This article was updated on April 3, 2020

In March 2020, the COVID-19 Insolvency Suspension Act (“COVInsAG”) was published in the Federal Law Gazette after it was enacted by the German Bundestag and approved by the German Bundesrat. The COVInsAG enters into force with retrospective effect from March 1, 2020, and provides a suspension of the obligation to file for insolvency initially until September 30, 2020. The COVInsAG is a part of the adopted law to mitigate the consequences of the COVID-19 pandemic in civil, insolvency and criminal proceedings. The aim of the law is to protect companies that get into financial difficulties as a result of the spread of COVID-19. The provisions of the COVInsAG are intended to enable such companies to continue as a going concern and to give the management time to rectify the insolvency situation.

1. Current situation

The massive increase in infections with the COVID-19 pandemic and the associated restrictions imposed by the government are causing economic damage in almost all sectors of the economy. Affected companies and their management are faced with the question of whether there is a reason for insolvency and whether therefore  ̶ to avoid civil and criminal liability  ̶ they have to make a corresponding filing.

2. No short-term liquidity support

The German government offers various instruments to provide companies that run into payment difficulties due to the effects of the Coronavirus epidemic. However, for organizational and administrative reasons, it is not certain that such assistance would reach companies in time, within the (maximum) three-week period for filing for insolvency.

Moreover, due to the existing uncertainties, the willingness to grant restructuring loans or shareholder loans is curbed and the continuation of business relationships is jeopardized by the threat of insolvency and the associated risks of potential claw-backs. This is precisely where the regulations of the COVInsAG come into play.

3. Suspension of the obligation to file for insolvency

According to sec. 1 sentence 1 COVInsAG, the obligation to file for insolvency will be suspended until September 30, 2020. The suspension will not take effect in cases in which the insolvency (illiquidity, over-indebtedness) did not occur due to the consequences of the spread of the COVID-19 virus or if there are no prospects of eliminating an existing insolvency. It is presumed to be in the interests of the company (otherwise) obligated to file for insolvency that the filing obligation is suspended if the company was not yet insolvent on December 31, 2019. This presumption is rebuttable. If insolvency applications are filed by creditors between March 28, 2020, and June 28, 2020, pursuant to sec. 3 COVInsAG, insolvency proceedings will only be opened if the insolvency already existed on March 1, 2020. However, the suspension of the obligation to file for insolvency does not constitute elimination of the material insolvency. Therefore, the suspension of the obligation to file for insolvency according to sec. 1 sentence 1 COVInsAG does not remove the possibility that a debtor can “voluntarily” apply for insolvency proceedings, for example by way of debtor-in-possession proceedings.

4. Consequences of suspension

If the obligation to file for insolvency is suspended, further privileges arise for the management (members of the board of directors, managing directors), shareholders, banks and business partners pursuant to section 2 COVInsAG:

• According to sec. 2 para 1 no. 1 COVInsAG, payments by management, which are made in the ordinary course of business, i.e. which serve to maintain, resume or reorganize the business operations, are compatible with the diligence of a prudent and conscientious manager. As a consequence, management is not personally liable for such payments, even in the event of a subsequent insolvency. This shall enable management to take the necessary measures for the continuation of the business without having to take personal responsibility.
• According to sec. 2 para 1 no. 2 COVInsAG, the repayment of shareholder loans granted during the suspension period (or payments on economically equivalent claims) by September 30, 2023 (but not their collateralization) are deemed to be non-detrimental to creditors, and the corresponding shareholder claims are not subordinated. This is intended to encourage shareholders to provide liquidity to their company.
• The repayment of new loans granted by third parties during the suspension period or the provision of collateral for such loans until September 30, 2023, is deemed to be non-detrimental to the other creditors under sec. 2 para 1 no. 2 COVInsAG. Therefore, such third-party lenders need not fear having to return payments received in the meantime or losing collateral if the restructuring efforts of an ailing company fail. According to the explanatory memorandum, commercial credits and other forms of service provision on later payment terms are also covered by sec. 2 para 1 no. 2 COVInsAG, so that suppliers and service providers do not bear the risk of a possible contestation and restitution obligation under the conditions of COVInsAG.
• According to sec. 2 para 1 no. 3 COVInsAG, the above-mentioned granting of loans and collateral is also not an immoral contribution to a delay in filing for insolvency. A tortious liability of the lenders is thus normally excluded.
• For loans granted by KfW (the German national development bank) and its financing partners or by other institutions within the framework of government aid programs in the context of the COVID-19 pandemic, the provisions mentioned above also apply if the loan was granted or collateralized after the end of the suspension period in accordance with section 2 para. 3 COVInsAG. In this case, the aforesaid provisions also apply to the repayment of the loan for an unlimited period of time. Consequently, pursuant to section 2 para. 3 COVInsAG, the time limits mentioned above do not apply to loans granted by the KfW and its financing partners as state aid programs in the context of the COVID-19 pandemic.
• The contractual satisfaction or securing of business partners in line with the terms and conditions agreed upon or similar legal acts cannot be contested in subsequent insolvency proceedings (sec. 2 para. 1 no. 4 COVInsAG). This does not apply, however, if the business partners had positive knowledge that the debtor's restructuring and financing efforts were not suitable to eliminate an insolvency that had occurred.
• Even companies for which, due to the legal structure, the obligation to file for insolvency do not apply (e.g. registered merchants) benefit from the lenders’ privileges according to sec. 2 para 2 COVInsAG in accordance with sec. 2 para 1 no. 2, 3 and 4 COVInsAG. According to sec. 2 para. 2 COVInsAG, this also applies to those companies that are subject to an obligation to file for insolvency in general, but where a reason for insolvency that requires an application has not yet occurred, even if the company is in serious economic difficulties. 

5. Extension

In addition, according to section 4 COVInsAG the Federal Ministry of Justice and Consumer Protection is authorized to extend the suspension of the obligation to file for insolvency until  March 31,  2021, at the latest if this appears to be necessary due to continued demand for available public assistance, ongoing financing difficulties or other circumstances.