When Does It Apply and When Does It Not?<\/p>\n
The so-called Covid-19 Insolvency Suspension Act (COVInsAG) entered into force retroactively as of 1 March 2020 and, subject to certain conditions, suspends the obligation of managing directors or board members to file for insolvency. It also limits, as an accompanying measure, the liability of corporate bodies in cases of insolvency caused by the Covid-19 pandemic.<\/p>\n
The suspension of the obligation to file for insolvency initially applies until 30 September 2020 and may, if necessary, be extended by statutory instrument without the consent of the Bundesrat until 31 March 2021 at the latest. This remains to be seen (as of April 2020).<\/p>\n
Requirements for the Suspension:
\nThe suspension of the obligation to file for insolvency does not apply if the insolvency maturity is not based on the consequences of the spread of the coronavirus SARS-CoV-2 \/ Covid-19 pandemic, or if there are no prospects of eliminating an existing inability to pay. If the company was not already unable to pay its debts on 31 December 2019, the law presumes in its favour that the insolvency maturity is due to the effects of the Covid-19 pandemic and that there are prospects that the company can eliminate an existing inability to pay.<\/p>\n
In the practice of managing a company in crisis, drawing the line as to whether insolvency already existed on 31 December 2019 means that the managing director or board must examine this question with particular care. Until 31 December 2019, the principles established by the Federal Court of Justice in settled case law for assessing the existence of inability to pay continue to apply.<\/p>\n
Practice also shows that managing directors and board members often interpret the criteria of inability to pay or over-indebtedness generously in their own favour, but simply incorrectly. This regularly leads to liability of corporate bodies and thus to personal liability of the managing director or board member, as well as to numerous avoidance claims that the insolvency administrator can later often derive directly from the balance sheet.
\nIf the managing director or board of a company in crisis does not merely wish to make the later work of the insolvency administrator easier, but instead wishes to guide the company successfully through the coronavirus crisis, a critical insolvency-law assessment and determination of the company\u2019s situation is required. In doing so, the managing director or board should not hesitate to seek professional advice.<\/p>\n
Over-Indebtedness Existing Before 31 December 2019 Is Harmless<\/p>\n
If only over-indebtedness, but not also inability to pay, existed before 31 December 2019, the clear wording of Section 1 sentence 3 COVInsAG gives rise to the statutory presumption that the insolvency maturity is based on the effects of the coronavirus pandemic. From a technical perspective, this is surprising, because if the company was already over-indebted before 31 December 2019, it is historically impossible for the insolvency maturity to be based on a pandemic that occurred in January 2020 at the earliest. This nevertheless reveals a legislative value judgment: over-indebtedness is apparently irrelevant in this respect, even though over-indebtedness still remains unchanged as a ground for opening insolvency proceedings under Section 19 InsO. The trend is decreasing: already during the financial market crisis of 2008, the legislature\u2019s assessment of over-indebtedness changed fundamentally. Through Article 5 FMStG, the provision was not only softened by introducing the going-concern forecast, but fundamentally adjusted. Nevertheless, insolvency administrators and the Federal Court of Justice\u2019s case-law development still continue to emphasise the significance of over-indebtedness. For insolvency administrators, the material interest is understandable, while the Federal Court of Justice, as the highest guardian of creditor protection, merely consistently applies what the Insolvency Code still provides. Even though the legislature\u2019s distancing from over-indebtedness as a ground for opening proceedings continues with COVInsAG, our litigation experience shows that courts still generally adhere firmly to the importance of over-indebtedness. <\/p>\n
The Prospect of Eliminating Inability to Pay Is the New Super-Elastic Positive Going-Concern Forecast
\nIf the company was not unable to pay its debts by 31 December 2019, the new statutory wording automatically and practically irrefutably assumes that prospects of restructuring exist. This results in something that has never previously existed in the law of over-indebtedness: solvency as of 31 December 2019 leads, at any later assessment date \u2014 potentially still in September 2020 or even in March 2021 \u2014 to an affirmative finding of a positive going-concern forecast. This is indeed a real gift, since the Federal Court of Justice had previously linked the existence of a positive going-concern forecast in cases of over-indebtedness to very specific and restrictively interpreted criteria, such as an overriding probability of success from the perspective of a careful manager, a coherent medium-term restructuring and liquidity concept, close weekly financial monitoring, and similar requirements. This strict framework, which had applied since 2008, has now been set aside for the time being.<\/p>\n
It is now sufficient merely to have prospects of eliminating an existing inability to pay \u2014 without any temporal requirements. The suspension applies only where no such prospects exist. However, from 1 October 2020, or \u2014 if the Act is extended, as is to be expected \u2014 from 1 April 2021, the new legislation again imposes an obligation to file for insolvency even on companies affected by the consequences of the pandemic if inability to pay still persists at that time. <\/p>\n
At least, while the risk of misjudging the probability of the economic recovery of the affected company is quite high in the judicial practice of liability proceedings \u2014 and the managing director or board member bears the full burden of pleading and proof in this respect, for example when seeking discharge \u2014 the legislature at least temporarily intends to remove the risk of such misjudgment generously from the managing director or board member.<\/p>\n","protected":false},"excerpt":{"rendered":"
When Does It Apply and When Does It Not? The so-called Covid-19 Insolvency Suspension Act (COVInsAG) entered into force retroactively as of 1 March 2020 and, subject to certain conditions, suspends the obligation of managing directors or board members to file for insolvency. It also limits, as an accompanying measure, the liability of corporate bodies […]<\/p>\n","protected":false},"author":29,"featured_media":55381,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[139],"tags":[],"class_list":["post-55380","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-news-en"],"acf":[],"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\t