Germany Makes Substantive Amendments to Insolvency Act Amid COVID-19

March 26, 2020

In order to avoid a large number of corporate insolvencies, the German Parliament adopted a law on March 25 to mitigate the consequences of the coronavirus (COVID-19) pandemic in civil, insolvency, and criminal procedural laws. The law will be effective retroactive to March 1, 2020.

The core point of the new law passed by the Germany Parliament is a temporary suspension of the obligation to file for insolvency and payment prohibitions for managers of insolvent companies from March 1, 2020 (the Effective Date) until September 30, 2020 (the Suspension Period). The Federal Ministry of Justice will have the option to extend the Suspension Period until March 31, 2021, by way of ordinance.

Suspension of Obligation to File for Insolvency

Generally, not only creditors of insolvent or over-indebted companies may apply for insolvency, but there is a statutory obligation pursuant to Section 15a of the Insolvency Act (Insolvenzordnung) on managers of a respective company to file for insolvency no later than three weeks after the date of the occurrence of the inability to pay (Zahlungsunfähigkeit) or the over-indebtedness (Überschuldung). In case of a violation of this obligation, the manager is subject to liability under criminal and civil law.

This obligation is now generally suspended under the new law, unless (1) the insolvency is not a consequence of the COVID-19 pandemic or (2) there is no prospect of eliminating the insolvency. If a company was not insolvent on December 31, 2019, the new law provides for a statutory assumption that a later insolvency is due to the COVID-19 pandemic and there are prospects of eliminating the inability to pay. The burden to prove otherwise lies with the insolvency administrator.

Besides the suspension of the obligation to file for insolvency, the new law provides that applications for the commencement of insolvency proceedings by creditors of the company which are filed between 1 March and 30 June 2020 will be only granted if the insolvency or over-indebtedness already occurred before 1 March 2020. This rule only applies to creditor applications which have not been decided on the date of the announcement of the new law.

Payment Prohibitions for Managers of Insolvent Companies

Another major amendment concerns payments made by managers of insolvent companies. Under normal circumstances such payments are prohibited and the manager of the insolvent company is liable for such payment. Further, such payments are voidable by the insolvency administrator. Under the new law, such payments that are made in the ordinary course of business during the Suspension Period are allowed. The purpose of this regulation is to enable the insolvent company to maintain or resume business operations or to implement a restructuring concept. Such payments are also exempted from challenge by the insolvency administrator, unless the contract partner was aware that the reorganization and financing efforts of the company were not sufficient to eliminate insolvency (which, however, has to be evidenced by the insolvency administrator).

Loans, including secured loans, granted during the Suspension Period are not considered as an illegal delay of insolvency. In order to incentivize the granting of financing to such companies, the new law provides that until September 30, 2023, repayments of loans that have been granted during the Suspension Period, including shareholder loans, shall not be considered a fraud of creditors and are therefore insolvency proof.

Further, agreements made before September 30, 2020, between an insolvent company and its contractual partners to shorten payment terms or grant payment relief; agreements on different forms of performance or on collateral; and agreements granting security or satisfaction to which the creditor was not legally entitled at such time are insolvency proof, i.e., not subject to later challenge by the insolvency administrator unless the creditor has positive knowledge that the reorganization and financing efforts of the company were not sufficient to eliminate insolvency.

The new law to mitigate the consequences of the COVID-19 pandemic in civil, insolvency, and criminal procedural law constitutes a quick and suitable action of the German legislator to avoid mass insolvencies that may occur as a result of the pandemic and provide companies time to adjust to the new situation or to implement necessary restructuring measures. The provisions of the new law are intended to be broad enough to provide managers with sufficient protection against personal liability.

Nevertheless, the new law does not entirely suspend manager obligations under insolvency, civil, and criminal law. As the new law applies only on a temporary basis, managers will have to carefully evaluate the economic situation of their company when making business decisions or entering into contractual relationships during the Suspension Period.

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If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Dr. Torsten Schwarze
Christian O. Zschocke
Karsten Emmermann