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Jan Erik Jonescheit
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Corona pandemic handout on insolvency law

Section 1, sentence 1, of the Act on Mitigating the Consequences of the COVID-19 Pandemic in Civil, Insolvency, and Criminal Procedure Law, and the COVID-19 Insolvency Suspension Act (COVInsAG) contained therein, temporarily suspends the obligation of managing directors and board members of companies required to file for insolvency to do so. The aim of the suspension is to give companies the opportunity to avert the grounds for insolvency, in particular by making use of the state aid to be provided, but also through restructuring or financing agreements.

When should a company file for bankruptcy if it faces financial difficulties due to COVID-19?

The obligation to file for insolvency under Section 15a of the Insolvency Code (InsO) issuspendedfrom March 1, 2020, through September 30, 2020.The legislature has also authorized the Federal Ministry of Justice to extend this period until March 31, 2021.

A prerequisite for the suspension of the obligation to file for insolvency is that the company’s insolvency isa result of the spread of the SARS-CoV-2 virus. As a second prerequisite, it must be demonstrated that the company has the ability to resolve its current insolvency, e.g., through government assistance. However, the law presumes that the possibility of remedying the situation exists if the company wasnot insolvent as of December 31, 2019. The burden of proof, however, lies with the party invoking the existence of the obligation to file for insolvency.

If these conditions cannot be demonstrated, the general rules continue to apply in full. Accordingly, as is typically the case in such situations, the management’s forecast—which is intended to justify the company’s continued operation—must be documented in writing. We would be happy to assist you in preparing the necessary documentation if needed.

What about prohibited payments, such as those made after the company becomes insolvent or to shareholders?

Once insolvency has been declared, the managing director is subject to a wide range of potential liability claims for payments made on his or her initiative. Payments made during the suspension period are given priority accordingly.

To protect the management from further liability risks, thepayment prohibitions linkedto insolvency under § 64, sentence 1 of the German Limited Liability Companies Act (GmbHG), Section 92(2), sentence 1 of the German Stock Corporation Act (AktG), Section 130a(1), sentence 1, also in conjunction with Section 177a, sentence 1 of the German Commercial Code (HGB) and Section 99, sentence 1 of the German Cooperative Act (GenG),are suspendedfor the duration of the suspension of the obligation to file for insolvency.This applies only to the extent that it concerns management measures taken in the ordinary course of business. This includes measures to maintain or resume business operations, as well as measures related to the restructuring of business operations and business models.

The current uncertainties also make it difficult to produce reliable forecasts and plans on which the granting of restructuring loans could be based. For this reason, restructuring loans granted asnew loansaregranted special protection under the laws governing avoidance actions and liability. This also applies to supplier loans, as parties already in a business relationship are intended to be motivated to continue the relationship by a restriction on the right to challenge the loan.

What about the criminal liability for delaying the filing of for bankruptcy?

If the conditions for the temporary suspension of the obligation to file for insolvency are met, failure to file for insolvency during this period is not a criminal offense. A violation of the obligation to file for insolvency is a criminal offense. Since this obligation is suspended until September 30 under the conditions mentioned above, it cannot be violated.

However, once the suspension period expires, the obligation to file for insolvency—and with it, criminal liability—is reinstated if the grounds for insolvency have not been resolved. If the grounds for insolvency, in particular insolvency, persist for more than three weeks after the end of the suspension (see § 15a(1), sentence 1 InsO), an insolvency petition must be filed immediately. By that time, therefore, the company must have secured refinancing at the very latest.

The following should also be noted. In addition to criminal liability for delaying the filing of for insolvency, there is always the risk of other insolvency-related criminal offenses.

Section 266aofthe German Criminal Code (StGB)isnot suspended by the COVInsAG.This provision makes the failureto pay social security contributionson time a criminal offense. The GKV-Spitzenverband has made it clear in a circular that a deferral of social security contributions is possible. However, this deferral is to be granted only “once all other measures from the various aid packages and support measures of the federal government have been exhausted.” Therefore, anyone who finds themselves in a situation where they are unable to pay owed social security contributions should document that there was no obligation to file for insolvency. This is because case law assumes that Section 266a of the German Criminal Code (StGB) applies only during the period when there is an obligation to file. Here, despite the lack of a suspension of § 266a StGB itself, the suspension of the filing obligation may have an indirect effect. In any case, applications for deferral must be submitted to the collection agencies.

Just as § 266a of the German Criminal Code (StGB) is not suspended, neither is the general fraud provision (§ 263 StGB). Yet fraud involving the entering into of contracts is frequently committed in situations related to insolvency. The COVInsAG is intended to ensure that the affected companies can continue their business operations. However, in the event of insolvency,entering into new transactionswithout advance payment can easily lead to arisk of fraudif a contractual partner has not been informed of the risk of default. Case law assumes “that the suppliers would not have delivered the ordered goods if they had been aware that they would no longer receive payment for them.” Therefore, to eliminate this risk, there must be careful documentation of the decision to continue operations, the forecast for (re)gaining solvency, and the economic viability of the company’s business activities. If this cannot be demonstrated, continuing business operations poses a criminal liability risk.

So what should be done?

In light of this, the management of companies facing financial difficulties must maintain the following documentation:

  • Documentation of the liquidity position as of December 31, 2019, indicating whether the company was solvent at that time.
  • Documentation of liquidity planning excluding the one-time impact of the COVID-19 pandemic.
  • Documentation of liquidity planning, including the impact of the COVID-19 pandemic.

Comparing the planning scenarios provides insight into whether the causes of insolvency are attributable to the effects of the pandemic. You should continue to maintain this documentation, at least until any causes of insolvency have been resolved. We would be happy to assist you with this.