One of the most important objectives of insolvency law is the protection of creditors of limited liability legal entities as well as the general protection of legal transactions against damage caused by materially insolvent but limited liability companies. Accordingly, the German Insolvency Code (InsO) stipulates a duty to file for insolvency in the event of material insolvency. This means that legal entities not only have the right but above all the obligation to file for insolvency in the event of insolvency. The prerequisites for the obligation to file for insolvency and the consequences under compensation and criminal law in the event of a breach of this obligation are primarily stipulated in the new legal provision added to Section 15 a InsO. This states that in the event of the insolvency of the company (§ 17 InsO) or in the event of its over-indebtedness (§ 19 InsO), the management is obligated to file a request for insolvency proceedings (§ 13 InsO) without culpable delay. Conversely, there is no obligation but rather a right to file for insolvency in the event of merely imminent insolvency (§ 18 InsO).
A. New deadlines and forecast periods
Previously, Sections 17, 19 InsO stipulated that the insolvency petition had to be filed no later than three weeks after the occurrence of the reason for opening insolvency proceedings. The SanInsFoG has doubled this deadline. Now, the insolvency petition must be filed in accordance with Section 15 (1) sentence 2 InsO (new version)
- upon the occurrence of insolvency after three weeks at the latest, and
- upon occurrence of over-indebtedness after six weeks at the latest
Doubling the deadline aims to enable out-of-court negotiations to successfully resolve the insolvency and allow the thorough preparation of preventive restructuring measures or self-administration.
Furthermore, the Act on the Further Development of Restructuring and Insolvency Law (SanInsFoG) specifies new forecast periods for the insolvency grounds regarding imminent insolvency (Section 18 InsO) and over-indebtedness (Section 19 InsO).
I. Imminent insolvency (Section 18 InsO (new version))
The forecast period for imminent insolvency is now twenty-four months according to Section 18 (2) sentence 2 InsO (new version). In addition, the Act on the Further Development of Restructuring and Insolvency Law (SanInsFoG) introduced the option of non-insolvency restructuring proceedings, known as StaRUG proceedings, instead of (classic) insolvency proceedings to address cases of merely imminent insolvency pursuant to Section 18 InsO (new version). (more on this below in Section B.).
II. Over-indebtedness (Section 19 InsO (new version))
The going-concern forecast period for assessing over-indebtedness has been specified as twelve months (Section 19 (2) sentence 1 InsO (new version)) instead of the previous twenty-four months (based on IDW S 11).
In addition, Section 4 CovInsAG stipulates an even shorter period of only four months as a possible basis in the period between January 1 and December 31, 2021 if the debtor’s over-indebtedness is attributable to the COVID-19 pandemic. This is a legal assumption if the debtor (1.) was neither insolvent nor over-indebted as of December 31, 2019, and (2.) achieved a positive result from ordinary business activities in the last financial year ended before January 1, 2020, and (3.) sales from ordinary business activities in calendar year 2020 declined by more than 30 percent compared to the previous year.
III. Currently no deadline due to suspension of the obligation to file
In addition, Section 1 (3) CovInsAG (currently) allows a general suspension of the obligation to file an insolvency petition until April 30, 2021 if (1.) an application for financial assistance has been or will be submitted by February 28, 2021, unless legal or material grounds prevented the submission of the application, and (2.) the application for assistance is not a hopeless endeavor or inadequate to prevent the grounds for insolvency.
IV. Consequences of CovInsAG
After the end of the suspension period of Section 1 CovInsAG, the three-week period stipulated by Section 15 a (1) InsO n. F. for filing an application shall commence anew if reorganization or financing efforts remain in progress at this point in time. On the other hand, if the likelihood of restoring solvency had already ceased to exist before the deadline expired, an application for insolvency must be filed immediately after the end of the deadline.
B. StaRUG proceedings
In addition, the SanInsFoG has introduced the first non-insolvency restructuring proceedings oriented on the German Act on the Stabilization and Restructuring of Enterprises (Unternehmensstabilisierungs- und -restrukturierungsgesetz – StaRUG), also referred to as StaRUG proceedings. At the same time, the StaRUG changes the obligations of business managers. According to Section 1 (1) StaRUG, the managers of limited liability companies (in particular the Unternehmergesellschaft, GmbH and Aktiengesellschaft legal forms) now have to continuously monitor the developments that may endanger their company as a going concern.
The StaRUG proceedings consist of a self-administration procedure (comparable to the self-administration defined by Sections 270 et seq. InsO). A detailed restructuring plan, forms the foundation for this procedure and is submitted separately to the individual creditor groups and/or shareholders for coordination. The only prerequisites for initiating proceedings are (1.) the debtor’s notification to the court, (2.) the submission of a restructuring plan and (3.) proof of imminent insolvency.
C. Liability of the management
The SanInsFoG introduces a modification to the management’s obligation to pay compensation for payments detrimental to the mass of the company after grounds for insolvency exist (Section 15 b InsO). This corresponds to the obligation to file an application for insolvency as described at the beginning (§ 15 a InsO).
Accordingly, the regulations governing the liability of the company management (e.g. Section 64 Sentence 1 GmbHG, Section 92 (2) AktG or Secs. 130 a, 177 a HGB), which are distributed among numerous different laws, have now been merged in Section 15 b InsO (with a number of modifications), independent of legal form and with modernized language. The previous special regulations have been deleted.
The new paragraph still applies together with Section 15b (1) InsO and states that the management may make no further payments from the company’s assets after the occurrence of over-indebtedness or insolvency. However, the new aspect in this regard is the statutory clarification of the standard defining a prudent and conscientious manager after grounds for insolvency exist in Section 15 b (2) InsO. The associated obligation to pay compensation for prohibited payments is maintained in Section 15 b (3) InsO. Only those payments are now privileged that are made (1.) in the ordinary course of business and which serve to maintain business operations, in particular, (2.) within the deadline for filing an application in accordance with Section 15 a InsO and (3.) for the purpose of permanently eliminating the grounds for insolvency or preparing to file for insolvency with the due care and diligence of a prudent and conscientious business manager. Furthermore, payments of this nature made between the filing for insolvency and initiating insolvency proceedings with the consent of the preliminary insolvency administrator are also privileged. According to Section 15 b (3) InsO, payments made after the expiry of the deadline for filing for insolvency do not reflect the due care and diligence of a prudent and conscientious business manager.
In order to avoid liability risks for the management arising from statutory tax payment obligations between filing the application and the decision by the insolvency court regarding whether to initiate insolvency proceedings, Section 15 b (8) InsO stipulates that if the application is filed in due time there shall be no violation of statutory tax payment obligations in accordance with Section 69 (1) AO (if applicable in conjunction with Sections 34, 35 AO) if tax debt claims are not met or payment obligations not met on time during this period.
Furthermore, the SanInsFoG also revises the scope of liability. The business management can now dispute the presumption of overall creditor damage to the amount of the prohibited payments. As a consequence, the management is only liable to the amount of the damage actually incurred by the creditors. However, in accordance with Section 15 b (4) InsO, the management must provide proof that the actual loss is less than the total amount of the payments made. Furthermore, it is partially argued that the new wording of Section 15 b (4) InsO, which speaks of damage to creditors, now implies that the obligation to pay compensation is structured as a claim for damages and is, therefore, covered by D&O insurance.
Ultimately, the change in responsibility for delayed filing for insolvency arising from the central standardization of the company management liability is interesting for legal practitioners. In future, the new cases relating to Section 15 b InsO will be decided by the IX Civil Senate of the Federal Court of Justice (BGH). Whether this also results in the abandonment of the past case law of the II Civil Senate regarding liability pursuant to Section 64 sentence 1 of the German Limited Liability Companies Act (GmbHG), Section 92 (2) of the German Stock Corporation Act (AktG) or Sections 130 a, 177 a of the German Commercial Code (HGB), remains to be seen.
The COVID-19 pandemic continues with no end in sight at this time. As expected, not only was the duration of state aid measures extended but preventive restructuring measures have also been simplified. In the process, the legislation has attempted to achieve a differentiated solution. This is specifically reflected by the extension of the suspension period only until April 30, 2021 and the exclusion of “inability to pay” as a reason for insolvency under the new regulations. However, it remains to be seen whether these measures will be enough to reduce the consequences of the COVID-19 pandemic over the long term.
Given the constant changes in numerous exceptions, we recommend that all parties facing imminent insolvency obtain expert advice regarding their obligations, rights and options as early as possible.