May 11, 2020

Relaxing bankruptcy filing rules due to COVID-19 crisis

Europe
Policy/Program
Description of the core change(s) brought by this policy instrument

The Federal Ministry of Justice can exempt companies that have been hit by the COVID crisis from the obligation to file for insolvency right away.

Normally, the regulatory scenario for companies in Germany is that if a company is over-indebted or insolvent, the management must file for bankruptcy within a maximum of 3 weeks. Failure to do so can result in criminal and civil liability of the company’s management. However, for many entrepreneurs, the restrictions imposed by the government to contain the COVID-19 pandemic (e.g. travel warnings, restrictions on shop opening hours, delivery bottlenecks, etc.) has meant an abrupt business downturn, a speed with which federal aid has not been able to keep up. 

Exempting companies affected by the crisis from the 3-week insolvency application deadline accommodates the reality that there might be a reasonable prospect of restructuring the illiquid or over-indebted.company by availing themselves of government assistance in the form of financing and restructuring agreements.

The statutory regulatory exemption took effect retroactively as of March 1, 2020.

 

Please list the implementing agencies

Federal Ministry of Justice and Consumer Protection. 

Please name the policy advisor(s) or leader(s) who have been key in introducing and/or designing this policy instrument

Justice Minister Christine Lambrecht: “We want to prevent companies from having to file for bankruptcy only because the aid offered by the federal government has not reached them in time. The regular three-week period of the bankruptcy code is too short for these cases”.

Lifecycle of target firms for this policy instrument
Existing SMEs
Larger, established companies
Scale-ups
Start-up firms
If you marked "start-up" and/or "scale-up" firms, please provide the specific definitions used

The suspension to file an insolvency application is only available where these conditions are fulfilled:

  • the illiquidity or over-indebtedness is based on the effects of the COVID-19 pandemic, and
  • there are prospects of remedying the insolvency.

If the company was not illiquid on December 31, 2019, it is assumed that the conditions for the suspension are met and that there is no obligation to file an insolvency application. If the company was still solvent on December 31, 2019, then an insolvency application only will be required if the negative conditions (illiquidity or over-indebtedness not resulting from the COVID-19 pandemic or no prospects of remedying the insolvency) are met without any doubt. 

In cases of uncertainty, the decision as to whether the conditions are satisfied will be made in favor of the company and its respective board members, and the burden of proving that the conditions have not been met is upon third parties who may wish to question the decision of the respective board member. 

 

Support offered
Non-financial Support
Level of intervention
Firm-level
Barrier(s) addressed with this policy tool
Regulatory
Policy timeline

Policy effective date: The obligation of companies in Germany to file insolvency applications was suspended on March 27, 2020 by a legislative act (the COVID-19 Mitigation Act).

Validity of the policy measure: The suspension applies until September 30, 2020, and may be extended until March 31, 2021, by the German Federal Ministry of Justice and Consumer Protection.

 

Stated goal/metrics of the policy instrument

The new legislation serves to suspend this obligation for an initial period of approximately five months and, if extended, for up to an entire year. As a result, companies will be able to continue their business for a longer time, even if they are unable to meet their obligations or have negative equity capital. The aim is to give these companies time to apply for grants, aid or credit and to maintain their business for an interim period.

Challenges, criticisms and lessons

Bankruptcy lawyers generally welcome the move, but they expressed that the measure will inevitably present liability risks for board members and managing directors.

To address these concerns, the enacted temporary changes to German Insolvency Law grant the management of (factually) insolvent companies certain protection from personal liability in connection with payments effected during the suspension period in order to resume or maintain the business operations or to implement a restructuring plan.

Further, protection from clawback and lender’s liability risk is provided to lenders who extend financing to German companies during the suspension period. Similar protection from clawback is provided to shareholders who grant new shareholder loans during the suspension period. 

 

Notes and additional context

Similar regulations have already been applied in Germany for companies that got into difficulties due to the floods in 2013 and 2016. 

Geographic scope
National-level