Germany Passes Law to Mitigate Impact of COVID-19 Pandemic

Suspension of Filing Obligation

 The newly enacted law provides for a suspension of the obligation to file for insolvency upon the occurrence of cash-flow insolvency (Zahlungsunfähigkeit) or balance sheet insolvency (Überschuldung) until September 30, 2020. Only companies becoming insolvent as a result of the COVID-19 pandemic and — in case of cash-flow insolvency (Zahlungsunfähigkeit) only — with prospects of resolving current cash-flow insolvency (Zahlungsunfähigkeit) benefit from the suspension, whereas the burden of proof is not with the respective managing directors. Moreover, the law even stipulates a rebuttable presumption that the prerequisites for the suspension of the filing obligations are met if the debtor was not cash-flow insolvent (zahlungsunfähig) on December 31, 2019.

As only the suspension of the filing obligation would not be sufficient to enable affected companies to continue their business during the crisis and to gain additional liquidity and loan financings, the amended regime also stipulates the following:

1. Payments made in the ordinary course of business, in particular those payments that serve to maintain or resume business operations or to implement a restructuring concept, shall be deemed to have been made with the due care of a prudent and diligent managing director and shall therefore not give rise to personal liability for making such payments. Consequentially, management is not obliged to enter into an emergency business mode (Notgeschäftsführung) provided it benefits from the filing obligation suspension.
2. Until September 30, 2023, any repayment of a new loan granted until September 30, 2020 and any collateral provided to secure such loan will not be deemed to be detrimental to creditors as a whole, which essentially mitigates clawback risks in connection with such transactions. The same applies to repayments of shareholder loans (and equivalent transactions) while such shareholder financing still cannot be collateralized in an insolvency proof manner. Shareholder loans (and equivalent transactions) granted within the above period are not equitably subordinated in insolvency proceedings that will be filed until September 30, 2023, which is supposed to incentivize shareholders to rescue finance their company by way of shareholder loans without running into equitable subordination.
3. Until September 30, 2020 the granting (and collateralizing) and/or extending of a loan is privileged and consequentially will not result in any lender liability issues or invalidity of the collateral granted, meaning that the requirement for a restructuring opinion (typically in the form of IDW S6) is effectively lifted.
4. Transactions that granted or enabled the other party to secure or satisfy its claims in the manner and at the time it was (contractually) entitled to shall not be subject to clawback in subsequent insolvency proceedings; only in case of cash-flow insolvency (Zahlungsunfähigkeit) this does not apply in case the other party was aware that the debtor's restructuring and financing efforts were not suitable to eliminate such cash-flow insolvency. The same shall apply mutatis mutandis to transactions in lieu of or on account of performance, payments by a third party upon the instruction of the debtor, the granting of alternative security if the originally owed security is not valuable, the shortening of payment periods and the granting of payment facilities.

The measure set forth under 2. through 4. above apply to all companies, irrespective whether such company was insolvent or not.

Moreover, to keep the affected companies out of insolvency and to decrease the leverage of creditors, creditors filings are limited and require in any case that the debtor was already insolvent on March 1.

Considerations for Distressed Companies

Companies in distress should diligently examine the new regime and seek advice on whether they may be able to benefit from the suspended filing obligation. Companies affected by COVID-19 and their management should carefully consider whether the new legislation provides for relief and breathing space for restructuring discussions with the stakeholders involved. The foreseen measures provide in any case for more leeway with respect to steering a company through this unprecedented and challenging time. Despite the broad presumption, management needs to carefully assess the legal implications that might be embedded in applying for or using other relief measures.

In parallel, the company should work toward a solution to the cash-flow insolvency, for instance by obtaining new loans that will benefit from privileges introduced by the emergency legislation. The repayment of newly granted shareholder loans (but not their collateralization) is also protected against clawback risks, and, moreover, such loans are not equitably subordinated. However, given that such shareholder loans cannot be collateralized in an insolvency-proof manner, they cannot be granted as super senior loans, so that in the event of a subsequent insolvency the shareholders would receive only the same quota as other unsecured creditors.

Moratorium

The suspension of the filing obligation is complemented by a moratorium that, however, applies only for consumers and microbusinesses. Consumers and microbusinesses have the right to refuse performance with regard to continuing obligations if certain requirements are met, inter alia, if the consumer/microbusiness is not capable of making such performance without jeopardizing its decent livelihood/economic basis of its business. The moratorium does not apply to rental, lease and loan agreements. However, all rental and lease agreements over real estate or premises cannot be terminated on the basis that the tenant is not making payments during the period from April 1 to June 30, 2020 if nonpayment is a consequence of the COVID-19 pandemic and the tenant provides evidence for this causality. For consumer loan agreements concluded prior to March 15, 2020, the lender's claims for repayment, interest or principal payments due between April 1 and June 30, 2020, shall be deferred for a period of three months from the due date if the consumer suffers a loss of income due to the exceptional circumstances caused by the COVID-19 pandemic that makes it unreasonable for him or her to perform the due payment.