German Covid-19 Measures in Insolvency Law and Their Cross-Border Relevance
On 27 March 2020 measures concerning insolvency law (and other topics not dealt with in this paper) were approved by the Federal Council (where the state governments are represented) and enacted the same day by the Federal President. These changes came into force retroactively as of 1 March 2020.
However, these exceptions are only for problems caused or deteriorated by the (direct and indirect) effects of the pandemic (among the indirect consequences would certainly be the decrease of turnover or the voluntary shut-down of businesses due to the lack of customers or the quarantine of staff and not only shut-downs which were formally ordered by the authorities) AND only if there is a perspective that the unability to pay due debts can be overcome. In order to reduce legal uncertainty there is a (rebuttable!) presumption that the difficulties were caused by the spread of the Corona virus and that there is a perspective to continue if the company in question was able to pay what was due on 31 December 2019.
The special rules in insolvency law can be summarised:
- If creditors apply for insolvency between 27 March 2020 and 27 June 2020 the grounds for opening an insolvency must have been fulfilled already on 1 March 2020.
- Directors do not have to apply for insolvency within 3 weeks from knowledge of overindebtedness or unability to pay until 30 September 2020
- Reduced personal liability of directors until 30 September 2020 for payments to creditors made in the crisis (more exactly the maturity for insolvency), if the payments were necessary for the due course of business, i.e. particularly its continuation or resumption, or the realization of a restructuring plan.
- The insolvency administrator cannot attack repayments of loans made until 30 September 2023 less easily if these new loans or securities [in the continental sense of the word, not in the meaning of the U.S. Securities Act 1934] for these new loans were granted between 1 March 2020 and 30 September 2020, be it by banks, be it by shareholders or other nearstanding (or acts equivalent to granting a loan) and there will be no criminal liability of the grantors of such new loans for aiding the delaying of the insolvency.
- No subordination of new loans to the company by a shareholder or other near-standing persons if the application for insolvency is filed before 1 October 2023.
- Longer periods apply concerning loans granted by the Kreditanstalt für Wiederaufbau [the national bank used for government programmes].
The date 30 September 2020 can be extended until 31 March 2021 at the latest by decree of the Federal Minister of Justice.
There is no clarification in the act whether directors are (partly) relieved from their criminal liability for fraud (in the form of cheating contract partners into making a new contract with the already insolvent company).
Recommendations to the directors:
- document all efforts made for finding additional funding,
- obtain a positive prognostic for the continuation of business as per 31 December 2019.
The international scope is:
These rules apply not only to companies registered in Germany!
They apply to all companies who have their Centre of Main Interests in Germany, see art. 3 of the EU Insolvency Regulation. These rules are extended to persons and companies from other countries by §§ 335 and following of the German Insolvency Act (i.e. Denmark and non-EU-members; and the U.K. after the transition period).
The rules envisaged in no. 3 above are considered to be insolvency law (since the Kornhaas judgement of the European Court of Justice), not company law, so they – like the other rules above - apply to companies whose liability is limited (capital companies like private limited companies, public limited companies etc.) and recognised in Germany as such.
BUT: German international company law only recognises foreign capital companies as such
- if they also have their administration in the state of registration OR
- if these companies enjoy freedom of settlement under the Treaty on the Functioning of the European Union, the Treaty on the European Economic Area (EU, Norway, Iceland and Liechtenstein), the US-German Treaty on Friendship, Commerce and Shipping or under a bilateral investment protection treaty.
Foreign companies which German law does not recognise as capital companies (e.g. a Swiss registered limited liability company with its actual administration in Germany!) will be treated as companies of persons, i.e. with full personal liability of the shareholders.
Fachanwalt für Internationales Wirtschaftsrecht/Bar Certified Specialist in International Business Law
Lecturer of European and International Company Law at Pforzheim University