As we reported in a previous blog the German legislator in November 2022 introduced the Law on the Temporary Adaption of Restructuring and Insolvency Law Provisions to Mitigate the Consequences of the Crisis (SanInsKG). This addressed the difficulty of companies assessing their solvency during the crisis at that time, in particular 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.
The most relevant change brought by SanInsKG was the reduction of the forecast period for the over-indebtedness test from 12 months to 4 months. This reduction allowed managing directors of companies time to address distress because they were not required to file for insolvency if a 4 months forecast period (rather than a 12 month forecast period) resulted in a positive going concern prognosis.
However, SanInsKG only applied for a temporary period and expired on 31 December 2023. As a consequence, when assessing over-indebtedness of a company, the forecast period is once again 12 months. This means that managing directors of German corporations are now obliged to file for insolvency on the basis of over-indebtedness, 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 be able to remain liquid within the next 12 months (“positive going concern prognosis”). The filing needs to be made without undue delay, but at the latest within 6 weeks of the company becoming over-indebted.
Whether this change in the German insolvency laws will result in an increasing number of insolvency filings based on over-indebtedness remains to be seen. However, given economic trading conditions remain challenging, particularly managing difficulties in the supply chain we are likely to see an increase in filings. As such managing directors are well advised to regularly and thoroughly review the over-indebtedness situation of their company and whether a positive going-concern prognosis exists. The results of these reviews should be properly documented so that the managing directors can evidence compliance with their obligations to avoid personal liability in a future insolvency.