19.03.2020

The temporary suspension of the obligation to file for insolvency for those affected by the coronavirus crisis

Background

On 16 March 2020, the German Federal Ministry of Justice and Consumer Protection (BMJV) announced that it would promptly create a legal regulation according to which companies that are experiencing economic difficulties as a result of the corona crisis may, under certain conditions, refrain from immediately filing for insolvency. The announcement [in German] can be found here.

Context and object of the announced regulation

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.

Now, due to the current corona crisis, companies and entrepreneurs are facing unexpected challenges. Due to the official restrictions on passenger and freight transport, many economic players are losing a considerable amount of revenue, while overhead costs remain unchanged. It is easy to understand that only very few companies have liquidity reserves that make it possible to survive such a situation for a long time. In order not to provoke a wave of insolvencies, the BMJV has announced the step, which is to be welcomed in principle, of suspending the obligation to file for insolvency - initially limited until 30 September 2020 - under the following conditions:

  • on the one hand, it must be established that the reason for insolvency is based on the corona crisis, i.e. that no reason for insolvency has occurred before;
  • on the other hand, the company concerned must have reasonable prospects of successful restructuring on the basis of an application for public aid or serious financing or restructuring negotiations.

Similar measures have already been taken in the past, most recently in connection with the flood disaster in spring 2016.

Assessment and recommendations

Due to the associated risks of criminal and civil liability (in contract or tort) for the executive bodies of companies concerned, it is urgently recommended that the existence of the prerequisites for making use of the exemption from the obligation to file for insolvency be carefully documented. But even if these prerequisites are understandable from a legal policy perspective, the announcement of the BMJV raises many questions:

  • How should the causal link to the corona crisis be documented? Does it have to be certified by an independent body? How immediate must the connection be? The problem of immediacy may be illustrated by the example that a company is still able to produce, but the customers are no longer purchasing goods (because they simply are unable to do so). Experience gained from comparable special regulations in the past could be used for answering these questions, such as, most recently, the flood disaster in 2016, even though this was limited to certain regions.
  • How much public aid must be applied for? At this stage, nobody can reliably predict how long the extreme economic situation will last. It is therefore difficult to estimate the extent of the loss of revenue that will need to be cushioned by public aid.
  • How is the existence of prospects of recovery documented? Are the documents to be submitted when applying for public aid sufficient? Or is an expert report, such as a restructuring report in the style of the certificate pursuant to Section 270b InsO, required, which must be submitted in the context of the application for insolvency in the protective shield procedure? It should be advisable for affected companies to consult with experienced lawyers and auditors at an early stage in order to agree on the necessary documentation of the existence of restructuring prospects.
  • Will companies that do not file for insolvency at an early state pay the price later or will accompanying measures be taken to prevent that? It is to be hoped that the legislator will not only suspend the obligation to file for insolvency, but will also alleviate liability for claims not having the (procedural) bankruptcy filing as a condition but rather the (material) occurence of insolvency as such. Once should mainly think of the liability of representatives of executive bodies for authorising payments after the occurrence of (material) insolvency: 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.

It is true that the BMJV's initiative has the declared aim of avoiding insolvencies. If, however, insolvency proceedings are nevertheless opened for the assets of a company which initially did not file for insolvency due to the change in the law - for example, due to a subsequent creditor application or an own application after the expiry of the suspension of the duty to file for insolvency - the following risk exists: It is recognised in case law that there is a presumption (in favour of the insolvency administrator as the creditor of the liability claim) that a reason for insolvency (inability to pay or over-indebtedness) which has once occurred will persist. If the sued managing director or board of directors refers to an interim regaining of solvency or the interim cessation of over-indebtedness of the company, the burden of proof rests with him/it. Experience has shown that proof, in turn, can only be provided by meticulous documentation. As a result, this means that the managing director who does not file for insolvency in reliance on the new regulation may later be liable for all payments made since the company became insolvent - although he was not obliged to file for insolvency at that time. The legislator is therefore called upon to extend the new regulation to include liability events linked to material insolvency.

Fazit
  • What is positive is that the legislator wants to relieve corona-plagued economic players and avoid corona-induced insolvencies of companies that are viable in themselves.
  • It remains to beseen how the announced suspension of the obligation to file for insolvency will be implemented in law. Details of the planned new regulation are not yet known.
  • It is to beexpected that considerable documentation effort will be required from those companies wishing to make use of this exemption, in order to avoid that they only feel secure, but in fact are not. Early coordination with economic and legal advisors will be essential.
  • It is to behoped that sensible accompanying measures will be implemented by the legislator in order to achieve the hoped-for relief effect. Without such additions, it is to be feared that problems will not be solved, but only shifted into the future and/or onto other shoulders.
Author
Reinhard Willemsen

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

Dr Philipp Honisch

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