Corona Crisis and Insolvency Law
The Corona crisis, triggered by the novel coronavirus (SARS-CoV-2) beginning in early 2020, had far-reaching societal and economic impacts worldwide. In Germany and Europe, the pandemic particularly affected numerous areas of law, with insolvency law playing a key role. The Corona crisis led to a multitude of special legal regulations and temporary adjustments in insolvency law to protect companies and entrepreneurs from insolvency in the acute pandemic-induced emergency and to mitigate the economic consequences of the crisis.
Definition: Insolvency Law and Its Connection to the Corona Crisis
Insolvency law essentially regulates the legal consequences in the event of the insolvency or over-indebtedness of a natural or legal person. Its objectives are the equitable satisfaction of creditors, the restructuring of viable businesses, and the orderly liquidation of economically unviable entities. During the Corona crisis, legislative interventions resulted in temporary special provisions within insolvency law to prevent pandemic-triggered waves of insolvencies and, thereby, to achieve economic stabilizing effects.
Legislative Measures and Special Provisions During the Corona Crisis
COVID-19 Insolvency Suspension Act (COVInsAG)
With the COVID-19 Insolvency Suspension Act (COVInsAG), temporary suspension of insolvency filing obligations was enacted on March 27, 2020. This allowed companies that had encountered financial hardship due to the effects of the Corona pandemic to defer the insolvency filing and thereby received a temporal “protective shield”.
Requirements for the Suspension
The suspension of the obligation to file for insolvency initially applied retroactively from March 1, 2020, until September 30, 2020, and was subsequently extended or modified several times. Companies were exempt from the filing obligation as long as the insolvency maturity was based on the effects of the COVID-19 pandemic and there were prospects of sustainably overcoming the existing insolvency or over-indebtedness. This was legally presumed in favor of the companies if they were not insolvent as of December 31, 2019.
Restrictions and Exceptions
From October 1, 2020, to December 31, 2020, the suspension was limited to cases of over-indebtedness, so from this date, the obligation to file for insolvency in cases of illiquidity was reintroduced. From January 1, 2021, more differentiated regulations applied depending on company size and the nature of the insolvency cause. For companies whose insolvency was not due to pandemic-related reasons, the obligation to file for insolvency continued to apply without restriction.
Effects on Managerial Responsibility and Liability
The suspension of insolvency filing obligations had a direct impact on the civil and criminal liability of company organs (e.g., management of a GmbH). During the suspension phase, payments made in the ordinary course of business and for the purposes of restructuring or continuation could still be made without organizational leaders fearing liability consequences. Simultaneously, the law contained stricter provisions against abusive practices, such as transactions depriving the insolvency estate of assets or violations of the eased requirements.
Payment Bans and Avoidance Rights
With the temporary suspension of insolvency filing obligations, statutory payment bans were temporarily relaxed. Payments made during the suspension were generally privileged and only subject to limited insolvency avoidance. The same applied to the granting of loans and securities to ensure the liquidity of the affected companies, especially regarding the state KfW corona support programs.
Consequences for Shareholder Loans and Creditor Statuses
The COVInsAG also allowed that shareholder loans and economically equivalent benefits were not treated as subordinated during the crisis period as would normally be the case. Here, too, facilitations were intended for the supply of liquidity and a simplified repayment of crisis-related bridging loans.
Insolvency Law Restructuring Instruments and the Pandemic
Expansion of Preventive Restructuring Instruments
In the course of the Corona crisis, implementation of the EU Restructuring Directive was accelerated. Since January 2021, companies have access to the ‘StaRUG,’ the Act on the Stabilization and Restructuring Framework for Companies. This enabled, for the first time, preventive out-of-court restructuring with judicial participation and creditor majority decisions – a milestone for the early restructuring of companies threatened by insolvency without initiating insolvency proceedings.
Protective Shield Proceedings and Self-Administration Adapted
Already in the context of the crisis, the protective shield proceedings were made more attractive for companies. Initiating such proceedings enables companies with prospects for restructuring to attempt a self-managed restructuring under the supervision of a (provisional) insolvency administrator.
Further Effects and Procedural Law
Statistical Development of Insolvency Events
Although the pandemic caused severe economic disruptions, there was a marked decline in insolvency cases in 2020 and 2021, especially compared to previous years. This was mainly due to the legal suspensions and government support measures.
Reversal of Support Measures
After the end of the pandemic-related special regulations, the possible reclamation of Corona aid and government bridge grants within subsequent insolvency proceedings is frequently discussed. It must be examined whether the funds were used as intended and whether any repayment claims exist.
Criticism, Evaluation, and Outlook
Assessment of the Measures
According to many analyses, the temporary special insolvency law provisions during the Corona crisis made a significant contribution to securing business continuity and jobs. There is a critical debate, however, as to whether this also artificially kept ‘zombie companies’ that were already insolvent in the market (‘zombie companies’), potentially delaying the reorganization of the economic landscape.
Return to Regular Insolvency Law
With the expiry of pandemic-related special regulations and the return to the regular application of the Insolvency Code from May 1, 2021, the classic insolvency law including the associated filing obligations applies again. Since then, companies are once again required to address restructuring and reorganization possibilities at an early stage.
Conclusion
The connection between the Corona crisis and insolvency law represents a striking example of dynamic legislation in economic exceptional situations. The quickly implemented emergency regulations helped avert a mass collapse of economic structures. The return to regular insolvency law underlines the importance of sustainable restructuring capabilities and early corporate management—both are essential foundations for a resilient economy.
See also:
* Insolvency Code (InsO)
* COVID-19 Insolvency Suspension Act (COVInsAG)
* StaRUG (Corporate Stabilization and Restructuring Act)
* Creditor protection
* Payment moratorium
* Corporate liquidity during pandemics
Literature and Web Links:
* Federal Ministry of Justice – Information on insolvency law during the Corona crisis
* German Bundestag – Legislation on the COVID-19 pandemic
* European Commission – Directive on Preventive Restructuring Frameworks 2019/1023/EU
Frequently Asked Questions
What effects does the Corona crisis have on the obligation to file for insolvency for companies?
At the start of the Corona crisis, the German legislator made significant changes to the obligation to file for insolvency by enacting the COVID-19 Insolvency Suspension Act (COVInsAG). In principle, managing directors of a GmbH or board members of an AG are obliged to file for insolvency no later than three weeks after the onset of insolvency or over-indebtedness. With the COVInsAG, this obligation was temporarily suspended to protect companies that had experienced financial difficulties as a result of the pandemic from a wave of insolvencies. However, this suspension applied only under certain conditions, for example if the insolvency or over-indebtedness was based on the consequences of the pandemic and there was a prospect of rectifying the insolvency maturity. Following the lapse of the pandemic-related special regulations, the regular provisions of the Insolvency Code (§ 15a InsO) once again apply without restriction. Managing directors must therefore examine very precisely whether the insolvency maturity is still based on circumstances related to Corona and whether the requirements for not filing still exist.
What liability risks exist for managing directors in connection with the obligation to file for insolvency during the Corona crisis?
Despite the temporary suspension of the obligation to file for insolvency, there are still considerable liability risks for managing directors. If the conditions for the suspension under the COVInsAG are not fulfilled and the insolvency filing is nevertheless not made in due time, civil and criminal liability consequences may arise. In particular, managing directors are liable for payments made after the onset of insolvency if these are not consistent with the care of a prudent businessman (§ 64 GmbHG, § 92 AktG). Furthermore, deliberate delay in filing for insolvency can be a criminal offense (§ 15a InsO). It is therefore advisable to continuously document the liquidity situation and the cause of any insolvency maturity and to seek legal advice in good time.
What special rules apply to leases of insolvent companies during the Corona crisis?
The COVInsAG and changes in tenancy law meant that tenants who were unable to pay rent as a result of the Corona pandemic could not be terminated for a limited period. For insolvent companies, this meant that rent arrears from the pandemic period did not lead to immediate termination, although the rent debts remain and must be registered as insolvency claims in the insolvency schedule. In insolvency proceedings, the general rules for dealing with leases continue to apply, especially the special right of termination for the insolvency administrator (§ 109 InsO).
Are there facilitations for companies applying for insolvency plan proceedings during the Corona crisis?
Within the framework of the COVInsAG, access to the insolvency plan procedure and restructuring measures was expanded by the SanInsFoG (Act for the Further Development of Restructuring and Insolvency Law). The restructuring framework allows companies in financial difficulties – including those due to pandemic-related loss of revenue – to implement a restructuring plan outside of insolvency proceedings. This gives medium-sized companies, in particular, more flexibility to undertake restructuring measures and avoid insolvency. Judicial confirmation of a restructuring plan requires only a majority of the affected creditor groups.
How are Corona-related subsidies treated in insolvency proceedings?
State aid and subsidies received, such as immediate assistance or bridging grants, generally form part of the insolvency estate in insolvency proceedings, provided they were transferred to the insolvent company’s account. Already disbursed funds must, however, be reviewed individually to determine whether they were misused; in such cases, the granting agency may claim repayment and the management may be held liable. The receipt and use of subsidies should therefore always be clearly documented and regularly coordinated with the insolvency administrator.
What are the obligations to inform and cooperate with the insolvency administrator in connection with pandemic-related challenges?
In insolvency proceedings, the debtor – i.e., the management of the affected company – is obliged to provide the insolvency administrator with comprehensive information and to be available (§ 97 InsO). These obligations extend to all measures and decisions related to Corona, such as applications for and use of immediate assistance, short-time working allowances, or loans. Breaches of the duty to cooperate and provide information may lead to claims for damages from the insolvency administrator or criminal consequences.
To what extent does the Corona crisis affect the assessment of going-concern forecasts in insolvency law?
Preparing a so-called going-concern forecast is a key task of management in the context of over-indebtedness assessments (§ 19 InsO). The Corona crisis poses significant challenges for the forecast due to loss of revenue and planning uncertainties. The COVInsAG stipulates that for the assessment of the going-concern forecast, pandemic-related uncertainties can be considered in favor of the company, as long as there is a prospect of overcoming the crisis and/or government aid has been or can be effectively utilized. Ongoing updates and logical documentation of forecast data is strongly recommended to avoid liability on the part of company organs.
