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The German “COVInsAG” – in practice

By Dr Volker Beissenhirtz of Beissenhirtz Business Law

After a rather short discussion on the various measures necessary to counter the economic effects of the corona virus pandemic (cf. for further information here (in German)), the legislator enacted a flood of bills on 25 March (“(German) Corona Consequences Mitigation Act”; “Corona-Folgen-Abmilderungsgesetz“). In a brief overview – focussing on the insolvency-specific regulations of the “COVInsAG” contained therein – I will try to evaluate the first experiences with the suspension of the obligation to file for insolvency.

As is well-known, Germany has one of the toughest “early-filing-requirements” for insolvency in Europe, cf. § 15a German Insolvency Act (“Insolvenzordnung, InsO“). In order to avoid large parts of the German enterprises being forced into insolvency, the German Parliament suspended, according to § 1 of the “COVID-19-Insolvency Suspension Act” (“COVInsAG“), the obligation to file for insolvency for managing directors of corporations initially until 30 September 2020 for those companies whose business operations are affected by the consequences of the SARS-CoV-2 virus (COVID-19 pandemic). However, an application obligation to file for insolvency pursuant to section 15a InsO still exists

  • if the insolvency is not due to the consequences of the spread of SARS-CoV-2 (COVID-19 pandemic), or
  • if there is no prospect of eliminating an existing illiquidity.

In this context, it is (rebuttably) presumed that the insolvency is based on the effects of the COVID 19 pandemic if the debtor was not insolvent on 31 December 2019. Within the framework of § 3 COVInsAG, the right of creditors to file an insolvency petition is also massively restricted, as they must prove that the reason for insolvency to which they refer already existed on 1 March 2020. This proof will only be successful in exceptional cases.
 
Furthermore, the COVInsAG has severely limited the liability for any payments made by the management, even if there are grounds for insolvency: “Insofar as the […] obligation to file an insolvency petition is suspended, payments made in the ordinary course of business, in particular those payments which serve to maintain or resume business operations or to implement a restructuring concept, shall be deemed compatible with the due care of a prudent and conscientious manager within the meaning of § 64 sentence 2 [GmbHG] […]. “, see § 2 (1) No. 1 COVInsAG.

Finally, large parts of the rules on insolvency avodance were suspended within the framework of the COVInsAG, cf. § 2 (1) No. 2 et seq. COVInsAG, so that especially with regard to the granting of loans in the current crisis, the risk of challenging repayments should be relatively low.
 
However, the protection of debtors and managers is not unlimited: Thus, further (creditor-protecting) regulations, such as those concerning the maintenance of capital of corporations, such as according to § 30 GmbHG, or the obligation to call a shareholders’ meeting in case of loss of half of the share capital, e.g. according to § 49 Paragraph 3 GmbHG, continue to exist unchanged. Furthermore, it is unclear whether it could constitute a fraud in the current situation if a managing director enters into new contracts without disclosing a corona-related crisis of the company. Finally, the question is currently being discussed as to how to proceed with the so-called “continuation forecast” (“Fortführungsprognose”) for the annual financial statements currently in preparation in view of the currently incalculable consequences of the corona pandemic.

Despite this extensive suspension of the obligation to file for insolvency and other regulations related to it, a number of well-known companies, such as Galeria Karstadt Kaufhof (here),  Maredo (here) or Esprit (here, all in German), have already filed for insolvency – and the list grows longer every week. Lufthansa, for example, is considering initiating a protective umbrella procedure in order to avoid state influence when emergency loans are taken out (here). Even if Lufthansa is somewhat special, the cases as a whole show that in view of the imponderables of the Corona crisis, insolvency – especially in the form of a “protective umbrella” (“Schutzschirmverfahren“) – appears to many market participants to be the “last straw”.

Deutscher Bundestag, BT-Drs.: 19/18110, “Corona-Folgen-Abmilderungsgesetz” (in German)
For the Parliamentary discussion, cf. here (in German)
Das müssen Unternehmer jetzt wissen, wenn ihr Betrieb zahlungsunfähig ist“, Interview ua. with Dr. Beissenhirtz, Tagesspiegel, 25 March 2020 (in German)


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