New insolvency regulation in Germany aimed at supporting businesses in distress
On March 23, 2020, the German Federal Government (Bundesregierung) published a draft bill to mitigate the consequences of the COVID-19 in civil, insolvency and criminal procedural law. From an insolvency perspective, the aim of the proposed amendments is to enable and facilitate the continuation of businesses that have become insolvent or are experiencing economic difficulties as a result of COVID-19 (see here ).
Currently, there are numerous restrictive measures within German legislation that could hinder the recovery of struggling businesses:
- in the event of an insolvency event, insolvency legislation compels creditors and managers of corporate entities with limited liability (e.g. AG, GmbH) to file an insolvency petition (section 14 of the Insolvency Code (Insolvenzordnung)). Breach of this obligation may be punishable by law and may incur liability;
- breach of insolvency-related payment prohibitions under company law may increase liability (Section 64 Sentence 1 of the German Limited Liability Companies Act (GmbHG), section 92 (2) sentence 1 of the German Stock Corporation Act (AktG) Section 130a (1) sentence 1, also in conjunction with section 177a sentence 1 of the German Commercial Code (HGB) and section 99 sentence 1 of the German Cooperatives Act (GenG));
- the current uncertainties make it difficult to prepare reliable forecasts and business plans. This gives rise to liability and rescission risks, which may make investors unwilling to grant loans. In addition, shareholders’ debt is subordinated, reducing shareholders’ willingness to grant loans (section 39 (1) no. 5 of the InsO and accompanying restrictions (sections 44a, 135 (1) no. 2 of the InsO)); and
- during the insolvency process, there is a the risk that creditors and contractual partners of the debtor may have to reimburse services received and payments made following challenge by the insolvency administrator.
Taken together, points 1 to 4 above could seriously hinder the ability of a struggling business to continue operating and/or recover. These restrictions are useful when a company is in permanent financial distress, but in the context of COVID-19 the restrictions could result in a more permanent end to a business that is only in temporary difficulty.
The German Federal Government therefore plans to support struggling companies and their corporate representatives. Companies should be given time to take the necessary precautions to eliminate insolvency, in particular to demand governmental aid or to negotiate financing or restructuring agreements with creditors and investors.
Therefore, the new insolvency regulations aims to assist the continuation of companies that have become insolvent or are experiencing economic difficulties as a result of COVID-19:
(1)the obligation to file an insolvency petition (Section 1 of the draft bill) is suspended until 30 September 2020. This will only apply if (a) the insolvency event is due to the consequences of COVID 19; and (b) there is a prospect of eliminating the insolvency. If the debtor was not insolvent on 31 December 2019, both aspect are presumed.
(2) For private individuals, a refusal of residual debt discharge cannot be based on the delay in opening insolvency proceedings in the period between 1 March and 30 September 2020.
(3) Where the obligation to file for insolvency no longer applies (pursuant to section 1 of the draft bill), section 2 No. 1 to 4 of the new draft bill states that:
(a) payments are considered to be made within the ordinary course of business, if such payments :
(i) serve for the maintenance or resumption of business operations or the implementation of a reorganization concept; and
(ii) are made with the care of a proper and conscientious manager (within the meaning of Section 64 sentence 2 of the GmbHG, section 92 subsection 2 Sentence 2 of the AktG, section 130a (1) sentence 2, also in conjunction with section 177a Sentence 1 of the HGB and section 99 sentence 2 of the GenG);
(b) a new loan granted during the suspension period (i.e. until 30 September 2020) for repayment up to 30 September 2023, and collateral provided to secure such loans are not considered to be disadvantageous to creditors;
(c) the granting of loans and collateral during the suspension period (i.e. until 30 September 2020) should not be regarded as an immoral contribution to the delay in insolvency; and
(d) the granting of security in favour of another party cannot not be challenged in later insolvency proceedings (unless the other party was aware that the funding efforts of the debtor were not suitable to eliminate the insolvency).
The measures at 3(b) to (d) will apply to loans granted by the Kreditanstalt für Wiederaufbau (KFW) and its financing partners or by other institutions (within the framework of government assistance programs) in connection with COVID 19, even if the loan is granted or secured after the end of the suspension period, and will allow an unlimited period of time for repayment.
Finally, the Federal Ministry of Justice and Consumer Protection is authorized to extend the suspension of the obligation to file for insolvency and the regulation on the reason for opening insolvency proceedings for creditors’ insolvency applications by statutory order, without the consent of the Bundesrat, until 31 March 2021 at the latest, if this appears necessary due to the circumstances (section 4 of the draft bill).
The measures introduced by the draft bill should hopefully help struggling companies to receive restructuring loans and enable businesses to survive during the uncertain and difficult environment surrounding COVID-19.