The Ukraine conflict has been putting an enormous strain on the economy, which was already struggling due to the coronavirus pandemic. Alongside disrupted supply chains, rising or fluctuating energy costs are driving up prices in many sectors and have pushed inflation to record highs. The rapid increase in costs and the decline in consumer spending in some sectors have been hitting many companies hard, often leading to liquidity bottlenecks. In response to this situation, the legislature has once again felt itself compelled to implement temporary adjustments to restructuring and insolvency law. With today’s promulgation, the newly adopted provisions will enter into force as the Act on the Temporary Adjustment of Restructuring and Insolvency Law Provisions to Mitigate the Consequences of Crisis (Sanierungs- und insolvenzrechtliches Krisenfolgenabmilderungsgesetz – “SanInsKG”), taking effect as of 9 November 2022.
1. Overview of new insolvency law provisions applicable through 31 December 2023
- The key element of these new provisions is the shortening of the going concern forecast period pursuant to section 19(2), sentence 1 Insolvency Code (Insolvenzordnung, “InsO”) from the current twelve months to four months. This means that managers of companies with balance sheet overindebtedness will no longer need to file for insolvency due to overindebtedness if the company has a liquidity gap (which most likely cannot be closed) between the fifth and twelfth month of the forecast period.
- The period required for self-administration and restructuring planning will be shortened from the current six months to a planning period of four months.
- The new provisions will additionally extend the maximum deadline for filing an insolvency petition in the event of overindebtedness from the current six to eight weeks.
- These provisions will apply until 31 December 2023.
2. Shortening the going concern forecast period to four months
Retroactive effect for all companies – even those not affected by the crisis
The reason for shortening the relevant period for the going concern forecast under insolvency law pursuant to section 19(2), sentence 1 InsO is to avoid those insolvency proceedings which arise only when a (twelve-month) positive going concern forecast cannot be achieved owing to the current uncertainties. This is meant to protect companies that are basically in good shape against unnecessary insolvency proceedings. The provisions also retroactively benefit companies which are already overindebted, but for which the (currently applicable) six-week maximum deadline for filing an insolvency petition had not elapsed by 9 November 2022. Notably, all companies fall within the scope of these provisions without exception. It makes no difference whether a company is experiencing difficulties on account of the current market disruptions. Public financial assistance, on the other hand, will still only benefit energy-intensive companies.
Only small practical benefits for energy-intensive companies or companies directly affected by the war in Ukraine
It is doubtful whether the (energy-intensive) companies actually affected by the current uncertainties will benefit from the shortening of the forecast period. Liquidity bottlenecks caused by the current crisis often tend to arise within much less than four months because, for example, additional liquidity is needed at very short notice due to margin calls or sudden increases in raw material or material costs. As a result, many companies will be facing impending insolvency within the next four months. Even once this amendment enters into force, such companies will still have negative going concern prognoses and therefore, as a rule, be obliged to file for insolvency due to overindebtedness. Illiquidity as grounds for filing for insolvency will otherwise on the other hand remain unaffected by the SanInsKG, along with managers’ duty to file for insolvency without delay (after three weeks at maximum).
Notwithstanding the SanInsKG Companies companies and managers will still have to plan ahead notwithstanding the SanInsKG – despite the current uncertainties
The practical benefit of shortening the forecast period is also likely to be slight due to the fact that pursuant to section 1 Corporate Stabilisation and Restructuring Framework Act (Unternehmensstabilisierungs- und -restrukturierungsgesetz, “StaRUG”), managers are still obliged to set up early warning systems and take appropriate countermeasures if a crisis is identified. Such measures would also include securing the short and medium-term financing of the company. Moreover, the SanInsKG will not affect accounting regulations or the going concern forecast periods provided for therein, such as the (unchanged) forecast period of one year after the balance sheet date in the IAS rules. In order to avoid lender liability, lenders in crisis situations will also continue to insist that borrowers draw up a turnaround plan which is to be examined and confirmed by an expert third party (e.g. in the form of an IDW S6 report). As a result, planning horizons will likely still need to extend over several years. Ultimately, managers may not incur unsecured (trade) liabilities if they have to assume that the consideration (payment) cannot be provided at the time it is due, as this could give rise to accusations of fraud (section 263 Criminal Code (Strafgesetzbuch, “StGB”)). If the consideration falls due within the forecast period of five to twelve months, the persons involved could therefore be subject to a criminal law risk – despite the limited obligation to file for insolvency – if they no longer examine and monitor the previous twelve-month forecast period (on the basis of liquidity planning) in the future.
Decreasing overlap between impending illiquidity and overindebtedness will make StaRUG easier to access in individual cases
As a side effect, the new provisions could increase the potential scope of pre-insolvency (financial) restructuring under the StaRUG. Procedural assistance under the StaRUG, such as approval of a restructuring plan, can be accessed in the event of impending illiquidity, i.e. if a liquidity gap occurs within the next 24 months, but not if insolvency illiquidity or overindebtedness has already occurred. This means that, in principle, the restructuring instruments of the StaRUG are available in the event of a liquidity gap that occurs within the next 5-24 months (currently 12-24 months), without overlapping with the going concern forecast or overindebtedness period. This can facilitate restructuring procedures under the StaRUG in orderso as to avoid insolvency.
3. Other changes
Self-administration planning period now four months rather than six months
The financial planning period under section 270a(1), no. 1 InsO (or section 50(2), no. 2 StaRUG), which has also been shortened to four months, will presumably only help a few companies avail themselves of self-administered insolvency (or a stabilisation order), given the fact that insolvency proceedings are normally opened no later than the fourth month after the filing of the petition, and measures which affect the course of the proceedings (sale of the company, job cuts, etc.) often have to be decided immediately after the opening – and therefore planned in advance.
Deadline for overindebtedness petitions now eight weeks rather than six weeks
Even an extension of the petition deadline in cases of overindebtedness will hardly provide any relevant practical relief. Companies with their own business operations don’t do not generally use all of the current six-week maximum period. Between the impending insolvency and the actual filing of the insolvency petition, managers have to comply with additional restrictions (“emergency management”), such as prohibitions of payment under section 15b InsO, which are imposed along with the risk of breaching the duty to file for insolvency under section 15a InsO and significantly curtail and burden business operations (such as dealing with customers and suppliers and other stakeholders). Managers will therefore generally (have to) file insolvency petitions at an early stage, and not avail themselves of the entire eight-week period, in order to keep the uncertain and especially risky phase of emergency management as short as possible.
4. Conclusion
In light of the current economic challenges, the declared objective of the SanInsKG provisions is to respond to planning uncertainties. The intention to limit liability risks for managers which arise solely due to uncertainties in the current economic situation is understandable. From the standpoint of insolvency and restructuring law, however, these legal adjustments are not very effectual. They only protect managers selectively and lack cohesion. Managers will still (have to) continue to draw up – in some cases very long-term – plans to protect themselves from liability risks. Even the legal situation as changed by the SanInsKG continues to burden managers of companies in crisis with a multitude of special duties to act and liability risks, and it remains the case that in such situations, a manager should seek expert advice in good time.
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