The Law on the Temporary Adaption of Restructuring and Insolvency Law Provisions to Mitigate the Consequences of the Crisis (SanInsKG) was published in the German Federal Gazette (Bundesanzeiger) today (8 November 2022) and will become effective in German law tomorrow (9 November 2022), following a very quick legislative process.
Purpose of the SanInsKG
SanInsKG is intended to address the difficulty of companies assessing their solvency in the current economic climate.
In addition to situations where a company is not able to pay its due liabilities (“illiquidity”), companies are considered insolvent in Germany where they are over-indebted, e.g. when the assets of the company no longer cover the company’s liabilities, unless it is more likely than not that the company will remain liquid within the next 12 months (the “positive going concern prognosis”).
As a result of the war in Ukraine, very high and volatile energy and raw materials prices, high inflation, rising interest rates and supply chain disruptions, it is increasingly difficult for companies to make projections for the coming 12 months.
As managing directors risk personal civil and criminal liability if they delay filing for insolvency, the legislator has seen the difficulties that the current economic uncertainties could cause, potentially resulting in a company filing for insolvency when, under normal circumstances it would have had a positive going concern prognosis..
What are the changes in the Insolvency Laws?
To address these concerns, SanInsKG makes the following modifications to the Insolvency Code:
- The forecast period relevant for the positive going concern prognosis is being shortened from 12 to 4 months. This is similar to legislation implemented in 2020 to address uncertainties resulting from the COVID-19 pandemic. However, while the 2020 legislation was specifically limited to situations where the over-indebtedness was caused by the COVID-19 pandemic, this time the legislator has not provided for any restrictions, so the shorter forecast period will apply to all cases of over-indebtedness.
- Similarly, the periods for which a financial plan has to be provided (i) in the context of self-administration proceedings, and (ii) in the context of a restructuring proceeding pursuant to the Law on the Stabilisation and Restructuring Framework for Enterprises (StaRUG) is also being shortened from 6 months to 4 months.
- Finally, the maximum period to file for insolvency in cases of over-indebtedness is extended from 6 weeks to 8 weeks. The purpose of this extension is to provide companies with more time to restructure out of insolvency, or alternatively to properly prepare restructuring proceedings pursuant to StaRUG or self-administration proceedings.
SanInsKG will apply retrospectively to situations where a company has become over-indebted (within the meaning of the Insolvency Code) prior to SanInsKG becoming effective, but where the insolvency filing would become due after 9 November 2022. For example, if a company determined on 31 October 2022 that it is obliged to file for insolvency on the basis of a 12 months prognosis, it may now re-evaluate its positive going concern prognosis based on the four months forecast period.
SanInsKG applies for a temporary period which will expire on 31 December 2023.
What did not change?
It is important to note that the extension of the maximum filing period to file for insolvency on the basis of over-indebtedness does not change the general legal requirement, which is to file for insolvency without undue delay. Therefore, if it is clear that it would not be possible to “cure” the over-indebtedness within the extended period for filing (i.e. 8 weeks), the company has to file for insolvency without undue delay (and may not take advantage of the full 8 weeks).
Also, consistent with the insolvency rules that applied during the COVID-19 pandemic, the obligation that companies file for insolvency at the latest within three weeks of illiquidity remains unchanged.
SanInsKG may, in many cases, avoid filings for insolvency, as a four months forecast period will most likely result in a positive going concern prognosis, more often than using a 12 month forecast period would. However, it remains to be seen whether this will really prevent a significant numbers of insolvencies, as illiquidity is the main reason for insolvency filings in Germany.
The number of corporate insolvency filings has already been increasing in recent months, and it is generally expected that a wave of insolvencies of German companies is likely to occur. SanInsKG may only delay the process but ultimately not prevent such a wave from happening.