Of interest.

Insolvency proceedings in the anti-virus veil – the German way out of the insolvency spiral

The Czech Parliament is currently discussing a draft bill to mitigate the impact of the coronavirus epidemic in the justice sector (the so-called “lex COVID”). One of the main topics of the crisis regulation is the area of insolvency law in which the filing of creditor insolvency petitions as well as the obligation to file a debtor’s insolvency petition are intended to be temporarily suspended and the institute of extraordinary moratorium to be introduced. The aim of this article is to provide a brief description of the legislation adopted by Germany to minimize the negative consequences of COVID-19 in the area of insolvency.

German crisis legislation

The German Bundestag passed a law to mitigate the consequences of the COVID-19 pandemic in civil, insolvency and criminal proceedings (hereinafter the “crisis legislation”). The crisis legislation aims to create conditions to enable and facilitate operation of companies that have become insolvent as a result of the COVID-19 pandemic.

Submission of debtor insolvency petitions

It should be noted that failure to comply with the obligation to file a debtor’s insolvency petition duly and on time leads, according to the German Insolvency Act, to an obligation to compensate damage and at the same time criminal sanctions are foreseen.

The core of the German crisis legislation is a temporary and complex suspension of the obligation of members of statutory bodies of legal entities, companies without legal personality and associations to file a debtor’s insolvency petition in case of over-indebtedness or insolvency. Simply said, the obligation to file a debtor´s insolvency petition is no longer necessary if it has gone bankrupt due to the spread of the coronavirus and there are also prospects of overcoming such insolvency.

The German legislature also laid down a rebuttable presumption that the insolvency occurred as a result of the coronavirus and that there are prospects of overcoming insolvency in case the bankruptcy happened after 31 December 2019. The explanatory memorandum contains two conditions: the spread of the disease did not cause the bankruptcy and that the elimination of insolvency was not likely. The presumption also protects debtors whose bankruptcy occurred at the beginning of 2020 but before the first infected in Germany.

This regulation suspends the obligation to file a debtor’s insolvency petition but does not prohibit its filing. If the debtor decides to file his own insolvency petition, he may do so.

Suspension of the obligation to file own insolvency petition will be effective until 30 September 2020 and it can be extended to 31 March 2021.

Submission of creditor insolvency petition

The creditor’s insolvency petitions filed between 28 March 2020 and 28 June 2020 shall be admissible only if the debtor was already in bankruptcy on 1 March 2020. For the said transition period, the creditor is obliged to prove, that the debtor has gone bankrupt as of that date.

If the debtor went bankrupt after 1 March 2020, the creditor cannot initiate insolvency proceedings, regardless of the causes of the debtor’s insolvency. In such case, only the debtor’s proposal will be admissible. This can be also extended to 31 March 2021.

Consequences of suspension of submission of the insolvency petitions

The suspension of submission of the insolvency petition is basic and initial measure. Equally important are the measures allowing the operation of companies that find themselves in bankruptcy as a result of the spread of COVID-19. These “legitimately” insolvent companies and their creditors would continue to be subject to the insolvency law restrictions, which would prevent recovery of their business activities.

For this reason, the crisis legislation provides that for the period during which the obligation to file a debtor’s insolvency petition is suspended (hereinafter the “transition period”), the debtor’s:

  • payments made in the ordinary course of trade shall be deemed to be made with proper care;
  • repayments of loans made during the transition period up to 30 September 2023 and establishment of security for such loans shall not be considered as a disadvantageous legal act; this also applies to the repayment of loans and advances provided by the debtor’s shareholders;
  • acceptance of (new) loan and establishment of security is not considered to be an act of unlawful postponement of insolvency;
  • legal actions which have been provided to the other party by performance or security to which the other party was entitled cannot be called into question in the subsequently initiated insolvency proceedings.

The objective of the crisis legislation is primarily to create conditions for the debtor’s management so that he will be able to make the necessary payments to maintain or resume operations. However, we can expect that without external financing many of the “legitimately” insolvent companies will not overcome the crisis. Temporary “equality” of lending and loans provided by the debtor’s partners should contribute to obtaining funding for “legitimately” insolvent companies. The aim of the crisis legislation is also to give contracting parties of “legitimately” insolvent companies certainty that the services provided under the contractual relationship will not be called into question in any future insolvency proceedings.

Effectiveness

The crisis legislation was approved on 27 March 2020, but its effectiveness was set retroactively as of 1 March 2020.

Conclusion

The German crisis legislation pursues two main objectives. On the one hand, it precludes opening of insolvency proceedings regarding “legitimately” insolvent companies and on the other hand, it creates conditions which do not discourage creditors and shareholders from providing “legitimately” insolvent companies with financing.

If you have any questions about this article or insolvency law in general, we are at your disposal – please do not hesitate to contact us.

 

Mgr. Martin Heinzel, attorney – heinzel@plegal.cz

 

www.peytonlegal.cz

 

14. 04. 2020

 

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