In light of the growing pandemic of COVID-19 the German government has decided on a number of unprecedented restrictions for all areas of private and business life which were unimaginable just a few weeks ago. As a result, many production facilities and businesses had to shut down. While the consequences for many companies are already dramatic, the full impact on the economy is still unpredictable as it is unclear how long the current restrictions will subsist.
While the German government has already taken significant measures in relation to short time work, tax relief and other areas, the German Parliament today passed a bill making several changes to insolvency, corporate and contract law (Gesetz zur Abmilderung der Folgen der COVID-19-Pandemie im Zivil-, Insolvenz- und Strafverfahrensrecht) ("Bill").
The most relevant provisions for borrowers and lenders under the Bill are the suspension of the obligation to file for insolvency and the facilitation of providing new money during financial difficulties.
In order to provide companies with the opportunity to overcome an insolvency — in particular by accessing aid provided by the public sector and by restructuring existing financing agreements or taking on new financing — the Bill provides for the suspension of the obligation to file for insolvency.
The obligation to file for the opening of insolvency proceedings is suspended from 1 March until 30 September 2020, unless the insolvency has not been caused by the effects of COVID-19 or there are no prospects of overcoming an existing illiquidity.
The burden of proof that the conditions for the suspension are met is not on the debtor — the party claiming that a duty to file for insolvency existed would have to prove that the conditions for the suspension of the filing obligation are not met. In addition, in order to further protect managing directors and to address the immanent difficulties to prepare forecasts during these times, it will be assumed that an existing insolvency has been caused by the effects of COVID-19 and that there are prospects of overcoming an existing illiquidity if the debtor was not illiquid (zahlungsunfähig) as of 31 December 2019. But even if the debtor was illiquid as of 31 December 2019 the burden of proof that the conditions for the suspension of the filing obligation are not met would be with the third party.
Furthermore, the right of third parties to request the opening of insolvency proceedings with respect to a debtor is suspended for a three—month period, unless the insolvency existed already at 1 March 2020.
In order to enable companies to continue operations and to overcome the insolvency, managing directors cannot be held personally liable for payments made in the ordinary course of business while the obligation to file for the opening of insolvency proceedings is suspended. Any payment made in the ordinary course of business, in particular payments made for the continuation or resumption of operations or the implementation of a turnaround concept, shall be deemed compatible with the due care of a prudent business man according to section 64 sentence 2 of the German Limited Liabilities Act (“GmbHG”), section 92 para. 2 sentence 2 of the German Stock Corporation Act (“AktG”), section 130 a para. 1 sentence 2 (and in connection with section 177 a sentence 1) of the German Commercial Code (“HGB”).
Please note that the new rules regarding the suspension of the managing directors' obligation and the third party right to file for the opening of insolvency proceedings apply only to companies having their centre of main interest (COMI) in Germany — irrespective of the governing law of any financing agreements.
To encourage lenders to grant new loans without being subject to voidability or being exposed to lender liability risks privileges for new loans granted between 1 March 2020 and 30 September 2020 are provided.
However, as only loans granted in circumstances where the obligation to file for the opening of insolvency proceedings is suspended will benefit from the new privileges, a decision on any relevant matter requires a careful analysis of the underlying facts and potentially further protection measures in the documentation.
The German Ministry of Justice is authorized to extend the suspension of the obligation to file for insolvency and of the right of creditors to file for insolvency until 31 March 2021.
Other than proposed by an early draft of the Bill, the Bill does not override loan agreements with companies. The automatic deferral of payment obligations by three months and the suspension of termination rights now apply only to consumer loans. However, the Federal Government is authorized, subject to the consent of the German Parliament, to extend the personal scope of the provisions to cover also loan agreements with, in particular, microenterprises (i.e. companies with less than 10 employees and annual turnover or balance sheet total below EUR 2 million) within the meaning of Article 2(3) of the Annex to Commission Recommendation 2003/361/EC of 6 May 2003 concerning the definition of micro, small and medium—sized enterprises.
The Bill also provides for a moratorium of obligations of consumers and certain microenterprises arising under material continuing obligations.
The provisions set out above (except for the right to refuse performance for consumers and microenterprises) shall enter into force with retroactive effect as of 1 March 2020.