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Coronavirus: Germany to suspend duty to file for insolvency

Out-Law News | 19 Mar 2020 | 2:55 pm | 2 min. read

For all companies that are facing economic difficulties in Germany as a result of the coronavirus crisis, the federal government intends to suspend the obligation to file for bankruptcy until 30 September this year. Companies that maintain business relationships with companies at risk of insolvency now need special protection, an expert said.

The new measure is to prevent companies affected by the coronavirus crisis from having to file for insolvency just because the aid being provided by the federal government does not reach them in time. An amendment of the relevant laws regarding the obligation to file for insolvency in Germany is to be published soon, the Federal Ministry of Justice and Consumer Protection (BMJV) has said.

Dr. Attila Bangha-Szabo, bankruptcy law expert of Pinsent Masons, the law firm behind Out-Law, said: “From a macroeconomic perspective, the suspension of the statutory three-week period makes sense. The government's steps protect companies that have operated well in the past. This measure will help to preserve jobs and companies.”

The three-week deadline is to encourage companies to file for insolvency at the right time instead of delaying it after directors become aware that the company is likely to become insolvent. "Companies that are exposed to a constant cash shortage are obliged to file for insolvency without delay. This applies regardless of whether the difficult cash situation is the result of mistakes by the management or whether the insolvency event was foreseeable, " Bangha-Szabo said. "If the managing directors do not file the application with the court within three weeks at the latest, they risk facing criminal charges."

Companies that maintain business relationships with companies at risk of insolvency should take special care now that the obligation to file for insolvency may be suspended, said Bangha-Szabo: "Anyone who has a business relationship with a company at risk of insolvency must now react and take proactive steps to minimise the risks of clawbacks. It is possible, that with the new regulation, a number of insolvencies will be merely postponed until autumn. Anyone receiving payments from a business that is threatened by insolvency potentially faces the risk of a later clawback." In such an event, amounts already paid may be later clawed back by the insolvency adminstrator in order to distribute the funds among all affected creditors.

To support the liquidity of companies that have experienced payment difficulties due to the corona pandemic and its aftermath, the German federal government has announced that it will provide various instruments of help. But it is not guaranteed that such help will reach the companies within the three-week deadline for insolvency application.

For the suspension of the insolvency filing deadline to apply, it is required that the reason for the insolvency is based on the effects of the corona pandemic and that there are prospects of restructuring through public aid or financing and restructuring negotiations.

Johanna Storz, an expert in corporate law of Pinsent Masons, said:  "Companies need to be aware of the fact that a suspension of the obligation to file for insolvency is only supposed to affect insolvencies that are based on the consequences of the coronavirus crisis. If the obligation arises for other reasons, it is likely that the obligation to file for insolvency within the three-week period will continue after the reason for the insolvency."

The new regulation is to apply until 30 September this year. If necessary, it will be extended until March 31, 2021.

Eike Fietz, an expert in company law and manufacturing industries at Pinsent Masons, said: "Proving 'Covid 19-related insolvency' could be extremely difficult. The planned statutory revisions will have to be clear: a provision which relates to the timing of insolvencies and does not differentiate between the reasons for them or, alternatively, provides for a statutory presumption – which can be rebutted – would simplify things." Nevertheless, it is to be expected that uncertainties will arise in many German industries, he said. "Due to disruptive developments such as electrification and autonomous driving, as well as the special effects of 'Dieselgate', the automotive industry, for example, is already under extreme pressure. Therefore, paying particular attention to timely documentation of the specific circumstances is highly recommended," said Fietz.