observed and compliance therewith must be documented. Numerous other obligations to act as well as risks civil and criminal liability risks in a company’s crisis will not be affected by the COVInsAG at all.
In general, managing directors and management board members are obliged to take all measures that are necessary to secure the existence and going concern of the company and safeguard business opportunities.
Suitable measures must be taken to safeguard liquidity. Any government support measures, such as liquidity assistance under the “KfW special programme 2020” (KfW Sonderprogramm 2020), will have to be applied for in a timely manner.
For many companies, far-reaching restructurings may become necessary. Timely actions can be pivotal. In many cases, it will not be possible to wait until the coronavirus pandemic has abated and business returns to normal. Many restructurings will have to be planned and commenced right now. Swift action can also – particularly in the current exceptional situation – provide numerous opportunities, not only for restructurings and reorganisations but also, for example, for the acquisition of undertakings or participations. Insolvency law and insolvency proceedings also offer extensive and attractive structuring options. Even if duties to file for insolvency may be suspended, the reasons for filing for insolvency and the right of the debtor to file will continue to exist. Timely reorganisations in protective-shield proceedings, self-administration proceedings, insolvency plans or other insolvency proceedings with the support and contributions of the shareholders or of investors can be the means of choice.
These issues are complex, and the requirements and (liability) risks involved are enormous. Without professional help it will be extremely difficult to manage this situation in the best possible manner. Please contact us if you require any assistance in this regard
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