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Mar 27, 2020

COVID-19: Update for Borrowers and Lenders in Germany

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COVID-19: UPDATE FOR BORROWERS AND LENDERS IN GERMANY

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.

Suspension of Obligation to File for Insolvency

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.

Suspension of Third Party Right to File for Insolvency

Furthermore, the right of third parties to request the opening of insolvency proceedings with respect to a debtor is suspended for a threemonth period, unless the insolvency existed already at 1 March 2020.

Suspension of Managers’ Liability for Payments During Insolvency

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.

Facilitation of Providing New Money

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.

  • No Rise to Lender Liability
    Loans extended in circumstances where the obligation to file for the opening of insolvency proceedings is suspended will generally not give rise to lender liability. In particular, extending credit and taking collateral while the obligation to file for the opening of insolvency proceedings is suspended shall not constitute an immoral contribution to the delay of insolvency filings. Sections 138 and 826 of the German Civil Code shall not apply to new loans and granting collateral to support companies in their difficulties as a result of COVID-19 crisis. While it was unclear in an early draft of the Bill if also the prolongation/deferral of payment obligations under existing credit agreements is privileged with a view to lender liability, the legislative reasons now explicitly also include prolongations.
  • No Voidability
    Furthermore, the repayment of new loans by 30 September 2023 (this limitation does not apply to loans granted or supported by KfW or other governmental institutions) or the granting of security in circumstances where the obligation to file for the opening of insolvency proceedings is suspended shall not be voidable. This privilege does, however, not extend to the prolongation and novation of loans as the intention of the legislator is to induce lenders to provide new money and additional liquidity and not to benefit from new privileges for existing loans.
  • No Equitable Subordination of New Shareholder Loans
    The repayment claims in relation to new shareholder loans granted in circumstances where the obligation to file for the opening of insolvency proceedings is suspended are not subordinated pursuant to section 39 par. 1 no. 5 of the German Insolvency Code in subsequent insolvency proceedings which have been filed for until 30 September 2023. In addition, the repayment of such new shareholder loans is not subject to voidability. Please note that the granting of security in relation to shareholder loans and the mere prolongation of shareholder loans are not privileged.

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.

Right to Refuse Performance for Consumers and Microenterprises

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 mediumsized 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.

Authors and Contributors

Winfried M. Carli

Partner

Finance

+49 69 9711 1000

+49 69 9711 1000

Frankfurt

Esther Jansen

Partner

Finance

+49 69 9711 1621

+49 69 9711 1621

Frankfurt

Andreas Breu

Associate

Finance

+49 69 9711 1000

+49 69 9711 1000

Frankfurt

Marius Garnatz

Associate

Finance

+49 69 9711 1621

+49 69 9711 1621

Frankfurt

Practices

Regional Experience