24.03.2020

The planned changes to insolvency law for companies affected by the coronavirus crisis

Background

On 23 March 2020, the German Federal Ministry of Justice and Consumer Protection (BMJV) presented a bill for an act to mitigate the consequences of the COVID 19 pandemic in civil, insolvency and criminal procedural law (Gesetz zur Abmilderung der Folgen der Covid-19-Pandemie im Zivil-, Insolvenz- und Strafverfahrensrecht). The German version of the bill can be retrieved here. This article presents and evaluates the proposed changes insofar as they concern insolvency law.


Context and subject of the bill

The currently applicable legal situation pursuant to Section 15a of the German Insolvency Statute (Insolvenzordnung, InsO) provides for corporations and partnerships in which no natural person is fully liable to be obliged to file a request for the opening of insolvency proceedings for the assets of the company at the latest three weeks after the commencement of insolvency or overindebtedness. If they fail to do so, the representatives of the company's executive bodies are threatened with criminal liability for delaying insolvency and far-reaching civil liability. Last week, the German Federal Ministry of Justice and Consumer Protection (BMJV) therefore announced that it would temporarily suspend the obligation to file for insolvency for companies affected by the coronavirus crisis, i.e. initially until 30 September 2020[Link zum Beitrag von Reinhard Willemsen und Philipp Honisch vom 19. März 2020].

Now the BMJV - after a first draft on Friday evening - has presented the revised draft bill (referred to as a "wording assistance") of an "Act to mitigate the consequences of the COVID 19 pandemic in civil, insolvency and criminal procedural law", which includes, among other things, the already announced COVID-19 Insolvency Suspension Act (COVID-19-Insolvenzaussetzungsgesetz, COVInsAG).

It does not only regulate under which conditions the obligation to file for insolvency does not apply. Rather, additional accompanying measures are planned to make it easier for the companies concerned to access fresh liquid funds and to avoid liability risks both for lenders and for the representatives of the executive bodies of the companies affected by the crisis. In detail:
 

Conditions for the suspension of the obligation to file for insolvency

The obligation to file for insolvency pursuant to Section 15a InsO will be suspended in accordance with the submitted bill until 30 September 2020 for all companies addressed, unless the fact that the company has to file for insolvency is not due to the COVID 19 pandemic or there are no prospects of eliminating an existing insolvency. In other words, the suspension of the obligation to file for insolvency presupposes a causal link between the existence of a reason to open insolvency proceedings (Insolvenzreife) and the corona crisis as well as theexistence of prospects of regaining solvency.

If it can be proven that the company in question was not insolvent on 31 December 2019, the envisaged regulation provides for the legal presumption that there is both the necessary causal link between the existence of a reason to open insolvency proceedings and the Corona crisis and the necessary prospects of regaining sustainable solvency.

Affected companies are therefore urgently advised to obtain immediate clarification, in close consultation with experienced economic and legal advisors, as to whether or not insolvency within the meaning of Section 17 InsO had already occurred as at 31 December 2019.
 

Accompanying measures

(1)   Restriction of creditors' requests to open insolvency proceedings

In addition to the companies in difficulty, under the current legal situation a creditor can also request the opening of insolvency proceedings pursuant to Section 14 InsO if he can credibly demonstrate a legal interest in the opening of proceedings and the existence of his claims against the company.

This right of the creditors to file a request is restricted by the submitted bill as follows: From 1 March to 30 June 2020, creditor requests for the opening of insolvency proceedings will only have a chance of success if the reason for insolvency (insolvency or overindebtedness) has already
existed on 1 March 2020.

(2) Restriction of the right to contest

Under the conditions of Section 129 et seqq. InsO, transactions made by the company in difficulty may be contested by the insolvency administrator after the opening of insolvency proceedings and any property of the debtor disposed of under the transaction must be restituted to the insolvency estate. The precondition for any claim to contest that the contested transaction (as a rule: payment for or collateralisation of liabilities) puts the other insolvency creditors at a disadvantage.

With regard to loans newly granted during the period of suspension of the obligation to file for insolvency, the planned new regulation provides that their repayment by 30 September 2023 and their collateralisation during the period of suspension shall in any case be deemed not to be disadvantaging creditors within the meaning of Section 129 InsO if the obligation to file for insolvency is suspended for the company concerned. This is intended to avoid a situation where a lender, who quickly provides liquidity to a company that is currently in difficulty, would have to surrender the repayments received if the company were to fall into insolvency after all. This is even to apply to shareholder loans and equivalent claims which, in the case of insolvency of the company, are in principle considered to rank lower than other claims of insolvency creditors (Section 39 (1) no. 5 InsO) and whose servicing and collateralisation can be contested under simplified conditions
(Section 135 InsO). For insolvency proceedings applied for by 30 September 2023, Section 39 (1) no. 5 InsO shall not apply to the repayment of such loans. The collateralisation of shareholder loans is explicitly excluded from the special scheme.

In addition, the following transactions will be excluded from the right of insolvency administrators to contest:

  • congruent coverage transactions (cf. Section 130 InsO);
  • performance in lieu of or on account of performance;
  • payments by third parties at the instruction of the subsequent insolvency debtor who is actually liable to pay;
  • provision of other securities of equal or lesser value than those originally agreed;
  • shortening of payment deadlines;
  • relaxation of payment conditions.

In each of the cases listed above, the exclusion of the possibility to contest is subject to the condition that the beneficiary must not have been positively aware that the debtor's restructuring and financing efforts were not suitable to remedy an existing insolvency.

(3) Limitation of the liability of the executive bodies

Probably the most important accompanying regulation for the suspension of the obligation to file for insolvency is the planned limitation of liability claims, which are not linked to the request to open insolvency proceeding (under procedural law aspects), but rather to the actual occurrence of the existence of a reason to open insolvency proceedings. Once should mainly think of the liability of representatives of executive bodies for authorising payments after the occurrence of (material) insolvency should be considered here: Section 64 of the German Limited Liability Companies Act (GmbH-Gesetz, GmbHG) for the GmbH, Sections 92, 93 AktG for the AG and SE and Sections 177a, 130a of the German Commercial Code (Handelsgesetzbuch, HGB) for commercial partnerships without a natural person as fully liable partner, in particular the widespread GmbH & Co. KG. According to these regulations, a representative of an executive body (board of directors, managing director) is personally liable for almost all outflows of assets from the company's assets which have occurred after the company has become insolvent. These liability claims are asserted by the insolvency administrator after the opening of insolvency proceedings.

The bill presented by the BMJV stipulates that "payments made in the ordinary course of business, in particular those payments which serve to maintain or resume business operations or to implement a restructuring concept," should give rise to liability claims if the obligation to file for insolvency is suspended for the company concerned.

(4) Extension option

With the authorisation of the Federal Minister of Justice to extend the suspension of the obligation to file for insolvency and the restriction of the opening of proceedings based on third-party requests until March 31, 2021 by means of a statutory ordinance requiring approval, the government draft bill contains a regulation that allows a flexible response to the development of the COVID 19 pandemic and its direct and indirect economic consequences.
 

Legal assessment

It was eagerly awaited how the legislator would define the conditions under which the obligation to file for insolvency would be suspended. It was clear that there would have to be a close connection between the insolvency and the coronavirus crisis. After the announcement of the BMJV that the bill would contain such a regulation, there had been speculation in particular about how the feature of the ability of regaining solvency would be implemented. Last week's press release still stated on this issue that one condition was the application for restructuring loans or other financing or restructuring negotiations.

The bill now presented bears witness to a certain legislative pragmatism. Only one condition should suffice to prove both the relationship between insolvency and the coronavirus as well as the ability to regain solvency: solvency on 31 December 2019. What is positive about this is that the beneficiaries of the new regulation will be more independent of the industry: The operator of a trade fair cancelled due to coronavirus-related official requirements would, for example, in principle have less difficulty in proving the fact that his economic difficulties were caused by the coronavirus than some other players in economic life. Restructuring lawyers and auditors can expect a lively influx of assignments to prepare the relevant documentation for the companies concerned. Experienced advisors can help efficiently, since the non-occurrence of insolvency must also be proven in the protective shield procedure pursuant to Section 270b InsO and therefore appropriate tools are likely to already be available.

It should be emphasised that the ability to restructure (within the meaning of IDW's pronouncements, in particular IDW S6) is not a prerequisite for the suspension of the obligation to file for insolvency. This is also logical, because at the present time no reliable statements can be made about the ability to restructure in the narrower sense.

Whether it would be legally and economically correct to maintain the obligation to file for insolvency only for companies that were already insolvent on 31 December 2019 is not to be conclusively assessed here.  What is remarkable, however, is that the focus is exclusively on solvency, but not on the second reason for filing for insolvency, overindebtedness, which triggers the obligation to file a request and leads to punishment if no request is filed. In corona-related extreme situations for the economy, many companies are likely to be less optimistic than before the crisis in their assumption of a positive going-concern forecast, which eliminates the reason for insolvency of overindebtedness according to Section 19 InsO. However, the excessive emphasis on the solvency test as compared to the overindebtedness test should not lead to strongly distorted results, as it is unlikely that a company will remain solvent for a longer period of time, if it is already overindebted and its continued existence as a going concern cannot be assumed.

It is to be welcomed that the legislator does not want to leave it at relieving companies of the obligation to file for insolvency which is associated with penalties and liability issues. The submitted bill of the COVInsAG provides for restrictions both with regard to the liability rules of representatives of executive bodies of companies in difficulty and with the regard to the possibility to contest transactions of the insolvency debtor. Under the current legal situation, these claims, which are suspended according to the bill submitted, will come into effect if insolvency proceedings are subsequently opened for the assets of the company. If the legislator had refrained from making regulations in this regard, this would have meant a high personal, liability risk under civil law for the executive bodies involved (see article of 19.3.2020).

According to the explanatory memorandum, both payments for the maintenance or resumption of business operations and measures in the course of a strategic reorientation of the business within the framework of restructuring should be legally secure. It is doubtful whether this is reflected in the somewhat complicated wording ('payments made in the ordinary course of business, in particular those payments which serve to maintain or resume business operations or to implement a restructuring plan') with the necessary reliability. Has a payment made with considerable delay and under pressure of enforcement still been made "in the ordinary course of business"? Does this apply to partial and instalment payments, especially in the context of enforcement settlements? Here, the legislator should consider deleting the relative clause on the "proper course of business" or replacing it with a more manageable limitation of the liability privilege.

In addition to the liability of executive bodies for payments after the existence of a reason to open insolvency proceedings, the right to contest is also severely restricted: It is intended to protect the servicing of loans granted in the current crisis, also by shareholders, from being contested. Congruent coverage shall no longer be contestable at all, and incongruent coverage shall be largely incontestable, as long as the debtor company would not be subject to an obligation to file for insolvency and as long as the creditor is not positively aware that there is no prospect of the debtor's ability to regain solvency.

In this way, the legislator is pursuing the understandable objective of enabling companies and entrepreneurs to take advantage of liquidity assistance and the relaxation of payment conditions and to take out and service loans without having to worry about later contestation in order to procure the liquidity that is lacking due to loss of revenue elsewhere.

In addition, it is intended to make it more difficult for the contractual partners of companies facing an existential threat to terminate contractual relationships at an early stage. From a regulatory point of view, the new bill distinguishes between new loans and other measures. Payments made in connection with or to avert enforcement measures and to avert (currently still admissible) creditors' requests for the opening of insolvency proceedings as well as other intentional acts to disadvantage creditors and provisions of goods and services without compensation remain contestable.

As it shall also remain possible to contest in case of positive knowledge of the failure of the restructuring efforts, the - otherwise surprising - privileged treatment of shareholder loans is somewhat put into a different perspective: There will hardly be anyone for whom it is easier to prove that they have knowledge of the (missing) chances of success of the restructuring efforts than the shareholders of the company concerned.

The restriction of the rights to contest should relieve the pressure on the entire economic cycle to a significant extent. Otherwise, there would have been the risk that - like a snowball system - after the resurgence of the obligation to file for insolvency, in view of the expected increase in insolvencies, a large number of large companies - energy suppliers, leasing companies, insurance companies, to name but a few examples - would have been exposed to a wave of contestation proceedings in which the insolvency administrators could have fallen back on the familiar assessment of individual cases based on the circumstantial evidence for individual elements of a claim.

In order to minimise the risk of recourse by insolvency administrators, the early termination of contractual relationships would otherwise often be one of the few possibilities, which would undoubtedly have meant loss of income for the terminating entrepreneur and often serious disruptions to business operations for the contracting party in difficulty. In this respect, the restriction of the right to contest is also to be welcomed. By means of the opening clause in the event of positive knowledge of insufficient prospects of restructuring, however, the legislator is almost challenging insolvency administrators and courts in particular to develop new evidence that would suggest such knowledge. A more stringent wording would have been desirable in this respect as well.

Finally, it is logical that not only the own requests for the opening of insolvency proceedings are suspended, but also creditor requests.
 

Conclusion

Even if there is still room for improvement in individual provisions, the legislator has put together a helpful package of measures. It is to be hoped that access to urgently needed liquidity support will be created and handled in practice with similar pragmatism.

Nevertheless, companies and their executive bodies should be advised to exercise caution: The regulations are limited in time. It is therefore highly recommended to be aware of the prerequisites of (in)solvency, which is strongly emphasised in the new regulation, and to maintain ongoing liquidity planning in order to be able to monitor the existence and continued existence of one's own solvency at all times and to be able to prove it, if necessary.

Author
Dr Marcus Backes

Dr Marcus Backes
Partner
Hamburg
marcus.backes@luther-lawfirm.com
+49 40 18067 24699

Reinhard Willemsen

Reinhard Willemsen
Partner
Munich, Cologne
reinhard.willemsen@luther-lawfirm.com
+49 89 23714 25792

Dr Philipp Honisch

Dr Philipp Honisch
Senior Associate
Essen
philipp.honisch@luther-lawfirm.com
+49 201 9220 24735