Germany continues insolvency filing suspension for some companies

The German Bundesrat approved a new law which will expand an exemption for overindebted businesses in the coronavirus crisis. With this, the duty to file for insolvency remains suspended until the end of 2020, but only for businesses which are overindebted due to the coronavirus crisis, but which nevertheless remain solvent.    

To protect businesses from having to file for insolvency only because the aid provided by the German federal government during the crisis could not reach them in time, the government had in March suspended the duty to file for insolvency until 30 September. This rule applied only for business insolvencies caused by the pandemic. Now it will be extended, with some limitations.

Businesses that are overindebted due to the coronavirus crisis, but are otherwise solvent, will still have the option to restructure or refinance themselves making use of available state aids or out of court settlements, said the German Bundesrat. They will not have to file for insolvency until the end of 2020, if at all.

The situation is different for businesses that have a lack of liquidity after the end of the preliminary exemption by the end of September. They will be obliged to file for insolvency from 1 October onwards.

"Usually 95% of the business insolvencies filed in Germany are caused by illiquidity," said Eike Fietz, a corporate law expert at Pinsent Masons, the law firm behind Out-Law. "An opening of the insolvency proceedings solely based on overindebtedness hardly ever happens. Businesses and their management must be aware of the fact that from 1 October onwards the general rules of insolvency law will apply for most of them without limitations."

The new provisions will establish more planning reliability, according to Dr. Attila Bangha-Szabo, insolvency law expert at Pinsent Masons. "Directors of Germany-based businesses in crisis must continuously check their business's solvency from 1 October onwards to make sure that the petition for insolvency proceedings can be filed in time. On the other hand, the duty to check whether an overindebtedness exists under German insolvency law – which can be complex and laborious – falls away."

The Federal Ministry for Justice and Consumer Protection had explained this new regulation saying that overindebted businesses might still have the chance to avert insolvency – as opposed to illiquid businesses.

"Illiquid businesses are already unable to pay for their debts. These businesses were not able to stabilise their financial situation adequately with the help of the state aid provided. To ensure the necessary trust in the economic system, those businesses shall not be included in the extension," the ministry said in a statement.

The desire to return to the legal situation before Covid-19 stems from the wish to avoid so-called “zombie businesses”, Fietz said. Since the beginning of the Covid-19 crisis, this term has been used to describe businesses that are unable to pay their debts but still participate in the course of business without any restrictions. "Only when the duty to file for insolvency applies again, the distress of those businesses will emerge", Fietz said.

Because of this, experts expect a wave of bankruptcies in Germany in the autumn: “Based on discussions with our clients, we expect that this wave will particularly hit medium-sized companies. These businesses do not employ large departments charged with obtaining subsidies on a regular and systematical basis. For this reason, many of them might still not have received adequate government support.”

The German Federal Statistical Office said that the number of corporate insolvencies filed in the first half of 2020 fell by 6.2% compared to the first half of 2019. At the same time, the amount of probable claims of creditors from corporate insolvencies rose to €16.7 billion in the first half of 2020, €6.5bn more than in the first half of 2019. Experts regard a decline in the number of corporate insolvencies with a simultaneous increase in the total number of creditors' claims as an indicator for a highly increased risk of bankruptcies in large and medium-sized companies.

Dr. Bangha-Szabo said: "The return to a stricter insolvency law will lead to a significant increase in business insolvencies, but in Germany insolvency proceedings also provide for several measures to restructure and continue businesses in distress. This should be considered when discussing the possible insolvency wave. From a macroeconomic view, a functioning insolvency law that removes economically unviable businesses from the market is indispensable."  

The law with the new exemption must be signed by the President of Germany (Bundespräsident) before it can be published in the Federal Law Gazette (Bundesgesezblatt). It will come into force one day after publication.