Germany protects businesses against insolvency during pandemic

Germany

The German government has moved quickly and decisively to protect businesses from the short-term impact of the Covid-19 pandemic. A new law was passed by parliament using remote voting procedures and comes into today, 27 March 2020. The Covid-19 Suspension of Insolvency Law (COVInsAG) provides a protective shield for businesses against the economic fallout caused by the extraordinary measures taken to limit the spread of the SARS- CoV 2 virus which causes the illness we now know as Covid-19.

The law addresses three main areas:

  • the corporate insolvency regime – for example the obligations imposed on management to file for insolvency, their potential personal liability for payments made when a company is in financial difficulties and the vulnerability of restructuring plans to later challenge;
  • protection for individuals and small business unable to pay their rent or meet loan obligations;
  • changes to corporate law requirements to allow virtual meetings to take place and avoid disruption to shareholder meetings.

Corporate insolvency

The obligations imposed on managers to file for insolvency have been suspended until 30 September 2020. This is a general rule which will apply unless the reason for the insolvency is not the Covid-19 pandemic or there is no prospect of the company being able to pay its debts in the future. Businesses need to document now the reasons for their financial difficulties to show, if challenged, the nexus with the pandemic. Relying on the general rule applying is not recommended.

Managing directors are personally liable for payments made by a company if it is insolvent. If, however, their obligations to file for insolvency are suspended because insolvency grounds stem from the Covid-19 pandemic, the usual payment prohibitions do not apply. Payments made in the ordinary course of business or which are made to maintain or resume business operations or to implement a restructuring plan, are to be treated as compatible with the diligence required of a prudent and conscientious manager. This excuses the managing director from personal liability. Again, accurate contemporaneous record keeping will be important to take advantage of these exceptions from the general rules.

The act also restricts creditors rights to file for insolvency against their debtors. Creditor applications filed within three months of the law coming into force will only be allowed to proceed if the grounds for insolvency existed on 1 March 2020.

Reorganisations carried out during the period to 30 September 2020 will be protected from later challenge provided certain conditions are met.

Consumer protection

A moratorium is being introduced for consumer and small businesses. This will apply to rent payments and loan repayments where the Covid-19 pandemic is the reason for the non-payment. The moratorium will be in force from 1 April to 30 June 2020. The underlying obligations to pay will remain in force so it may be necessary for creditors to agree changes to payment plans or to otherwise restructure debt obligations.

Changes to company law

Public companies (KGaA and SE) will be granted relief by way of a simplified process to conduct annual general meetings. The management board may, with the approval of the supervisory board, allow shareholders to participate in the annual general meeting electronically. Votes may also be cast electronically without this being authorized in the articles of association or rules of procedure. The executive board may also decide, with the approval of the supervisory board, to hold a virtual general meeting. Some other further formal requirements are also being relaxed.

Companies with limited liability (GmbH) will be given the right to pass shareholder resolutions in text form or by written resolution.

These changes will apply through the calendar year 2020.

Summary

These are important changes and form part of the German government's overall response to the economic crisis the pandemic has brought on.  The changes, however, only grant businesses time to find solutions to their current problems. Re-organisation plans (operational measures, stakeholder contributions, subsidised loans or state aid) must now be developed. On the existing timetable, businesses will have to produce and implement these plans by 30 September 2020 when the suspension ends.