March 17, 2020

Federal Government plans to suspend insolvency application

The Federal Government is keeping its promises and introduces initial measures to avoid a wave of insolvency proceedings.

Currently, a regulation to suspend the obligation to file for insolvency is being prepared. It is designed to protect companies that are in financial distress due to the corona pandemic.

"We want to prevent companies from having to file for bankruptcy only because the aid by the federal government does not reach them in time. The regular three-week period of the (German) insolvency code is too short for these cases. We are therefore flanking the aid package already approved by the Federal Government with a suspension of the obligation to file for insolvency until September 30, 2020. With this step, we are helping to cushion the consequences of the outbreak for the economy, "said Christine Lambrecht, Federal Minister of Justice and Consumer Protection. *

As things stand at present, the regulations that were established in 2002, 2013 and 2016, when the east of Germany was suffering from flood disasters, are to serve as a model. In concrete terms, this would mean that the obligation to file for insolvency will (only) be suspended (i) if the reasons for insolvency of inability to pay or over-indebtedness are "based" on the Corona Pandemic, (ii) the parties required to file for insolvency are engaged in serious financing or restructuring negotiations, and thus (iii) reasonable prospects of rehabilitation exist.

We welcome the swift action of the German Government. However, it would be preferable if the German Government could adopt the measures more to the current circumstances. In particular, the German Government should refrain from adopting the prerequisites and obligations to provide evidence (on causality, serious financing negotiations, reasonable prospects for rehabilitation) established at the time of the flood disasters. These prerequisites and obligations were certainly justified for locally limited flood crises in an otherwise functioning financial and credit market. In the current situation, the prerequisites, especially the need for serious financing and restructuring negotiations, seem to be difficult to fulfil for many companies - especially for start-ups.

All in all, the plans to suspend the obligations to file for insolvency can only be the first step of a comprehensive legal measurement package to shield the German economy from a wave of insolvency proceedings. Above all, it is still unknown and up to regulation how the suspension of the obligation to file for insolvency will affect the insolvency-specific obligations as well as the requirements of the insolvency clawback provisions (on liability risks: our webinar "Start-Ups in Crisis"), which are regularly linked solely to the existence of the reason for insolvency in material terms. As long as these questions have not been clarified and regulated, company managers are well-advised to critically assess each payout, but also each payment received, under insolvency law.

If you have any questions on this subject, our colleagues will be happy to answer them at any time:

* Source: Bundesministerium f├╝r Justiz und Verbraucherschutz