Out-Law / Your Daily Need-To-Know

Germany temporarily relaxes insolvency law

Out-Law News | 31 Oct 2022 | 1:03 pm | 2 min. read

Germany has amended its insolvency law to protect businesses under financial pressure due to the energy crisis from having to file for insolvency prematurely.

An amendment to the restructuring and insolvency law has passed both the German Bundestag and the Bundesrat. It is intended to protect businesses from being pressed into insolvency proceedings in the current energy and raw materials crisis. Under German law, the directors of companies that are illiquid or overindebted are obliged to file for insolvency without delay; failure to do so constitutes a criminal offence. Among other things, the new rules shorten the forecast period for the over-indebtedness test from twelve to four months. This means that over-indebted businesses will not have to file for insolvency if they have a predominant likelihood for a going concern for another four months.

The shortening of the forecast period is intended to protect businesses from being forced into insolvency proceedings due to general uncertainties affecting all businesses. Furthermore, over-indebted companies will in future have up to eight weeks to file for insolvency. Previously, this had to be done within six weeks to avoid liability for delaying insolvency.

"It is important to note that the obligation to file for insolvency for illiquid companies remains and only the forecast period for over-indebtedness will be adjusted," Dr Attila Bangha-Szabo, an expert in insolvency law at Pinsent Masons, said. "Illiquid companies are not allowed to continue trading at the expense of their business partners."

In September, Germany’s federal minister of justice, Marco Buschmann, had initiated the legal amendment. The changes were subsequently included in the German government's so-called ‘third relief package’ aiming to support businesses and households during the crisis. The German government explained the necessity of the changes to insolvency law with the current "conditions and developments on the energy and raw materials markets". It said these are putting a strain on the financial situation of businesses and making it difficult for them to plan ahead. The new rules are intended to prevent businesses from hastily filing for insolvency when it is difficult for them to make long-term forecasts in the current situation. "However, all companies will benefit from the new regulation, regardless of whether their financial difficulties were caused by the current situation or not," Dr Bangha-Szabo said.

The new rules will be implemented by the previous Covid 19 Insolvency Suspension Act, which will be renamed the Reorganisation and Insolvency Law Crisis Consequence Mitigation Act. Bangha-Szabo said: "There will be no complete suspension of the obligation to file for insolvency as in the Covid crisis. Most of all, the new regulation protects business managers in particular when preparing their going concern and liquidity forecasts by reducing the forecast period. On the other hand, creditors and business partners of crisis-stricken companies will have to watch out because over-indebted businesses whose forecast is foreseeable to become negative within five months - or more - will no longer have to file for insolvency, but will in fact be allowed to continue trading."

The new rules will come into force after their publication in the Federal Law Gazette, which is expected to happen shortly. They will expire on 1 December 2023.

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