Insolvency Filing Requirements to be suspended in the Coronavirus Crisis

Created by Dr. Adrian Bölingen |

The Federal Ministry of Justice and Consumer Protection will present a legal regulation suspending insolvency filing obligations for companies which run into financial difficulties as a result of the corona epidemic, probably until 30 September, 2020. This is intended to prevent the aid decided by the Federal Government from arriving too late.

The German government has announced its intention to provide liquidity support to companies which run into financial difficulties as a result of the coronavirus crisis. In particular, the package of measures includes a "protection shield" in the billions, which will provide unlimited funds, especially for KfW funding programs. The funding programs are accessible to entrepreneurs via their house banks and financing institutions. However, KfW's existing funding programs do not yet provide for support for enterprises in difficulty. New funding programs need to be developed and designed in line with EU state aid law so that the funds can also be provided in the current crisis. 

The intended conditions for the suspension of the obligation to file for insolvency should be that

  • the reason for insolvency is based on the effects of the coronavirus epidemic and that because of either
  • the application for public aid and/or
  • serious financing or restructuring negotiations of a party obligated to file for insolvency
  • there is a reasonable prospect of rehabilitation.

Outlook / Summary
It remains to be seen which concrete shape the regulations will take. This step is welcome in the current situation. Only a temporary suspension of the obligation to file for insolvency can prevent a market collapse in many areas. The intended rescue aid will be granted in the form planned so far via the house banks or financing institutions. It will therefore be necessary to allow time not only for the implementation of the intended package of measures by the Federal Government, but also for the review by the individual credit institutions before granting loans. Moreover, the rescue aid is additional debt capital for the company to be restructured. The interest and redemption costs must therefore be taken into account when examining justified prospects of rehabilitation. According to the announcement of the ministry, the suspension of the filing obligations in its intended form is also associated with considerable additional examination obligations for the entrepreneur. In these troubled times, it is already demanding enough for him to recognize his own obligation (enforced by criminal law and liability) to file for insolvency. In addition to this, he should now examine the causes of his entrepreneurial crisis in particular to determine whether they are based on the coronavirus epidemic and whether there is a reasonable prospect of restructuring. Credit institutions will also examine these conditions when granting rescue aid to enterprises in difficulty. Otherwise, the granting of loans threatens to result in the credit institution's participation in an insolvency protraction. 

Alternative restructuring option through protective shield and self-management
Alternatively, the law already offers an existing option for restructuring without additional borrowing through the protective shield and self-administration procedures ("ESUG procedure") introduced in 2012. It is therefore appropriate to examine such a restructuring option in parallel. Especially if the causes of the crisis were already established before the coronavirus epidemic and are now being intensified, this can be a more reliable restructuring option for companies.

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