On 16 March 2020, the Federal Ministry of Justice and Consumer Protection announced that it is preparing a statutory regulation to suspend the obligation to file for insolvency until 30 September 2020, in order to protect companies in financial difficulties because of the spread of the COVID-19 virus. This measure is intended to be an additional element in the package of measures already adopted by the Federal Government to protect employees and companies.

Current situation 

The spread of COVID-19 is currently causing severe difficulties for many German companies. An increasing number of companies are suffering from financial difficulties and face the risk of insolvency.

Suspension of obligation to file for insolvency

In order to avoid a flood of insolvency filings, the Federal Ministry of Justice is currently preparing a legal regulation according to which the obligation to file for insolvency will be suspended until 30 September 2020. The obligation to file for insolvency will be temporarily waived if the reason for insolvency is based on the effects of COVID-19 and if there are reasonable expectations that the governmental aid measures or serious financing or restructuring negotiations can contribute to help the company through the crisis.

Current legal situation

Pursuant to section 15a of the German Insolvency Code, companies are currently obliged to file for insolvency immediately, but no later than three weeks after the occurrence of illiquidity or over-indebtedness without a positive going concern prognosis.

If the obligation to file for insolvency is violated, the management (board of directors, executive management) is subject to a considerable risk of personal liability – both under civil and criminal law.

Package of measures of the Federal Government

In order to help employees and affected companies, the Federal Government adopted a package of measures as of 13 March 2020, to dampen the economic effects of the coronavirus.

The package of measures is based on four strategic pillars:

1. improving access to short-time work compensation;
2. fiscal liquidity support;
3. measures to provide liquidity to companies; and
4. strengthening European cohesion.

All these measures still need to be developed and implemented in detail.

Does the obligation to file for insolvency no longer apply?

The intended suspension of the obligation to file for insolvency by the Federal Ministry of Justice does not mean that companies would no longer be subject to any obligation to file for insolvency.

Once the proposed regulation has come into effect, companies should examine whether the insolvency has occurred due to the spread of COVID-19 and whether the other conditions for suspension, which still have to be defined, have been met. Only in this case will the obligation to file for insolvency be suspended. In all other cases, the obligation to file for insolvency and the associated liability rules remain applicable.

From the current perspective, it is highly probable that all other obligations of a managing director of a company in financial crisis will continue to apply regardless of the intended suspension of the obligation to file for insolvency. The associated personal liability risks (resulting from, for example, withholding of remuneration or non-payment of social security contributions and taxes) must therefore continue to be taken into account.

The removal of the statutory obligation on a company’s management to file for insolvency does not, for the avoidance of doubt, remove the fact of an actual illiquidity (where applicable) and all ensuing risks resulting to creditors therefrom in the sense that hardening periods and contestation rights of insolvency administrators in a subsequent insolvency (if applicable) will apply. We therefore recommend that creditors seek legal advice before engaging with the relevant debtor in question over extension of payment terms, new credits, new deliveries or any similar measures.

How do the planned measures impact employees’ salaries?

The package of measures adopted by the Federal Government includes the implementation of improved access requirements for short-time working compensation. We have compiled a detailed overview of the requirements for short-time work in the following article: COVID-19 (Coronavirus) - Key Rights and Obligations of Employers in Germany

What should be considered if trade debtors cannot pay due invoices from supply agreements?

If you have delivered goods subject to retention of title, you should examine whether you have to issue a processing and utilization ban to the relevant customer. You should request information on the remaining stock of goods in the customer's warehouse and agree with the customer that he may only use the delivered goods which are subject to retention of title (and/or receive further) goods if he pays for them in advance. 

Is it possible to accept payment by instalments?

The simple request of a company for payment relief and a subsequent agreement on payment by instalments does not lead to the risk for the creditor of having to repay the received payments in a subsequent insolvency of the company. However, such a risk does exist or may arise out of a situation where agreed payment plans are not complied with or where a creditor has firm knowledge of a factual insolvency. 

May companies receive governmental support?

According to current statements by the Federal Government, companies should contact their regular bank if they intend to take advantage of governmental aid programs. State aid is granted in the form of loans with the involvement of local commercial banks. According to the Federal Government's package of measures, the Federal Government should ensure that the granting and hedging of loans will be accelerated. 

Consequently, as far as a loan is considered, it is important to examine whether it is reasonable to enter into such a loan agreement, since a loan increases the indebtedness of the company and the repayment of a loan is required. 

Please note that banks cannot grant these loans unconditionally. The conditions for granting a bridge loan must be met in any case. It remains to be seen whether banks will be willing to bear a residual risk even if the KfW banking group agrees to assume the credit risk of such loans.

We provide an overview of the current possibilities for state supported loans under state aid law in the following article: State Aid Rules and COVID-19 (Coronavirus) in the EU.

Has there already been such a crisis situation?

In the past, the Federal Government has reacted to natural disasters with similar measures to protect companies in crisis.

For example, in the flood disasters of 2002 and 2013, the Federal Government supported affected companies by suspending the statutory obligation to file for insolvency.

We are there for you

We would be pleased to assist you with these and other questions. Our restructuring and insolvency team with more than 20 lawyers throughout Germany is always at your disposal. We will help you to navigate safely through the crisis.