Suspension of the legal obligation to file for insolvency approved

On 27 March, the German Bundesrat [Federal Council] adopted the "Act On Mitigating 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"]. Among other things, this act includes regulations for the suspension of the legal obligation to file for insolvency in order to support companies suffering financial struggles due to the COVID-19 pandemic.

Legal obligation to file for insolvency currently in force

Pursuant to Section 15 (1) sentence 1 InsO, where a business becomes illiquid or overindebted, the members of the board of directors of a legal person shall file a request for the opening of insolvency proceedings. According to the current legal situation, the persons responsible in the company may evaluate the possibilities for reorganisation within a maximum period of three weeks after the commencement of insolvency or overindebtedness. If the members of the board of directors of a legal person do not comply with their legal obligation to file for insolvency, they may be subject to personal liability risks due to delay in filing a request for insolvency proceedings.

Planned legislation and requirements for the suspension of the legal obligation to file for insolvency

Pursuant to the new law, the legal obligation to file for insolvency is suspended until 30 September 2020; a possible extension of the suspension of the obligation to file for insolvency until 31 March 2021 by means of a regulation is included in the law.

In this way, the companies are provided with the opportunity to resolve the existing illiquidity, especially by means of the governmental support measures to be provided, or restructuring or financing agreements, as applicable. The approved suspension of the legal obligation to file for insolvency is aimed to support the COVID-19 relief package recently adopted by the German government. The suspension of the legal obligation to file for insolvency is applied under the following preconditions:

The suspension of the legal obligation to file for insolvency shall not apply if:

• the insolvency is not caused by the effects of the spread of the COVID-19 pandemic or
• if no prospect of remedying existing illiquidity (Zahlungsunfähigkeit) exists.

As it may be unclear whether the insolvency is caused by the effects of the spread of the COVID-19 pandemic and forecasts are difficult to be made due to the current uncertainties, businesses under duty to file for insolvency are granted extensive relieve as it will be assumed that if the business was not illiquid on 31 December 2019, the subsequent insolvency is related to the COVID-19 pandemic and that there is prospect of discharge of their debt.

This is meant to ensure that the current uncertainties and challenges with regard to providing evidence for the causality and the predictability of the further development will add to the burdens the businesses under duty to file for insolvency.

Acute need for action and risks

The legal presumption that if a company was liquid on 31 December 2019 the insolvency is caused by the effects of the COVID-19 pandemic and if there are prospects of remedying existing illiquidity constitutes a significant relief for affected businesses with regard to the evidence required to prove that the prerequisites for the suspension of the legal obligation to file for insolvency are fulfilled. The only fact companies still need to prove is that the company was still liquid as of 31 December 2019.

Although the executive directors of a legal person are protected extensively from liability claims when applying the suspension of the legal obligation to file for insolvency based on the new law, those liability claims may not be excluded completely. In addition, it is likely that the banks responsible for granting assistance loans will require reliable business planning and evidence of the business crisis being caused by the COVID-19 pandemic for granting the loan. 

Hence, we recommend the persons responsible in the affected companies preparing themselves and the company without delay for the legal changes and the required evidence. This includes companies that are currently neither experiencing nor expecting a liquidity crisis.

Therefore, we recommend implementing the following measures without delay:

- Evaluate the possibility of applying for assistance measures without delay and file an ad hoc request for financial aids at your bank or syndicate bank in a timely manner: If you are already experiencing or expecting a business crisis, you should consider applying for the financial aids approved by the German Federal government. If you are eligible for an application, we recommend filing the request without delay as a multitude of similar applications may be expected, leading to a congestion of banks and the KfW [German state-owned development bank]. Our financial advisors from the Debt Advisory department are happy to support you with their extensive experience.

-Document the development of the company figures (before the impact of the COVID-19 pandemic): Every business should be able to provide detailed evidence of the development of the company figures before the significant impact of the COVID-19 pandemic. In case of a business crisis, these figures serve as a basis if evidence is required to which extent the crisis is caused by the COVID-19 pandemic. The presumption that if a company was liquid on 31 December 2019 its insolvency is caused by the effects of the COVID-19 pandemic necessitates substantiated evidence of the company's liquidity as of 31 December 2019 as minimum requirement. In our view, this means the following in terms of implementation: The executive directors of a legal person relying on the above-mentioned presumption are obliged to provide evidence of the company's liquidity as of 31 December 2019 at least in form of a documented liquidity calculation.

-Prepare and validate a planning of the reorganisation in a timely manner, in case your business is already suffering a crisis: Based on the legal presumption that in case of an existing liquidity as of 31 December 2019 a prospect of remedying existing illiquidity exists, the legal requirements for the suspension of the legal obligation to file for insolvency are fulfilled in case of the company's liquidity as of 31 December, it is to be expected that the bank responsible for payment of the assistance loans will require a reliable business planning proving sound financial strategies as well as a positive forecast concerning the affected company's ability to continue as a going concern.

It may be expected that the assessment of whether there are reasonable prospects of a successful reorganisation will take into account the professional evaluation criteria established in the case law of the Bundesgerichtshof [German Federal Court of Justice - BGH] concerning insolvency law (minimum requirements established by the BGH) and the professional standards promulgated by the Institut der Wirtschaftsprüfer [Institute of Public Auditors in Germany] (IDW) concerning the valuation of the maturity for insolvency [„Beurteilung des Vorliegens von Insolvenzeröffnungsgründen (IDW S 11)“] and the Restructuring Report [„Anforderungen an Sanierungskonzepte“ (IDW S6)].

As part of the evaluation of the request for assistance loans by the banks or syndicate banks and, if applicable, by the KfW, it is likely that less evidence is required than for the assessment of the restructuring ability based on a Restructuring Report according to IDW S6 in order to streamline processes and the decision on whether the loan is granted.

According to the current loan and assistance conditions of the banks and planned legislative amendments, the following requirements exist with regard to the planning calculations to be submitted by the company:

• Evidence of the company's liquidity as of 31 December 2019: Liquidity status as of 31 December 2019, supplemented by a weekly liquidity preview for the following 13 weeks (three months), if required, including the related readily available credit lines.
• Derivation of the financing need and sound financing strategies of the company at least until 31 December 2020: The required capital and financing needs are to be derived based on an integrated monthly business planning, comprising the results of operation, balance sheet planning, and liquidity planning, including investment planning.
• Evidence of a positive forecast concerning the affected company's ability to continue as a going concern: Generally, this includes evidence of a positive forecast concerning the affected company's ability to continue as a going concern and an additional assessment of the resilience of the company's business model. Due to the liquidity shortfalls caused by the consequences of the COVID-19 pandemic, the evidence of a positive forecast concerning the affected company's ability to continue as a going concern is expected to be crucial for the assessment of whether a successful reorganisation of the company may be expected. In this context, it is to be evaluated whether the company has sufficient free liquidity after implementation of the assistance, financing, and restructuring measures, based on a liquidity planning (budget), which is derived indirectly from the results of operation and the balance sheet planning. According to the current professional standards, this liquidity planning is generally to be prepared for the current and the following financial year on a monthly basis. Assistance, financing, and restructuring measures may only be taken into account in the planning if the implementation of the measures is highly likely and sufficiently concrete.

Our experienced team from the Recovery and Reorganisation department is happy to support you with regard to the preparation and validation of reorganisation planning. In addition, we offer a brief report including all required economic information for the loan decision for submission to the banks as preparation and acceleration of the application for assistance loans. From our experience, this brief report in the form of an independent statement facilitates a loan decision of the banks.

-Review and update your current planning system in case your company is not yet suffering a crisis: The liquidity position must be monitored continuously. Our team from the Corporate Finance & Advisory Services department is happy to assist you in establishing an appropriate planning system.