Guest contribution: Preliminary assessment of the COVID 19 bankruptcy suspension law (COVInsAG). By Philip Karrenstein

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The Bundestag and Bundesrat quickly passed the law to mitigate the consequences of the COVID-19 pandemic in civil, bankruptcy and criminal procedure law. The law was announced on March 27, 2020.

The essential regulatory content of COVInsAG is

  • Suspension of the insolvency application
  • No obligation to compensate for certain payments made by bodies of legal entities (e.g. managing director, board of directors) after the insolvency maturity
  • The granting and repayment of certain loans are deemed not to disadvantage creditors
  • Extensive exclusion of the bankruptcy challenge

The obligation to file for bankruptcy is suspended in accordance with § 1 COVInsAG. This only does not apply

  • if bankruptcy is not due to the consequences of the spread of the SARS-CoV-2 virus or
  • if there is no prospect of eliminating existing insolvency.

It is assumed by law that

  • bankruptcy maturity is based on the aforementioned effects and
  • There are prospects of eliminating existing insolvency,

if the insolvency did not already exist on December 31.12.2019, 31.12.2019. A corresponding exclusion does not apply in the event of overindebtedness existing on December XNUMX, XNUMX.

The obligation to file for insolvency is therefore largely suspended. It is only necessary that the bankruptcy maturity is related to the corono pandemic. In the event of over-indebtedness factually no obligation to file for insolvency even if it existed before 01.01.2020/XNUMX/XNUMX.

I. Healthy companies are dragged deeper into the crisis

Over-indebtedness practically no longer requires insolvency applications during the period of validity of the law.

According to section 19 (2) InsO, there is overindebtedness if the debtor's assets no longer cover the existing liabilities, unless the continuation of the company is largely probable in the circumstances.

As a rule, the bankruptcy code wants to prevent an already manifest risk from deepening further at the expense of creditors. A company whose level of indebtedness is constantly deepening causes more damage to its creditors with every business transaction.

As a result of the new legal regulations, the corporate representatives of over-indebted companies are not at risk (further sanction) if, despite over-indebtedness that has existed for years, they do not file for bankruptcy even under the now worsening conditions and continue to participate in the market.

This applies even if insolvency is added to the already existing overindebtedness after December 31.12.2019, XNUMX. In this case, the legal presumption applies that the added insolvency is based on the consequences of the pandemic and can be remedied.

As a result, companies whose assets did not cover their liabilities before the crisis and who are no longer able to service their liabilities when they fall due (insolvency) will continue to be able to participate in the market and generate losses. The law therefore expressly allows these over-indebted "zombies" to continue to act in a way that damages the creditor. However, anyone who interacts with these companies in commercial transactions is potentially a creditor.

The legal presumption rules can only be refuted by specialists with the greatest effort and then only by an in-depth analysis of the communication and electronic accounting that took place during the crisis.

As sick and insolvent market participants can now continue to participate in market events before the crisis, they - like the corona virus - will infect other market players who may be only slightly affected. Because regardless of the duration of the application of these regulations, which negate reality, sooner or later these market participants will run out of money because the bow wave of overdue liabilities becomes too large. This will put numerous other market participants who are now experiencing failures in a comparable situation. At the same time, these over-indebted companies compete with fundamentally healthy companies for subsidies, making them more expensive due to the higher risk for the banks.

The suspension of the obligation to file for bankruptcy for companies that are over-indebted and only insolvent after December 31.12.2019, XNUMX will further exacerbate the crisis and sweep away numerous companies.

Correcting the suspension of the insolvency application is only likely in cases where insolvency has occurred temporarily due to the corona pandemic. The suspension is detrimental to the economy if artificial ventilation is provided to companies that had to file for insolvency prior to the crisis due to persistent over-indebtedness.

The provision in section 1 of the COVInsAG therefore goes far too far. The chance of a real market shakeout was missed. The consequences of this omission can have a serious impact on healthy companies.

II. Further tightening by excluding the obligation to pay compensation

If the legislature had left it with the suspension of the obligation to file for insolvency and thus with the exclusion of criminal liability (Section 15a (4) InsO) for organs of legal persons subject to the application for insolvency, the consequences would still have been manageable. For even more than criminal liability, organs fear the obligation to replace illegal payments. Section 64 sentence 1 GmbHG can be mentioned here as an example. Thereafter, the managing director of a GmbH is liable for all payments made after the insolvency maturity. The concept of payments should be interpreted very broadly; it affects practically every act that can lead to an outflow of assets; for example, deposits into a customer-led account, since a liability to the bank is satisfied here, which at the same time reduces the distributable amount (the claim expires when the account is paid into the debit account).

According to the basic legal model, the body is burdened with proof and proof that payments made after the bankruptcy maturity were compatible with the care of a proper and conscientious manager. According to Section 2 (1) No. 1 COVInsAG, there is now a (further) legal presumption that is difficult to refute. Because payments during the period of validity of the law should be largely compatible with the care of an orderly and conscientious manager.

In other words, there is no obligation to pay compensation, and unrestrained damage to society (and thus creditors) is wide open.

However, the other provisions under Section 2 (1) No. 2 and No. 3 COVInsAG are correct and sensible, which aim in particular at not granting a loan simply because repayments of loans granted in the crisis would have to be feared . In this respect, the lenders are to be rewarded for the willingness to grant funds to overcome the crisis. This is a useful instrument that promotes the preservation of companies worth preserving. However, this instrument would be more valuable if the provisions of § 1 COVInsAG were not also applicable to companies that were already over-indebted on December 31.12.2019, XNUMX (see above).

III. Extensive exclusion of the bankruptcy challenge

The provision with the potentially most serious consequences is the largely complete exclusion of the insolvency contest for legal acts that took place between 01.01.2020/30.09.2020/2 and 1/4/31.03.2021; Section XNUMX (XNUMX) no.XNUMX COVInsAG. This period can even be extended until March XNUMX, XNUMX.

To this end, a few general explanations on the legality of legal acts must be put in front. Sections 129 et seq. Of the InsO stipulate that legal acts, ie any act carried out by a will, which has legal effects and can change the debtor's assets to the detriment of insolvency creditors, can be challenged in a later insolvency proceedings. The main rules of contesting bankruptcy are:

  1. Contestability of congruent and incongruent coverages in the special contestation period of the last three months before and after the bankruptcy application (§§ 130, 131 InsO). On the one hand, legal acts are contestable if the recipient was aware of the insolvency or the insolvency application or if the opposing party has received an incongruent cover, i.e. satisfaction or collateral to which he was not entitled at the time or in the manner. An example of an incongruent cover is the case of a friend who is a friend and who has - without his claim being due - fully satisfied.
  2. The resolution of intent with a contestation period of up to ten years before the application for insolvency; Section 133 (1) to (4) InsO. According to Section 133 Paragraph 1 InsO, legal acts of the debtor contestable with the intention of discriminating against its creditors if the other part (usually the recipient of a payment) was aware of the debtor's intention to discriminate against the creditor. It is a practically very important regulation that has a high preventive effect. Because only a few creditors generally run the risk of having to return money that they received for properly performed services. Anyone who, despite being aware of the insolvency of his business partner, continues to do business and (e.g.) accepts money must expect to be challenged by the insolvency administrator. The restitution claim due to deliberate creditors' disadvantage is also an important instrument for increasing the mass in the insolvency proceedings. Without the avoidance regulations, numerous insolvency proceedings would not open due to a lack of funds and the disadvantaged creditors would rarely be able to expect a relevant quota payment.

During the period of validity of Section 2 (1) No. 4 COVInsAG, however, the legal acts that have so far been subject to contestation can no longer be challenged. This applies to congruent cover, a substantial part of incongruent cover and to legal acts that deliberately disadvantage other creditors.

Institutional creditors such as the tax office or social security institutions can carry out enforcement without the need for a judgment beforehand. These creditors can therefore access the debtor's assets either themselves or, for example, by instructing the main customs office immediately after issuing a seizure and confiscation order. This gives you a significant advantage in the debtor's crisis.

In the corporate crisis, it is not uncommon for the debtor to make relevant contributions to the success of these enforcement actions. For example, loans are specifically paid out to the bank account affected by the garnishment, or loan funds are used to service the garnishment and to make the account available again for dispositions.

While private and commercial creditors of the debtor usually take months or years to obtain an enforcement title, health insurers and financial authorities can now not only freely access the debtor's assets due to the exclusion of the insolvency contest - they also do not have to be refunded later fear contesting bankruptcy.

As already explained in the introduction, it has so far been possible to reverse asset transfers - from which particularly significant creditors have benefited - by means of contesting bankruptcy. As a result, the rather unimportant supplier or the landlord, who was often confronted with defaults, was no worse off than the imposed creditors (tax office, health insurance companies, professional associations) at the end of insolvency proceedings.

To exacerbate the consequences mentioned under I. and II., Which are now causing numerous creditors to run into the bankruptcy of insolvent companies, commercial creditors in particular must now expect that in the end (numerous insolvency proceedings) they will face total failure.

The Treasury, on the other hand, is largely harmless at the expense of private individuals with the provisions in section 2 (1) no. This is a scandal that has received little attention in the debate about the equally serious imbalances in the area of ​​tenancy law (suspension of termination options).

Nevertheless, the market will react and switch to prepayment in many areas. Because even if there is no threat of bankruptcy, there is still a risk that one's own claims will no longer be satisfied due to the primarily satisfied creditors.

This anticipated backlash from the market will further exacerbate the already existing liquidity bottlenecks. Benefits will hardly be credited anymore.

IV. Outlook

It currently seems difficult to imagine that the federal government will abolish the "fiscal privilege" that has now been established. A sensible market adjustment is prevented at the expense of private or commercial market participants. In addition, even before the crisis, over-indebted companies - of which there are many - will sweep away many of their healthy business partners until the crisis began.

The federal government has failed to use the crisis for a painful but fundamentally sensible market shakeout, and above all has given itself an advantage with unforeseeable long-term consequences at the expense of all other creditors.

V. Significance for landlords

Landlords could now see the reduced risk of avoidance as an opportunity, because landlords do not have to fear the insolvency administrator's claims regarding the legal acts covered by COVInsAG. However, that is only half the truth.

On the one hand, the rather rare challenge to rent payments does not apply, on the other hand, landlords can hardly expect a quota payment in a later insolvency proceedings over the tenant's assets. Because the Treasury can - as shown - clear the tenant's accounts with impunity. Twice tragic for landlords: The termination due to existing arrears is temporarily excluded, so that above average arrears will accrue. The landlord should therefore have any arrears accumulated in the competition for the best possible satisfaction of his claims; possibly with a lawsuit for future performance. So it can enforce faster or as quickly as the Treasury.

Philip Karenstein
Attorney / Dipl.-Kaufmann (FH)

Karrenstein Glaser Rechtsanwaltsgesellschaft mbH
Unter den Eichen 108a, 12203 Berlin

Tel + 49 30 797 484 53
Fax + 49 30 818 277 24