Measures under insolvency law

Suspension of obligation to file for insolvency

The suspension of the obligation to file for insolvency is intended to prevent affected companies from having to file for insolvency solely because the processing of applications for public assistance or of financing or restructuring negotiations in the current exceptional situation cannot be completed within the three-week obligation to file for insolvency.

The draft law of the Act to Temporarily Suspend the Obligation to File for Insolvency and to Limit Directors’ Liability in the Case of Insolvency Caused by the COVID-19 Pandemic (COVID-19-Insolvenzaussetzungsgesetz – COVInsAG) has now been released and adopted by the Bundestag (lower house of the German parliament). It was passed by the Bundesrat (upper house of the German parliament) on 27 March 2020. The law was announced in the Federal Law Gazette and entered into force on the same day. (Download COVInsAG)

There are two conditions:

  1. The reason for insolvency is based on the effects of the COVID 19 pandemic.

There are prospects that the existing insolvency can be eliminated.

  • It is assumed that the reason for the insolvency is based on the effects of the pandemic and that there is a prospect of eliminating the insolvency if the debtor was not yet insolvent on 31 December 2019.
  • The obligation to file for insolvency is suspended both in the event of insolvency and in the event of excess debt.
  • The scheme will apply retroactively from 1 March 2020 and until 30 September 2020, but may be extended until 31 March 2021.
  • Despite the presumption rule, management should clearly document that their economic difficulties are due to the COVID-19 pandemic and that there are prospects for financial restructuring. Management should also be able to demonstrate that no insolvency had occurred by 31 December 2019.
  • We will help you to minimise remaining risks and to implement the specifications correctly by quickly preparing a business plan and providing advice on insolvency law.

Further new regulations under insolvency law in connection with COVID-19:

  • The suspension of the filing obligation is supplemented by a limitation of the liability of managing directors/board members for payments during the period of suspension (Section 2(1) No. 1 COVInsAG). Payments made during this time that serve to maintain or resume business operations or to implement a restructuring concept are to be deemed consistent with the due care of a prudent director. This arrangement creates a high degree of legal certainty for the acting decision-making bodies concerned.
  • Lenders are relieved of liability and rescission risks when granting new loans during the period of suspension. The repayment and collateral of new loans during this period is not considered disadvantageous to creditors. This is also to apply to the repayment of shareholder loans if they were newly granted during this period. Furthermore, the granting of credit and collateral during the period of suspension is not to be regarded as an unconscionable contribution to delaying the insolvency proceedings. This must, however, be based on the fact that the conditions for suspension of the filing are met (in particular, that the claim is based on COVID-19 and positive prospects, as shown above). It is therefore recommended that evidence of solvency as at 31 December 2019 and the prospects of eliminating the insolvency should be supported by appropriate documentation or planning. We would be happy to help you with this.
  • Objections to legal acts during the period of suspension are excluded unless the insolvency administrator succeeds in proving that the recipient of the benefit was aware of the unsuitability of the restructuring and financing efforts to eliminate the insolvency.
We recommend the following guidelines to the legal representatives for what to do next:

  1. Keep calm
  2. Document the occurrence of proximity to insolvency after the cut-off date (through updated financial planning for 2020 and 2021)
  3. Develop a restructuring concept taking into account the measures (short-time working allowance, KfW loans, tax deferrals, etc.), including integrated financial planning that documents the overcoming of the liquidity crisis
  4. Arrange short-term liquidity planning (daily/weekly), if not available
  5. Establish communication with all parties involved (banks, works council, shareholders, suppliers, customers, etc.)
  6. Particular care is needed in cases where symptoms of the difficulties were already present before the cut-off date
  7. Regularly review the assumption that the prospects for restructuring remain positive

Obtain professional advice if applicable