March 31, 2020

COVID-19 Germany: Significant changes in civil and insolvency law

The Law to mitigate the consequences of the COVID-19 pandemic in civil, insolvency and criminal procedure law ("Gesetz zur Abmilderung der Folgen der COVID-19-Pandemie im Zivil-, Insolvenz- und Strafverfahrensrecht") was adopted by the German Bundestag on 25 March and approved by the Bundesrat representing the federal states on 27 March 2020. With its draft published by the German Federal government on 23 March 2020, the implementation was probably the fastest legislative procedure of such scope in the history of the Federal Republic. The law is designed to avert existential consequences and hardships caused by the pandemic on companies and private individuals, in particular by suspending the obligation to file for insolvency until 30 September 2020.

The Law to mitigate the consequences of the COVID-19 pandemic in civil, insolvency and criminal procedure law has far-reaching consequences for the insolvency practice. Furthermore, it also contains important alterations with regard to the summoning of Annual General Meetings, which directors and officers should be aware of. In the following, we will briefly outline the key legislative changes with regard to insolvency and corporate law.

Key legislative changes in insolvency law:

Main objectives:

  • The objective of the proposed insolvency legislation is to enable and facilitate the continuation of businesses that have become insolvent or are experiencing economic difficulties as a result of the COVID 19 pandemic.

  • The companies concerned as well as their directors and officers should be given time to take the necessary steps to eliminate the insolvency, in particular to take advantage of state aid or to make financing or restructuring arrangements with creditors and capital providers for this purpose.

  • Furthermore, by limiting liability risks and risks with regard to claw-back claims, companies shall benefit from receiving restructuring loans and that business relations with debtors continue to be maintained.

Suspension of the obligation to file for insolvency:

  • In general, ie under current insolvency legislation, legal entities respectively their managing directors have a statutory obligation to file for insolvency within three weeks of suffering a liquidity risk or becoming over-indebted. According to the new legislation, the obligation to file for insolvency will be suspended until 30 September 2020.

  • The law is applicable under the following prerequisites:

    • The illiquidity or over-indebtedness of the company must be a consequence of the COVID 19 pandemic; and

    • There are prospects of eliminating an existing illiquidity.

    • For companies who were solvent until 31 December 2019, it is assumed that the insolvency is based on the Covid 19 pandemic and there are prospects of eliminating an existing illiquidity.

  • A further consequence of the actual suspension is that payments made in the ordinary course of business, in particular payments which serve to maintain or resume business operations or to implement a restructuring concept, shall be deemed to be compatible with the due care of a prudent businessman within the meaning of section 64 sentence 2 of the German Limited Liability Companies Act ("Gesetz betreffend die Gesellschaften mit beschränkter Haftung") and related provisions.

Claw-back claims legislation:

  • New loans during the crisis are privileged in terms of liability and under the claw-back claims regime.

  • For example, the return of a new loan granted during the suspension period described above by 30 September 2023 and the provision of collateral to secure such loans during the suspension period shall not be deemed to be disadvantageous to creditors.

  • Furthermore, the granting of credits and collateral during the suspension period is not to be regarded as an immoral contribution to the delay in filing for insolvency.

  • Additionally, the aforementioned two provisions shall apply for loans granted by institutions within the framework of government aid programmes in the wake of the Covid 19 pandemic, even if the loan is granted or secured after the end of the suspension period and for an unlimited period of time for their repayment.

Timely scope:

Retroactive from 1 March 2020 until 30 September 2020 with an option to further extend the suspension period until 31 March 2021.

Key legislative changes in corporate law:

Main objectives:

  • The changes in corporate law shall maintain the companies' ability to act as due to the COVID 19 pandemic, wide restrictions have been put in place which have consequences on the assembly of persons.

  • In order to enable the companies to pass the necessary resolutions and remain capable of acting even if the restrictions on the possibilities of holding meetings continue to exist, substantial temporary facilitations will be created in particular for the holding of general meetings of the stock corporations etc.

Key changes:

  • Presence-free virtual Annual General Meeting with shortened notice period introduced with the aid of suitable electronic means of communication even without authorisation by the statutes or rules of procedure.

  • The Annual General Meeting can take place throughout the whole business year and thus in extension of the eight month period.

Timely scope:

Annual General Meetings taking place in 2020 with the option to extend to 31 December 2021.

Further amendments and reliefs:

Further temporary regulations are introduced, inter alia, with respect to contract law, for example which provide for an extraordinary right to refuse performance or a right to discontinue performance of contractual obligations until 30 June 2020 arising from material continuous obligations (such as electricity, gas and telecommunications).

Consequences for D&O's:

With the significant amendments in insolvency law, the legislation seeks to mitigate liability risks (and risks for criminal prosecution) of D&O's arising in the context of the COVID 19 pandemic and its comprehensive economic disruptions. For D&O's in companies struggling these days, it is a relief to be able to maintain the due course of business by figuring out restructuring programmes and keeping up business with partners without them having to fear that payments could potentially be contested by an insolvency trustee. Furthermore, a presumption provision reliefs the D&O's from providing proof that the illiquidity is a direct result of the COVID 19 pandemic, which further reduces their liability risks.

However, we still expect to see more insolvencies as a result of COVID 19 and the economies' shutdown and thus, insolvency trustees' liability claims against D&O's. D&O's should therefore thoroughly assess whether the company could overcome its current financial crisis or whether, as a last resort and despite the suspension, he may need to file for insolvency. D&O's should therefore keep in mind, that their liability is not excluded and if an insolvency trustee claims that payments were made while the company was illiquid or over-indebted, D&O's would need to prove that such payments were compatible with the due care of a prudent businessman, though these prerequisites have been broadened by the changes.