Germany returns to stricter insolvency law from 1 October

For businesses in crisis due to the impact of Covid-19, the German Federal Government had in March suspended the duty to file for insolvency until 30 September 2020. This suspension was extended, but only for overindebted businesses as far as they are still solvent.

For the majority of businesses the duty to file for insolvency proceedings within three weeks will apply again from 1 October onwards without limitations. When illiquidity is objectively identifiable and it is clear that it cannot be overcome within three weeks the business must file for insolvency immediately.

In the first half of 2020 there was a reduction of 6.2% in insolvencies filed according to the German Federal Office of Statistics. This was due to the suspension of the duty to file for insolvency. Now that the duty to file for insolvency will come into force again for most businesses, a significant increase in insolvency proceedings can be expected.   

The three week deadline is designed to encourage businesses to file for insolvency at the right time instead of delaying it after directors become aware that the company is likely to become insolvent. If they do not comply with this statutory provision, directors and board members can be prosecuted and may face personal liability for any damages incurred by creditors. When accused of delayed filing for insolvency, directors have to provide evidence that their business was still solvent at the date in question.

With the upcoming return of the duty to file for insolvency, directors and board members should be aware that the three week period does not start on 1 October, but with the occurrence of illiquidity: those companies that were already insolvent at 10 September 2020 or earlier will have to file for insolvency on 1 October. 

Contestability of payments will also come into force again: when an insolvent business repays some of its creditors before it files for insolvency – and thus puts other creditors at a disadvantage – the insolvency administrator can reclaim these assets to add them to the bankruptcy estate.

With the return to the strict rules of German insolvency law, from 1 October onwards payments of loans, securities and to creditors will be contestable again to full extent – even if their contestability had been suspended before.

Thus not only payments for new obligations, but also for obligations from the last six months will be affected. Even in the case of deferral or instalment agreements, which were unassailable until now, there may be risks of contestability.

Businesses in crisis therefore should:

• Check if their business is solvent and if it isn't, check whether it is possible to restore solvency within a period of three weeks.
• Prepare a liquidity plan and a liquidity balance sheet or check, update and control daily those which already exist. Those documents record the company's financial situation dynamically in view of the three-week deadline and beyond that within a 12-week period looking ahead. The fact that such a documentation exists – and ideally was checked by external experts such as accountants – may help reduce the risk of being accused of a delayed filing for insolvency and therefore also reduces the potential liability of the director.
• If only overindebted, prepare a financial planning calculation based on accounting figures at minimum for the year 2020, better even for 2021. The budgeting must include profit, asset and liquidity planning. It should focus on liquidity planning to demonstrate that it is highly likely that the business will become solvent again within the period of the forecast in order to establish a going-concern.
• Revise the existing restructuring plan in line with the changed legal situation
• Continue restructuring
• Check incoming and outgoing payments for their contestability
• Check whether the business is in the position to apply for state aid measures: there are still various kinds of state aid available for businesses.
• Communicate with creditors and banks to preserve business relations and develop new restructuring concepts