The German Federal Ministry of Justice and Consumer Protection is preparing new legislation suspending the obligation to file for insolvency in order to protect companies that encounter financial difficulties due to the coronavirus crisis (see here).
According to section 15a(1) of the German Insolvency Code (Insolenzordnung), managing directors or management board members of legal entities (including GmbH, AG, GmbH & KG) are obliged, in the event of insolvency or over-indebtedness of the company, to file for insolvency without delay, but in any event no later than three weeks after the event leading to the insolvency.
Under the Insolvency Code, insolvency proceedings can only be opened if a request is filed at the first instance court (Amtsgericht), which is competent for the debtor’s place of residence. According to the Insolvency Code, a debtor is illiquid when it is unable to pay its debts as they fall due, and is deemed to be illiquid if it has ceased making payments. In addition, another insolvency reason was introduced later: imminent illiquidity. In general, a company will be regarded as being over-indebted whenever the company’s total liabilities (including accruals) exceed its total assets (including hidden reserves, which can be taken into account).
Until 17 October 2008, where there was a predominant probability that the company’s business could be continued, the company was permitted to have its assets evaluated on a going-concern basis, rather than on a liquidation basis, when considering whether or not it was insolvent. Notwithstanding the predominant probability of the continuation of its business, if a company’s valuation on a going-concern basis (considering hidden reserves) still resulted in a negative net asset value, the company had to file for insolvency. Because of the financial crisis, on 18 October 2008, the Insolvency Act was modified so that a company is generally no longer regarded as being over-indebted when there is a predominant likelihood that the company’s business can continue.
As a result of the catastrophic floods in 2013 and 2016, the insolvency rules were amended in 2013 and 2016. The proposed new regulation in section 15a of the Insolvency Code probably appears to be based on the regulations that were adopted in 2013 and 2016, respectively. The new rule for the suspension of the obligation to file for insolvency reads as follows:
If the occurrence of illiquidity or over-indebtedness is due to the effects of the corona epidemic, the obligation to file for insolvency pursuant to § 15a of the Insolvency Code is suspended as long as those required to file an application are engaged in serious financing or restructuring negotiations and there are reasonable prospects of restructuring as a result, but for no longer than until the end of September 30, 2020.
Under the assumption that the wording of the new regulation is based on the wording adopted in 2013 and 2016, companies should ensure that they can prove that the over-indebtedness or illiquidity was caused by the coronavirus epidemic. Consequently, the three-week insolvency-filing period will be suspended by the statutory regulation for a period until 30 September 2020. The precondition for suspension is that the reason for insolvency is based on the effects of the corona epidemic and that there are reasonable prospects of restructuring based on an application for public assistance or serious financing or restructuring negotiations by a party obliged to apply for assistance.
In addition, an authorization for the extension of the measure until 31 March 2021 at the latest has been proposed.
It will therefore be crucial for companies experiencing serious financial distress as a result of the coronavirus outbreak to immediately and seriously consider their restructuring options and engage appropriate advisers, to maximise their chances of falling within the carve-out of the obligation to file for insolvency.