SARS-CoV-2 and the COVID-19 pandemic is a threat not only to people's health but also to the health of the businesses which underpin the economy. Governments across the world are taking steps to support businesses and here we explain how this is being done in Germany.
Why is the COVID-19 pandemic a health threat to businesses?
The COVID-19 pandemic has had an immediate and dramatic effect on a number of sectors. The hotel and tourist industries have been hit by cancellations and a collapse in demand. Exhibitions and conferences, sports, entertainment are all suspended for the time being at best. Other businesses are indirectly affected. Supply chains are being interrupted, production postponed and in some cases simply halted.
The interruption of business life translates into a significant reduction of turnover and liquidity stress. For businesses without sufficient liquid reserves or which currently benefit from the seasonality of their business, may quickly be facing at least a short-term inability to finance payments as they fall due. In normal circumstances this would mean many managers being confronted with the decision to file for insolvency.
Even if the impact of the COVID-19 pandemic is not an immediate threat to a business, there may still be a need to revisit and adjust the cashflow planning. If a company's financing through to the end of the next finance year is in question, management need to consider their obligations to ensure the continuing viability of the business and whether the company is over-indebted (which is of itself a ground for insolvency in Germany).
Are the state aid measures announced a suitable antidote?
If the company is already facing a liquidity squeeze, a decisive issue is whether the company qualifies for one or more of the available state aid programmes. For management to remain confident of the company's continuing economic viability, they need to consider how quickly support can be obtained and what impact it will have.
Which programmes have been announced or implemented?
The German government has already presented a comprehensive package of measures to support the German economy through the COVID-19 crisis. The parliament has passed a number of new laws and the European Commission has also taken measures.
Changes to short-term working regime
The German government has been empowered by a new law passed on 13 March 2020 to relax the rules for payment of short-term working subsidies, to reduce the social security contributions payable by employees on short-term working payments. Agency workers will also qualify for short-term working payments.
There have been calls to extend payments by the German employment ministry to employees of insolvent companies from three to six months. Whether this will actually be implemented currently remains open.
Tax changes to help liquidity
Changes have been made to the tax payment regime to help companies with short-term liquidity. Tax authorities will be able to defer tax payments. Payments of tax on account should also be easier to adjust where turnover is reducing. Companies directly impacted by the COVID-19 pandemic, should also benefit from protection against enforcement actions and penalty payments through to 31 December 2020. Any companies affected in this way are recommended to contact the relevant tax authorities as soon as possible so as to make the required applications.
Credit support and subsidies
A range of opportunities have been created for companies to receive state support.
The EU Commission has temporarily relaxed the usual state aid rules. Certain qualifications still apply, for example a recipient of state aid must not have been in financial difficulties as at 31 December 2019.
The EU Commission has already approved two state aid programmes proposed by Germany to counter the economic fallout from the COVID-19 pandemic. These programmes include credit programmes which will be made available through the state KfW Bank. Companies will be given access to loans on preferential terms. For example, one of the programmes will cover 90 % of the credit risk for loans to companies in the programme. Qualifying loans under the programme are available, depending on liquidity requirements of the company, for up to EUR 1 billion.
Germany also has existing programmes available, including the KfW Entrepreneur Loan (037) and the ERP Start-up Loan – Universal (073), the terms of which have been relaxed. These schemes should facilitate the commercial banks to provide additional credit. Major corporates from various sectors with turnover up to EUR 5 billion will be given easier access to consortium financing also through the KfW Loan for Growth scheme. Credit support guarantee programmes are also being extended. Some guarantee banks have already agreed to provide guarantees up to EUR 500,000 within three days of application.
The German government is currently considering further programmes. A possibility being discussed is an equity programme analogous to the one used for Commerzbank following the financial crisis in 2008. It is expected that individual companies will be supported rather than a general programme set up.
Businesses which are in financial difficulties, including where these difficulties existed before 31 December 2019, may also be eligible for state aid if they can qualify for approval under the existing state aid schemes. The EU Commission has already indicated that exceptions will be made to the general rule that a company may only qualify for sate aid every ten years. State aid is only available, however, within a defined time frame and subject to conditions.
As well as the possibilities mentioned above, the EU Commission has qualified the COVID-19 crisis as a natural catastrophe. This allows further state aid to be made available to cover loss and damage which arise from the crisis. The Commission takes the view that sectors which are particularly badly affected can be helped in this way. This would cover transport, travel, tourism, hospitality and sole traders. Other EU member states have already applied this approach and, for example, implemented state aid programmes for event organisers.
Suspension of insolvency requirements
Usually, as soon as a company is unable to pay its debts or is balance sheet insolvent, management must apply to start insolvency proceedings. The maximum time allowable by law for this application is three weeks.
The new law, COVID-19 Suspension of Insolvency Law (COVInsAG) passed through parliament and came into effect on 27 March 2020. This introduced a general rule suspending the obligation to file for insolvency until 30 September 2020. It does not apply, however, if the insolvency is not a result of the COVID-19 pandemic or in general, there is no reasonable prospect of the company becoming solvent. There is a general presumption that provided on 31 December 2019 a company was able to pay its debts as they fell due, any subsequent insolvency was caused by the pandemic and there is a prospect of a return to solvency unless shown otherwise. Managers should, therefore, document the company was able to pay its debts as at 31 December 2019 and that the company qualifies for support under one or more of the various state aid programmes.