Under the Insolvency Suspension Act COVID-19 (COVInsAG), the obligation to file for insolvency is suspended under certain conditions due to the coronavirus. The regulations apply retroactively to 01.03.2020.
The coronavirus is spreading fast. Measures to slow its spread are already hitting companies hard and will cause many companies considerable financial difficulties in the foreseeable future.
Obligation to file for insolvency
Managing directors of a GmbH and executive board members of an AG are obliged to file for insolvency if their company is insolvent, i.e. insolvent or overindebted (section 15a (1) sentence 1 InsO). Managers can wait up to three weeks before filing for insolvency, but only for so long as it is expected the reason for insolvency can still be eliminated within that time.
If managers fail to comply with their obligation to file for insolvency, they may be exposed to personal liability risks and may even be liable to prosecution.
Suspension of the obligation to file for insolvency due to coronavirus
The Federal Ministry of Justice and Consumer Protection has prepared the legal regulation to suspend the obligation to file for insolvency. The aim of the regulation is to protect companies that get into financial difficulties as a result of the corona pandemic.
The government has announced numerous aid programmes for companies. However, it is questionable whether the aid will reach the companies in time - before the three-week period for filing for insolvency expires.
Christine Lambrecht, Federal Minister of Justice and Consumer Protection, explains:
We want to prevent companies having to file for insolvency just because the aid decided on by the Federal Government does not reach them in time. The regular three-week period of the Insolvency Code is too short for such cases. We are therefore flanking the aid package already adopted by the German government with a suspension of the obligation to file for insolvency until September 30, 2020 for the companies affected. With this step, we are helping to cushion the consequences of the outbreak for the real economy.
The regulations which suspended the obligation to file for bankruptcy during the flood disasters in Germany in 2002, 2013 and 2016, serve as a model for the suspension.
Conditions for the suspension of the obligation to file for insolvency
The suspension of the obligation to file for insolvency is intended to ensure that affected companies do not have to file for insolvency solely because the processing of applications for public assistance or financing or restructuring negotiations in the extraordinary current situation cannot be completed within the three-week period obligation to file for insolvency.
Two conditions apply to the suspension of the obligation to file for insolvency:
- The reason for insolvency is based on the effects of the COVID 19 pandemic.
- There are prospects for a return to solvency.
The suspension of the obligation to file for insolvency is therefore the general rule. It is only disapplied if the insolvency occurred for reasons other than the COVID 19 pandemic or if there is generally no prospect of the company returning to solvency. There is a presumption that the insolvency is caused by the pandemic and there is a prospect of returning to solvency if the debtor was still able to pay its debts as they fell due as at 31 December 2019.
The regulation applies initially until 30 September 2020. However, the Federal Ministry of Justice is to be authorised to extend the suspension until 31 March 2021 at the latest.
Conclusion: The new regulations create scope for restructuring solutions by 30 September 2020
This gives companies time to find a solution to the economic difficulties caused by the COVID 19 pandemic by 30 September 2020. At that date, however, the usual insolvency law balance sheet insolvency test will be reapplied. This may be problematic as it means a positive prognosis for the continuation of the business must be available at the latest by then. However, the positive prognosis for continuing the business may be jeopardised by the direct and indirect effects of the pandemic. Many companies may find it difficult to forecast and thus calculate future income, expenditure and liquidity requirements in the current and following financial year. It would therefore be more expedient not only to temporarily suspend the obligation to file for insolvency, but also generally to suspend the application of the balance sheet insolvency test. But the COVInsAG does not provide for this.
Despite the suspension of the obligation to file for insolvency, managers should clearly document that their economic difficulties are due to the COVID 19 pandemic and that there are prospects of recovery. They should also be able to demonstrate that the company was able to meet it debts as they fell due as of 31 December 2019. In case of doubt, they should seek legal advice in order to minimise remaining risks and implement the requirements correctly.
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