COVID-19: Legal impacts on insolvency law in Germany

By Dr. Dirk Barcaba, Elie Kaufman

04-2020

Temporary suspension of obligation to file for insolvency and of creditor’s right to request opening of insolvency proceedings

On 25 March 2020 the German parliament passed a bill “to mitigate the consequences of the COVID-19 pandemic in civil, bankruptcy and criminal procedure law” (COVID-19 Bill) that aims at protecting companies that experience financial difficulties as a result of the COVID-19 pandemic.

The COVID-19 Bill includes a temporary suspension of both, the debtor’s statutory obligation to file for insolvency and the creditor’s right to request the opening of insolvency proceedings for insolvency reasons that occurred after 1 March 2020.

The COVID-19 Bill was confirmed by the Federal Council and becomes effective upon execution by the Federal President and promulgation in the Federal Law Gazette.

Background - statutory obligation to file for insolvency and creditors right to request opening of insolvency proceedings

Companies that become illiquid or over-indebted are obliged to file a request for the opening of insolvency proceedings without undue delay, however, at the latest within three weeks after the commencement of insolvency or over-indebtedness, Section 15a para 1 sentence 1 German Insolvency Code (filing obligation).

The filing obligation is a personal duty of all legal representatives of the company, typically the managing director and/or members of the management board; in case the filing obligation is infringed, personal liabilities and criminal penalties are threatening.

Creditors of a company that experience payment defaults may request the opening of insolvency proceedings, provided they have a legal interest in the opening of the insolvency proceedings and are able to demonstrate their claim and the opening reason to the satisfaction of the court, Section 14 German Insolvency Code.

Suspension of debtor’s obligation and creditors’ right to file for insolvency
The COVID-19 Bill provides for a temporarily suspension of the filing obligation until 30 September 2020; this deadline can be shifted by the Federal Ministry of Justice until 31 March 2021 by decree.

For the suspension of the filing obligation two conditions must be fulfilled:

  • The reason for insolvency must be based on the effects of the COVID-19 pandemic (and not on other reasons).

  • There are prospects for a restructuring of the company due to pending procedures for granting public aid to the company and/or pending negotiations with (potential) creditors of the company about additional financing or reorganization of debt.

The COVID-19 Bill provides for a legal presumption that these conditions are fulfilled if the company was not illiquid as of 31 December 2019.

As a logic consequence, the liability for legal representatives of the company for payments despite company’s illiquidity or over-indebtedness (company law liability and criminal law liability) is lifted to this extent.

For the next three months, creditors’ right to request for opening of insolvency proceedings is cancelled for requests that are based on circumstances that occurred after 1 March 2020. Again, the Federal Ministry of Justice can extend this cancellation period until 31 March 2021.

Extract from the text of the COVID-19 Bill

§ 1 – Suspension of the obligation to file a request

"The obligation to file a request for insolvency under section 15a of the Insolvency Code and section 42 (2) of the Civil Code is suspended until 30 September 2020. This does not apply where the insolvency is not a consequence of the spread of the SARS-CoV-2 virus (COVID-19 pandemic) or where there are no prospects of remedying the insolvency. Where the debtor was not illiquid on 31 December 2019, it is assumed that the insolvency is a consequence of the COVID-19 pandemic and that there are prospects of remedying the insolvency. If the debtor is a natural person, section 290 (1) no. 4 of the Insolvency Code applies, with the proviso that the refusal to discharge residual debt may not rely on a delay in the opening the insolvency proceedings in the period between 1 March 2020 and 30 September 2020. Sentences 2 and 3 shall apply accordingly.”

§ 3 – Reason to open insolvency proceedings in creditors' request for insolvency

"In the case of requests to open insolvency proceedings which are filed by creditors in the period from 28 March 2020 to 28 June 2020, the opening of insolvency proceedings is conditional upon the reason to open insolvency proceedings having already existed prior to 1 March 2020“.

§ 4 – Authorization to issue statutory instruments

"The Federal Ministry of Justice and Consumer Protection is authorised, by way of statutory instrument not requiring the approval of the Bundesrat, to extend the period of suspension of the obligation to file a request for insolvency under section 1 and the rules concerning the reason to open insolvency proceedings in creditors' request for insolvency under section 3 until no later than 31 March 2021 if this appears necessary due to continuing demand for available public aid, ongoing financing difficulties or other circumstances.”

Further information

The Ministry (Ms. Lambrecht) commented:

"We want to prevent companies from having to file for insolvency for the only reason that the aid provided by the federal government does not reach them in time. The regular three-week period of the Insolvency Code is too short for these cases. [….] With this step, we are helping to cushion the consequences of the Corona outbreak for the real economy”.

Whether the conditions for the suspension of the filing obligation are fulfilled has to be judged by the management board of the company.

The causality of the COVID-19 pandemic for the financial crisis of the company can be verified by demonstrating that the company was liquid on 31 December 2019, for example through annual financial statements as of 31 December 2019 with unqualified audit opinion.

Obviously, the suspension of the filing obligation does not release the company from any of its (contractual) obligations towards business partners, employees etc.

The COVID-19 Bill addresses this issue separately for some types of contracts (consumer agreements such as agreements for supply with utilities, loan agreements, insurance agreements and commercial lease agreements) and excludes creditor’s termination right for payment default temporarily if certain conditions are fulfilled.

For the rest, the specific contract, any force majeure clauses therein and the statutory right to terminate for good reasons as well as the German rules for adjustment and revocation of contracts for interference with the basis of the transaction (Geschäftsgrundlage) are to be considered to understand the contractual obligations during the crises.

Last reviewed: 15 April 2020