COVID-19 - Attack on the resilience of German businesses

Germany

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 adopted a Temporary Framework which eases the conditions under which state aid may be provided. This framework includes certain restrictions. Most importantly, state aid beneficiaries must not have been in financial difficulties on 31 December 2019.

Germany has already taken advantage of the new regime and has notified several programmes which have been approved. Any State aid granted under these approved programmes, does not require any further notification to the EU Commission.

The approved programmes include an extension of the existing support services of the German Promotional Bank (KfW).Loans of up to EUR 1 billion with a low interest rate are now available subject to certain conditions being satisfied. KfW will take over up to 90% of a loan provided by a bank to a beneficiary. KfW can also participate in consortium financings for investments and working capital. For these KfW can assume up to 80% of the risk, up to a cap of no more than 50% of the company's total debt, facilitating loans of EUR 25 million or more.

The Commission has also approved a guarantee programme. Based on this programme, public authorities can more easily provide guarantees for business loans.

In addition, Germany has set up an economic stabilisation fund. Only companies of a certain size which were not in financial difficulties on 31 December 2019 are eligible to apply for support from the fund. Depending on the circumstances, the fund allows guarantees to be provided and even for state participation in companies. The fund has not yet been approved by the Commission and once approved may still require each individual measure to be notified.

Irrespective of whether companies were already in financial difficulties before 31 December 2019, State aid may be permissible under existing aid rules. The EU Commission has announced it will make exceptions to the general rule that a company is eligible for rescue and restructuring aid only once every ten years.

Furthermore, the EU Commission has classified the COVID-19 crisis as an "exceptional occurrence". This allows State aid to be provided to cover losses caused by the crisis. In the Commission's view, sectors that have been particularly affected by the pandemic can be helped in this way. These sectors include transport, tourism, hospitality industries and retail. Other EU member states have already made use of this policy, for example by introducing 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.