Package of Corona-Measures by the Federal Government: Benefits for Consumers, Companies and Banks

The subject of this article is the package of measures presented by the Federal Government in the cabinet bill of 22 March 2020 to provide short-term support for consumers and entrepreneurs, who areto be relieved by rights to refuse performance and the restriction of termination rights in tenancy and consumer loan law as well as by the suspension of the obligation to file for insolvency. The resulting effects on banks are also presented.

The measures will create a legal framework that will initially give consumers and (micro) enterprises some breathing space and give banks a sense of security. Nevertheless, we must fear that from 1 July and 1 October 2020 respectively, companies and consumers will not be able to pay off the accumulated mountain of debt without further ado, the problem has merely been postponed and there is nevertheless a threat of going to the insolvency court. In any case, time has been gained to deal with this problem in due course.

The bill is to be submitted to the Bundestag on 25 March 2020 in a simplified procedure in initial consultation. The second and third consultations are also planned for the same day. It can therefore be expected that a resolution will be passed and the measures will enter into force in the short term.

The most important points at a glance:

  • Consumers and micro-entrepreneurs in financial distress can temporarily refuse payments to utilities, landlords and banks without risking the termination of their contracts;
  • The entrepreneur as tenant is protected against termination if he cannot pay the rent for the months April to June 2020;
  • Insolvency filing obligations and the resulting liability risks for managers are temporarily suspended or limited;
  • Insolvency avoidance risks from transactions with companies in crisis are temporarily significantly reduced;
  • The risks that otherwise exist for banks and savings banks of filing for bankruptcy and compensation for damages when granting loans during the crisis have been noticeably mitigated for new loans.

Benefits for consumers, businesses and banks

1) Consumer

The first aim is to prevent consumers being hit existentially by the crisis because they are no longer able to fulfil contracts for housing or basic services.

a) Contract law

In order to alleviate the financial hardship of consumers, the primary aim is to ensure that they continue to receive basic services (i) and to avoid the loss of a rented home (ii). To this end, the endangerment of current consumer loans should also be prevented (iii).

i) Right to refuse to provide universal service

For consumers, the right to refuse performance for other continuing obligations concluded before 8 March 2020 is likely to be of existential importance. According to this, consumers should be allowed to refuse performance until 30 June 2020 if the performance of the service leads to a threat to the consumer's or his dependents’ reasonable livelihood due to circumstances related to the COVID 19 pandemic. This is intended to help, for example, consumers whose household income has been temporarily or permanently reduced or lost due to the pandemic.

This regulation is intended in particular to ensure that consumers continue to be supplied with basic or public services, in particular electricity, gas, telecommunications and water, but also compulsory insurances. This is to be clarified by the fact that the right to refuse performance is only applicable to "material continuing obligations".

By exercising the right to refuse performance, the creditor is not only prevented from enforcing his claims by way of execution. At the same time it prevents the occurrence of consequences of default, in particular the obligation to pay default interest. The right to refuse performance expires after 30 June 2020, which is why from 1 July 2020, payments refused up to that date must be paid in full. In the event of non-performance, default is also possible again. The Federal Government may provide for an extension of the deadline by means of a directive. However, it is recommended to find an amicable solution with the creditor by 30 June 2020. 

However, the right to refuse performance does not exist if its exercise is unreasonable for the creditor, which is the case if it jeopardizes the economic basis of his business. This means that if the exercise of the right to refuse performance on the part of the creditor leads to results such as the lack of performance would for the debtor, the right to refuse performance should not apply. In this case, however, the debtor can terminate the contractual relationship. 

ii) Rental law

The intended restriction of the right of termination for all leases and usufructary leases is also of fundamental importance for tenants and landlords. This applies to both residential and commercial leases. In contrast to the previous provisions in Section 534 para. 2 No. 3 a) BGB (German Civil Code) (for residential leases in conjunction with Section 569 para. 3 No. 1 BGB), it should not be possible to terminate leases solely on the grounds of default of payment by the tenant if the rent payment was due in the period from 1 April to 30 June 2020. The connection with the COVID-19-pandemic should be made credible. In order to make the connection credible, the tenant must present facts from which it can be assumed with a high degree of probability that his non-performance is due to the COVID-19-pandemic. To substantiate this, the tenant may use appropriate evidence, an affidavit or other suitable means. Appropriate means may include, in particular, proof of application for or the certificate on the granting of state benefits, certificates from the employer or other proof of income or loss of earnings.

However, tenants are not granted a right to refuse performance comparable to the one described above. They thus remain obliged to perform in accordance with general principles and are also in default in accordance with Section 286 BGB. The landlord can therefore enforce execution against the tenant's assets due to the non-payment of rent, just as the debtor has to pay default interest. 

The protection against termination is applicable until 30 June 2022. This means that the contract can again be terminated after this date if payment arrears that occurred between 1 April 2020 and 30 June 2020 have not been settled by 30 June 2022. Tenants and landlords therefore have two years from 30 June 2020 to settle any arrears of rent or lease entitling them to terminate the agreement.

iii) Loan law

The termination of loan agreements is also to be restricted in the case of consumer loan agreements concluded before 15 March 2020.

Initially, all payment obligations arising from loan agreements, be they interest, repayment or redemption obligations, are to be deferred by law for three months in the period between 1 April and 30 June 2020 when they fall due. The deferral is conditional on the consumer's loss of income due to the COVID 19 pandemic, which would make payments unreasonable, especially if the consumer's reasonable livelihood or that of his dependents were at risk. The connection between loss of income and the COVID-19 pandemic is generally assumed.

If, however, the consumer pays in accordance with the contract within the aforementioned period, no statutory deferral shall be granted.
If payments are considered deferred by law, the consumer loan cannot be terminated until the expiry of the deferral. The same applies in the event of a significant deterioration in the financial circumstances of the consumer.

By way of exception, the statutory deferment of payment and the restriction of the right of termination shall not apply if deferment and exclusion of termination are unreasonable for the lender, taking into account all circumstances of the individual case. Serious or protracted culpable breaches of contract on the part of the consumer, such as fraudulent statements or sales of securities contrary to the contract, which considerably impair the creditor's interest in security, come into consideration. In such individual cases, payments are neither considered to be deferred nor does the block on termination apply. 

b) Insolvency law

The refusal of residual debt discharge in consumer insolvency proceedings should not be based on a delay in the opening of insolvency proceedings between 1 March and 30 September 2020. This is subject to the condition that the consumer's insolvency is due to the COVID-19-pandemic, which is presumed by law if the insolvency did not exist on 31 December 2019.

2) Entrepreneurs

The German government wants to provide extensive support for entrepreneurs as well.

a) Contract law

The above-mentioned restrictions on the right to terminate rental or lease agreements also apply to the entrepreneur as tenant.

In addition, tenants of commercial properties can regularly provide credible evidence of the connection between the COVID-19-pandemic and non-performance, for example, by pointing out that the operation of their company has been prohibited or significantly restricted by legal ordinance or official order in the context of combating the SARS-CoV-2-virus. This currently affects restaurants or hotels, for example, whose operation is prohibited in many German states, at least for tourism purposes.

As a borrower, however, the entrepreneur is not protected. This means that he can only pass on the loss of rental income to the bank after an agreed deferral of interest and repayment of principal or is dependent on the application for state funds.

The general right to refuse performance of continuous obligations entered into before 8 March 2020, as described above in order to ensure the provision of basic services, also applies to micro-entrepreneurs. Micro-entrepreneurs are companies with fewer than ten employees and an annual turnover or balance sheet of less than EUR 2 million. Micro-entrepreneurs who are unable to perform as contractually agreed due to circumstances caused by the COVID-19-pandemic or where performance jeopardizes the economic basis of the commercial enterprise are entitled to the right to refuse performance. In addition to supply contracts with basic suppliers, permanent supply contracts with suppliers or customers are likely to be particularly affected. 

The microentrepreneur's right to refuse performance is also linked to what is reasonable for his creditors. The right to refuse performance is unreasonable if the creditor's or his dependents' reasonable livelihood or the economic basis of his business would be endangered.

b) Insolvency law

For managing directors, the suspension of the obligation to file for insolvency in a crisis is existential (i). Consequently, the consequences under criminal law as well as the payment prohibitions and the resulting obligations to pay compensation have been restricted despite the fact that the company is ready for insolvency (ii). Finally, the risk of insolvency avoidance is reduced if the business partner becomes insolvent (iii) as are the possibilities for creditors to file for insolvency (iv). 

i) Suspension of the obligation to file for insolvency

The general suspension of the obligation to file for insolvency until 30 September 2020 is of extreme relevance. This means the obligation to file for insolvency pursuant to Section 15a InsO (German Insolvency Statute) and Section 42 para. 2 BGB will cease to apply. This is under the condition that the insolvency maturity is a consequence of the COVID-19-pandemic and that there are prospects of eliminating the insolvency. The burden of proof lies, according to the explanatory memorandum to the law, with the person who invokes the existence of the obligation to file for insolvency. Those with an obligation to file are relieved by a legal presumption that the insolvency maturity is connected with the COVID 19 pandemic and that there are prospects of eliminating the insolvency, provided the entrepreneur was not insolvent on 31 December 2019.

ii) Limitation of payment prohibitions

In addition to the temporary suspension of the obligation to file for insolvency, there are considerable advantages for managers of companies with limited liability. On the one hand, the criminal consequences of a late filing for insolvency are eliminated. On the other hand, the payment prohibitions linked to the insolvency maturity, such as those arising from Section 64 sentence 1 GmbHG (German Limited Liability Company Act), Section 92 para. 2 sentence 1 AktG (German Stock Corporation Act), Section 130a para. 1 sentence 1 in conjunction with Section 177a para. 1 HGB (German Commercial Code) and Section 99 sentence 1 GenG (German Cooperatives Act) are limited in that payments are excluded which are made in the normal course of business. These include in particular payments which serve to maintain or resume business operations or to implement a reorganisation concept.

iii) Facilitating business during the crisis

Finally, congruent cover payments are no longer subject to insolvency challenge in accordance with the principles of the challenge of cover in accordance with Section 130 InsO and the challenge of intent in accordance with Section 133 para 3 InsO, unless the beneficiary knew that the restructuring and financing efforts were not suitable for eliminating an inability to pay which had occurred. 

(iv) Obstruction of creditor filings

Finally, the right of creditors to file for insolvency is restricted to the extent that a creditor's filing can only lead to the opening of insolvency if the reason for the opening of insolvency proceedings already existed on 1 March 2020. This makes it considerably more difficult for creditors' applications, which are often submitted by social security institutions and the tax authorities. 

3) Banks

The measures described above have corresponding effects on the banking side.

Firstly, the possibility of terminating consumer loans is limited to the extent described above, in that services provided by the borrower for a period of up to three months are considered to be legally deferred. In this context, successful recourse to unreasonable demands on the part of a bank is unlikely to come into question.

The granting of credit in the crisis is made considerably easier by excluding or reducing risks by law.
If a company is granted a loan until 30 September 2020, or if the company provides collateral to secure such a loan, the repayment of the loan up to and including 30 September 2023 is legally considered to have no adverse effect on creditors. An insolvency challenge, in particular in accordance with Section 133 InsO, is therefore excluded. 

The accusation of immorality and delay in filing for insolvency is also legally excluded in the granting of credit and collateral until 30 September 2020, so that claims for damages based on this, in particular in accordance with Section 826 BGB, and any criminal prosecution can be excluded.

The assessment of the borrower's ability to restructure, which has been required to date for the granting of loans in times of crisis, should in any case be considerably reduced in the period up to 30 September 2020, if not even eliminated, provided that repayment is guaranteed by 30 September 2023. The problem has therefore been postponed, but not eliminated.

If you have any questions, our experts Jens Weber and David Schrader, Finn Peters and Dr. Adrian Bölingen will be happy to assist you.

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