German Federal Government presenting draft law on suspension of directors obligations to file for insolvency

In an amendment to the currently existing Section 15a InsO the normal obligations of the directors of a corporation to file for insolvency within the standard 3 weeks period is to be generally suspended until 30 September 2020. Only if the insolvency or over-indebtedness is not due to the consequences of the spread of the SARS-CoV-2 virus (COVID-19 pandemic) or if there is no prospect of eliminating an existing state of insolvency, the suspension does not apply by way of exception (Section 1 p. 2 COVInsAG).

The suspension is flanked by a generous presumption rule working in favor of the directors: If the debtor was not already insolvent on 31 December 2019, it is assumed that the reasons for the existing insolvency status is due to the effects of the COVID 19 pandemic and that there are prospects of eliminating an existing insolvency (§ 1 p. 3 COVInsAG).

The suspension represents a significant ease on the otherwise strict obligations of company management – in general, the directors are obliged to file for insolvency if a 3 weeks cashflow forecast of current liabilities and expected proceeds shows a coverage of less than 90%. A violation of this obligation results in severe liabilities for the acting directors – basically they become personally liable for each and every payment leaving the company after the criterias for insolvency were met.

In consequence the COVInsAG also limits the liability of the managers for payments leaving the company in the event of insolvency (Section 64 GmbHG, Section 92 (2) AktG, Section 130a (1) sentence 2 HGB and Section 99 sentence 2 of the Cooperatives Act) during the suspension period. It is precisely these liability norms that normally pose significant liability risks .

Insofar as the obligation to file for insolvency is suspended (see above), payments which are made in the ordinary course of business are deemed to be compatible with the diligence of a prudent and conscientious person and do not trigger any liability of the manager as a result (§ 2 para. 1 no. 1 COVInsAG). This applies in particular to such payments which serve to maintain or resume business operations or to implement a restructuring concept.

In addition the potential risk of a lender liability has also been limited.

Normally, the infusion of new capital into an ailing entity can result in a potential risk for the providing lender, unless specifically defined criteria (preparation of a restructuring audit and plan) are met.

Due to the corona crisis, it is currently hardly possible to make reliable forecasts and plans upon which the granting of restructuring loans are usually based.

Against this background, the legislator has ruled out the risks of avoidance of loan repayments and collateralisation as well as liability for intentional immoral damage (Section 826 of the German Civil Code) through the granting of loans (so-called lender insolvency procrastination) if the loans were granted during the suspension period and shall be repaid by 30 September 2023 at the latest (Section 2 (1) No. 2 COVInsAG).

Privileges for shareholder loans

The COVInsAG provides the shareholders with considerable incentive to participate in the financing to overcome the crisis caused by the coronavirus. Shareholder loans receive a significant appreciation through COVInsAG in the event of insolvency.

The standard subordination of shareholder loans under section 39 (1) no. 5 InsO is excluded for new shareholder loans if insolvency proceedings have been applied for in respect of the debtor's assets by 30 September 2023. The same applies to securities of the shareholder (§ 44a InsO).

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