German Parliament: “Covid19 risk mitigation law” on insolvency law and manager liability

On 25 March 2020, the German Parliament (Bundestag) unanimously accepted a draft for a new law for the mitigation of the consequences of the COVID-19-pandemic in civil, insolvency and criminal law (Parliamentary Documentation 19/18110). It also contains a law on the temporary suspension of the obligation to file for insolvency and a law for the limitation of management liability in case of an insolvency due to the COVID-19-pandemic (COVID-19-Insolvenzaussetzungsgesetz – "COVInsAG"), which takes effect retrospectively as from 1 March 2020. The regulations contained therein are limited in time and have wide-ranging effects on a possible liability of managing directors in case of factual insolvency of a company.

1. The crucial regulation, namely the suspension of the obligation to file for insolvency, can be found in s. 1COVInsAG.

Accordingly, the suspension of the obligation to file for insolvency until 30 September 2020 is the general rule. However, the suspension shall not apply if the insolvency is not based on the consequences of the COVID-19-pandemic or if there are no chances to overcome an existing illiquidity. The claimant or rather the insolvency administrator bears the burden of proof for this exception.

As an accompanying regulation, a presumption regulation was included, which according to the explanatory memorandum of the new law expressly leaves unaffected the burden of proof described above. Accordingly, it is refutably presumed that insolvency is based on the consequences of the COVID-19-pandemic and that there are chances to overcome the illiquidity if the debtor was not illiquid on 31 December 2019. Pursuant to the explanatory memorandum, it is hereby to be guaranteed that the currently existing insecurities and difficulties with regard to the proof and the predictability of further developments shall "in no way be to the detriment of the party obligated to file the petition".

It is striking at first that the wording of the presumption regulation merely refers to the reference date 31 December 2019, which is therefore likely to play a central role in future disputes. The previous period is left out of consideration according to the wording of the law, as it is explicitly not mentioned that the company has not been illiquid "until" 31 December 2019.

2. In s. 2 COVInsAG, further consequences are linked to the suspension of the obligation to file an insolvency petition, which are meant to enable the companies concerned to survive the current crisis.

a) Limitation of liability for payments after insolvency

The most important regulation for managers can be found in paragraph 1, which contains a limitation of the so-called liability for payments after insolvency (cf. for example s. 64 sentence 1 GmbHG (Limited Liability Companies Act) or s. 92 para. 2 sentence 1 in connection with s. 93 para. 2 AktG (Stock Corporation Act). Accordingly, payments made in "ordinary course of business", especially payments that serve the maintenance or resumption of business operations or the implementation of a restructuring concept, shall be deemed to be compatible with the due care of a prudent and conscientious manager.

Thus, the defence argument of the so-called "privileged payments", which eliminates a breach of duty, is significantly enhanced. Even until now, according to case law there shall be no liability for payments for the maintenance of business operations at least until expiry of the three-week period for the filing of an insolvency petition, insofar specific or rather realistic chances for restructuring are given. By the regulations in the COVInsAG, the possible period for a privileged payment is significantly extended. Moreover, payments for the maintenance of business operations are mentioned merely as a non-exhaustive example for a payment in the "ordinary course of business". Thus, this term used in the law is to be understood more widely. However, it is not explained more specifically in the explanatory memorandum. Even though it can be assumed that this term will be interpreted widely and rather generously, it will be the task of courts to develop criteria by which to assess whether a payment is made in ordinary course of business or not.

b) Protection of creditors and shareholders with regard to new credits

S. 2 para. 2 COVInsAG intends to motivate banks, creditors and shareholders to provide additional liquidity to overcome illiquidity. For this reason, it is i.a. not deemed as detrimental to creditors if a credit granted "newly" during the suspension period or a "new" shareholder loan is repaid until 30 September 2023. It is decisive that it is a new credit. Mere novations or prolongations of credits / loans already lent out are not encompassed.

c) No violation of morality by granting credits and securities during suspension period

Pursuant to s. 2 para. 3COVInsAG, in case of suspension of the obligation to file for insolvency, granting credits and securities during the suspension period is not be considered an immoral contribution to delayed filing of insolvency. Hereby, a risk for creditors shall be prevented that results from a judgment of the Federal Court of Justice dated 12 April 2016 – XI ZR 305/14 = BGHZ 210, 30 margin no. 39 et seq. – according to which the granting of credits / securities during a crisis may satisfy the requirements of a transaction contrary to public policy pursuant to sections 138, 826 BGB (Civil Code).

3. Lastly, s. 3 COVInsAG provides for a suspension of creditors' right of filing for insolvency of their debtors. Creditors will not be allowed to file an insolvency petition for a period of time of three months, in case that the reason insolvency had not already been given on 1 March 2020. This regulation applies regardless of whether the obligation to file an insolvency petition pursuant to s. 1 COVInsAG is suspended or not.

4. It is not yet possible to predict when this pandemic will be contained. Therefore, s. 4 COVInsAG empowers the Federal Ministry of Justice and Consumer Protection to extend the regulations in s. 1 and s. 3 COVInsAG until 31 March 2021 at most. Even though s. 2 COVInsAG is not expressly named in this provision, the corresponding regulations shall be comprised by the power to issue statutory ordinances due to the close relationship with s. 1 COVInsAG.

5. The COVID-19-pandemic and the therewith connected economic upheavals are or will be particularly damaging to those companies that already were in a financial crisis or even insolvent. However, also many formerly sound companies have plunged into a crisis that poses an existential threat. A large number of companies will not succeed in overcoming illiquidity and/or over-indebtedness, so that the last resort will be to file for insolvency. This will inevitably lead to the fact that D&O insurers in the near future will face more and more claims asserted by insolvency administrators and/or creditors against managers.

It seems very likely that insolvency administrators will try via general provisions to substantiate factual insolvency of the company clearly before the outbreak of the pandemic or rather before 1 March 2020, in order to make null and void the protective regulations of the COVInsAG. Managers of companies which had already been in an acute financial crisis before the outbreak of the pandemic will presumably only be protected by these regulations to a lesser extent. As regards managers of companies which had been sound until then, however, the liability situation has decisively improved in case of suspension of the obligation to file an insolvency petition, even though open questions remain that will have to be answered by the courts. Furthermore, the costs for defence against the actually most important claims regarding payments after insolvency will still be high and, thus, also the therewith connected costs for D&O insurers.

Bastian Finkel, Cologne

Jan Kordes, LL.M., Cologne