In light of the Corona pandemic and the resulting problems for German companies, a draft “Law to mitigate the consequences of the Covid-19 pandemic in civil, insolvency and criminal proceedings” has been approved by the German government on 23 March 2020. The new law is expected to be adopted by the German parliament Bundestag on Wednesday (25 March 2020) and provides not only for a suspension of the obligation to file for insolvency, but also for an adjustment of the payment ban.

Pursuant to Section 1 of the “Corona Insolvency Suspension Act” (CorInsAG), the obligation to file an insolvency in accordance with Section 15a InsO and Section 42 (2) of the German Civil Code (BGB) is to be suspended until 30 September 2020. This does not apply if “the insolvency reason is not based on the consequences of the spread of the SARS-CoV-2 virus (Covid-19 pandemic) or if there is no prospect of eliminating an existing illiquidity. If the debtor was not insolvent on 31 December 2019, it is assumed that the insolvency is due to the effects of the Covid-19 pandemic and that there is prospects of eliminating an existing insolvency.”

Liquidity planning with and without “corona effect” decisive

If this welcome change in law comes into force, directors of crisis-affected companies should first determine whether illiquidity and/or over-indebtedness have actually occurred or will occur in the short term. If this is the case, they should document in writing,

(a) what is the specific conjunction between the Corona crisis and the occurrence of illiquidity and/or over-indebtedness,

(b)  that and when and to what extent they have applied for public aid or with whom they have negotiated on which financing or restructuring solutions, and

(c) to what extent the public aid is specifically suitable for restructuring the company. This will certainly require a written restructuring concept which shows the conjunction between public aid and the restructuring success in a coherent manner.

It is also advisable to be able to present a documented liquidity plan with two scenarios. To this end, the liquidity effects of the Corona pandemic on the company must be quantified: Scenario A should show that without the “corona effect” no illiquidity and over-indebtedness would have occurred. In Scenario B should show to what extent the Corona pandemic leads to the occurrence of a reason for insolvency. In addition, the management should document the concrete prospects of eliminating illiquidity. Finally, in consultation with the auditor, it should be noted retrospectively, with a view to the 2019 financial statements, that there was no insolvency on 31 December 2019.

No external insolvency filings in a three-months transition period

According to the draft, self-filings for bankruptcy and filings by creditors (“external filings”) remain possible. However, Paragraph 3 CorInsAG-E requires that the reason for insolvency was already in place on 1 March 2020 in case of external filings for a transitional period of three months.

Regulation on the payment ban will also be adapted

Insofar as the obligation to file for insolvency is suspended under Section 1 CorInsAG, “payments made in the proper course of business, in particular payments that serve to maintain or resume business operations or to implement a restructuring concept, are to be made with the care of a prudent merchant within the meaning of Section 64 sentence 2 GmbHG, Section 92 (2) sentence 2 AktG, Section 130a (1) sentence 2, also  in conjunction with Paragraph 177a sentence 2 of the German Commercial Code (HGB) and Paragraph 99 sentence 2 of the GenG shall be deemed to be compatible” in accordance with Section 2 of the CorInsAG.

This adjustment of the payment ban, which had not been publicly discussed, is also very useful. For executives, there is a personal liability risk according to Section 64 sentence 1 GmbHG or Section 92 (2) of the German Stock Corporation Act (AktG) with regard to payments in the day-to-day business of the company, if it comes to an actual illiquidity and/or over-indebtedness. In light of this, executives will, also for reasons of self-protection, stop payments in the operational business as far as possible, even if the insolvency filing duty is being suspended. In practice, exemptions from the payment ban provided for by current law, usually lead to mere ’emergency operations’ of the distressed company.

However, this would undermine the purpose of suspending the obligation to file for insolvency in order to mitigate the consequences of the Corona outbreak for the real economy. It is therefore only logical that the payment ban shall now also be adjusted. In order to avoid personal liability risks, managing directors should document in writing to what extent the respective payments serve the maintenance or resumption of operations or the implementation of the restructuring concept.