The COVID-19 pandemic and the subsequently imposed measures to slow down its spread have extensive consequences on our lives and the entire economy. Due to the closure of companies, the interruption of supply chains, the decline in orders and delays in payment, the existence of many companies is immediately threatened. With the sudden slump in sales and ongoing payment obligations, they are in danger of running out of liquidity and becoming insolvent. At the same time, any prior given positive business forecast will cease due to the special effects caused by the Corona crisis, possibly leading to over-indebtedness. As a result and according to the current legal situation, they would immediately or after three weeks at the latest have to file for insolvency pursuant to Section 15a Insolvency Statute (Insolvenzordnung – InsO). The German Federal Government is urgently working on an act to mitigate the above-mentioned consequences.
The “draft of the act to mitigate the impact of the COVID-19 pandemic on civil, insolvency and criminal law” includes under Article 1 the “Act for the temporary suspension of the obligation to file for insolvency and for the limitation of D&O liability for insolvencies caused by the COVID-19 pandemic” (COVID-19-Insolvenz-Aussetzungsgesetz – COVInsAG). The act’s key aspect is the temporary suspension of the obligation to file for insolvency when the insolvency was caused by the Corona pandemic. In addition, filings by creditors are suspended, D&O liability is limited and challenges of the debtor’s transactions prior to insolvency proceedings are widely excluded. Financing by third parties is facilitated and the subordinated status of newly-granted shareholder loans is abrogated. The draft is already presented to the German Bundestag, which will decide on it this Wednesday. If the act is passed, it will be – retrospectively – effective from 1 March 2020. In detail, the current draft of 24 March 2020 (BT-Drucks. 19/18110) includes the following provisions:
- The obligation to file for insolvency pursuant to Section 15a InsO – or Section 42 German Civil Code for associations – will initially be suspended until 30 September 2020. The suspension prerequisites that the insolvency be based on the impacts of the COVID-19 spread and that there are prospects to resolve an illiquidity. Thereby, the act intends to avoid that affected companies must file for insolvency solely because applications for public aids cannot be processed and negotiations for financing or restructuring cannot be finalised within the three week period to file for insolvency in the current extraordinary situation. As it would be difficult to prove these prerequisites in individual cases, the (rebuttable) presumption shall apply that insolvency is based on the impact of the Covid-19 pandemic and prospects to resolve it exist if the debtor was not insolvent on 31 December 2019. The suspension period can be prolonged until 31 March 2021 at the longest.
- To prevent a creditor from using its right to file for insolvency despite the debtor’s suspended obligation to file for insolvency, a creditor’s application for insolvency shall only be permittable if there were grounds for insolvency prior to 1 March 2020.
- During the suspension period, the liability of members of the representative body of the creditor will be limited. To this end, it will be assumed that payments made in the ordinary course of business, in particular for continuing or resuming the business or the implementation of restructuring concepts, are deemed compatible with the due care of a prudent and diligent businessman within the meanings of the respective liability provisions (Sec. 64 Sent. 2 Limited Liability Companies Act, Sec. 92 Para. 2 Sent. 2 Stock Corporation Act, Sec. 130a Para. 1 Sent. 2 and Sec. 177a Sent. 1 Commercial Code, and Sec. 99 Sent. 2 Act concerning Commercial and Industrial Cooperatives).
- To facilitate access to further liquidity, obstacles for financing will be reduced. The provision states to that end that any repayments by 30 September 2023 of a new loan granted during the suspension period as well as the provision of guarantees for such loans during the suspension period shall not be deemed disadvantageous to the creditor. Thus, providers of loans for restructuring no longer face the threat that the debtor’s transaction prior to insolvency proceedings may be challenged. This explicitly also extends to shareholder loans. In this respect, the subordination status of newly-granted shareholder loans is abrogated: Sec. 39 Para. 1 Sent. 5 InsO does not apply to shareholder loans granted during the suspension period in insolvency proceedings filed for until 30 September 2023. In addition, loans and guarantees granted during the suspension period will not be deemed an improper contribution to a delay in the filing for insolvency. As a result, banks and financial institutions will be able to promptly grant loans without having to obtain a time-consuming restructuring report – as is currently necessary – first.
- In order to protect contractual partners and facilitate the continuation of business operations, also any contest of debtors’ transactions other than loan repayments prior to insolvency proceedings will also be substantially limited . Legal acts will mostly not be contestable in a later insolvency proceeding, unless the contractual partner knew that the debtor’s restructuring and financing efforts were not suitable to resolve an occurred insolvency.
The act constitutes a substantial relief for companies and their governing bodies affected by the Coronavirus crisis and gives some much-needed breathing space. In these times, when nobody knows how long the current situation will continue and how it will develop, it is important that companies are not pressured into insolvency without fault and have easier access to liquidity. At the same time, it does not give free rein not to file for insolvency and under no circumstances exempts from liability risks. Directors and managers must strictly verify whether the companies led by them can restructure and survive the Coronavirus crisis without insolvency, otherwise an insolvency at this time may even be the better option.
Management must be aware of the fact that the presumption of the Coronavirus crisis as the grounds for insolvency is rebuttable. As a result, it is essential that they protect themselves against the possible reasoning of an insolvency administrator that the company became insolvent prior to 31 December 2019 or that the insolvency was caused by other factors. For that reason, it is highly recommended to prepare a respective documentation and preferably have it certified by a restructuring consultant or auditor.
During the suspension period, any measures and expansion investments not strictly necessary should temporarily be neglected. Should it later emerge that the reasons for insolvency could not be resolved during the suspension period, subsequently leading to insolvency proceedings, the company’s management is still liable for payments that were made not only in the ordinary course of business and for continuing or resuming the business or the implementation of restructuring concepts. Therefore, the continuation of an insolvent company during the suspension period is a difficult balancing act under liability aspects and is – even in light of the act – subject to severe liability risks.
It should not be ignored either that taking out further loans in the current situation naturally leads to further liabilities. If revenues break away and payment obligations continue, further liquidity will often become necessary to continue business operations on a limited scale. However, management must be aware that these new loans will have to be paid back at some point, which will be difficult, if not impossible, with a lack of revenues. By the time the suspension period terminates, the obligation to immediately file for insolvency applies again instantly. If the filing for insolvency was only delayed during the suspension period and must be submitted directly afterwards, nothing will be gained, but several months will be lost. Management would be well advised to initially prepare a conservative liquidity plan in consideration of the Coronavirus crisis and then genuinely decide on that basis whether they should make use of the granted possibility to suspend the obligation to file for insolvency or whether insolvency proceedings with all the possibilities it offers for restructurings would not be the better choice.
Should there be changes to this draft law in the legislative procedure, we will inform you about it here.