Measures in German Insolvency Law due to the Outbreak of COVID-19

Without undue delay upon occurrence of illiquidity or overindebtedness, at the latest within three weeks, members of the representing body of a legal entity have to apply for the opening of insolvency proceedings over the assets of such entity

Insolvency reasons:

• Illiquidity 
  • Inability to meet payment obligations when due
  • This is the case if the debtor is not able to pay at least 90% of their total liabilities due within three weeks
• Over-Indebtedness
  • Assets not longer cover the existing liabilities, unless a going concern of the debtor is predominantly likely (balance sheet insolvency).

Directors' liability:

• In case of a violation of the obligation to file for insolvency, the management is exposed to both criminal as well as civil law liability
• Management is generally obliged to personally compensate the company for payments made after it has become illiquid or over-indebted
• Claw-back risks with regard to payments by the (later) insolvent company in particular within the three months preceding the filing for insolvency
• Shareholder loans are subordinated in insolvency proceedings
• Risk of liability of creditors in case of so-called immoral restructuring loans

The insolvency law related part of the COVID 19 justice package covers the suspension of the obligation to file for insolvency, payment prohibitions for management, new loans and collateral, as well as claw-back risks

Suspension of the obligation to file for insolvency:

• General suspension of the obligation to file for insolvency until 30 September 2020 with retroactive effect from 1 March 2020. The suspension does not apply if the insolvency is not a consequence of the COVID 19-pandemic or if there are no prospects of resolving the illiquidity
• Causality to the pandemic and prospect of resolving an illiquidity is (rebuttably) presumed if the debtor was not illiquid on 31 December 2019

Suspension of directors’ liability

• Provided that the obligation to file for insolvency is suspended in accordance with the COVID 19 Justice Package (cf. above), payments in the ordinary course of business, in particular for the purposes of continuing or resuming trading or in order to implement a restructuring concept, are not prohibited
• As a consequence, management initiating payments and economically corresponding actions, does not act in breach of duty and are not obliged to compensate such payments

Creditors' filiing:

• The opening of insolvency proceedings based on a filing by a creditor requires that the reason for the opening of insolvency proceedings already existed on 01 March 2020

Provided that the obligation to file for insolvency is suspended in accordance with the COVID 19 Justice Package (cf. above) 

• Repayment until 30 September 2023 of a loan granted during the suspension period or the furnishing of new collateral is not considered to be detrimental to creditors and, hence, may not be challenged by an insolvency administrator in subsequent insolvency proceedings; this shall also apply to repayments on shareholder loans and similar legal acts, but not to collateral for shareholder loans
• Shareholder loans newly granted during the suspension period are not subject to the statutory subordination in insolvency proceedings which will have been applied for in the period until 30 September 2023
• Loans granted and collateral furnished during the suspension period are not subject to the concept of immoral restructuring loans
• Independent of the knowledge of the creditor of its debtor’s illiquidity, so-called congruent payments or furnishment of collateral are not subject to claw-back rights of a (later) insolvency administrator, unless the creditor has been aware that that restructuring and financing efforts of the debtor were not suitable to eliminate the illiquidity occurred
• This shall also apply to the following legal acts: Performance in lieu of performance or on account of performance, third-party payments upon instruction of the debtor, furnishing of different – but not more valuable – collateral, shortening of payment terms or facilitation of payment terms

The new regulations on loans and collateral shall apply on loans granted by Kreditanstalt für Wiederaufbau (KfW) and its financing partners or other finance institutions due to the COVID 19 pandemic public aid also if a loan has been granted or secured after the suspension period has expired and indefinitely on the repayment of such loan

In addition to companies to which the new suspension rule applies, the new regulations on loans and collateral as well as the restriction of claw-back rights also apply to companies which are not (yet) insolvent and to businesses without statutory insolvency filing obligations (i.e. (limited) partnerships (OHG, KG) and sole traders)

The Ministry of Justice and Consumer Protection may extend the suspension period by ordinance until 31 March 2021