The global Corona virus disease (COVID-19) Pandemic has increasingly serious implications for the economic situation of employees and corporations in Germany, Europe and the World. More and more airlines, travel organizations, car manufacturers and subcontractors put a hold on operations or productions, respectively, for the time being. Many companies are massively affected by slump in orders and sales and thereby resulting revenue declines. In order to ensure the survival of their businesses, executive officers and other principals shall take immediate measures to switch to crisis mode without hesitation.
With the aim of protecting workplaces and corporations, the German Federal Government has decided on a multi-billion-euro aid programme, and has initiated tax, labour and insolvency law measures to provide comprehensive protection for jobs and companies. It has been announced that, if necessary, additional action can be taken not only on national but also on European level. In the following, we will briefly present the key points of the currently applicable set of measures. These key points will certainly be further specified when individual points are implemented and - if necessary, for economic policy reasons - also extended. Following the overview, we make some initial recommendations to managers to help companies navigate through this extraordinary situation as successfully as possible.
The Federal Government’s Protective Shield for Employees and Corporations
The measures of the federal government in the first instance include the following key points:
Flexibilization Of Short-Time Allowance
With retroactive effect from 1 March 2020, companies can apply for short-time working regime if more than 10% of its employees (instead of 30% as before) suffer from a loss of remuneration of more than 10% due to the difficult present state of the economy or loss of tasks. In the future, temporary workers shall also receive short-time working compensation. Moreover, the federal employment agency, the Bundesagentur für Arbeit, will compensate fully the obligatory payments of social security contributions for cancelled working hours, which are normally paid by the employers. It is desired to prevent the build-up of negative working hours which would aim at circumventing the introduction of short-time allowance.
Fiscal Liquidity Support for Companies (Tax measures)
Taxpayers who are demonstrably affected significantly by the COVID-19 crisis shall be eligible for fiscal liquidity supports. Accordingly, deferrals of income taxes, corporate taxes and turnover taxes which are due until 31 December 2020 shall be more easily possible. Interests resulting from the deferral of taxes shall not be imposed. However, a deferral of withholding taxes, e.g., the payroll tax, is not intended. A deferral of the trade tax shall be applied for at the respective competent municipality, which is not bound by the relief.
The same benefits shall be applicable for adjustments of advanced payments for income and corporate tax purposes and for the corporation trade tax base (therewith including the resulting trade tax) due by 31 December 2020.
However, for periods starting on or after 1 January 2021, specific justifications for claiming deferrals and advanced payments are required.
Moreover, enforcement measures shall be suspended until 31 December 2020. Already forfeited late payment surcharges shall be waived in this respct.
Existent and Newly Introduced Credit Programmes of the KfW and State-Owned Banks
The existing programmes of the Kreditanstalt für Wiederaufbau (KfW), a German state-owned development bank, will be extended and amplified in order to facilitate easier access to favourable loans for companies. Depending on the company’s age and its annual revenues, there are various aid programmes which shall be applied for with the assistance of its relevant bank or other financing partners, e.g. other commercial or direct banks, insurance companies, financial agents.
Furthermore, additional special loan programmes have been announced by KfW. These programmes are designed for companies with a functioning business model which currently cannot access existent aid programmes without obstacles although they face liquidity shortages resulting from the crisis. The launch of these programmes is still subject to approval by the European Commission.
The KfW will for some programmes raise the threshold of release from liabilities for commercial banks to 70-90% of the credit volume. It is to be seen whether the remaining equity ratio will be low enough to persuade the commercial banks to grant credits. However, companies will have to examine carefully if they can afford the additional debt. It is therefore not surprising that it has already been called for additional- even more effective-financial assistance, e.g. aid in form of direct liquidity injections, state participation, long-term loan capital with a minimum interest rates or with up to 100% assumption of the default risk by the KfW in case of the aforementioned KfW aid programmes. It is also suggested that the existing obstacles to shareholder financing (subordination in course of insolvency) or to the granting of restructuring loans shall be suspended at least until the Pandemic and its aftermath has been overcome. In case of an intensification of the overall economic situation, the government will certainly (have to) resort to these or even additional measures.
Further, aid programmes of the development banks (Landesförderbanken) can continue to be used. In addition, the existing guarantee instruments of the German states are still valid for companies which were not already in difficulty elsewhere.
Suspension of the Duty to File Insolvency
The German Federal Ministry of Justice (Bundesjustizministerium) announced that the existing obligation to file for insolvency in case of illiquidity or over indebtedness will be suspended until 30 September 2020- possibly extended until 31 March 2021, if their “insolvency” is due to the COVID 19 Pandemic and there are reasonable prospects of restructuring the affected company due to an application for state aid or serious financing or restructuring negotiations. The suspension is subject to the criteria that insolvency would be filed due to the COVID-19 Pandemic and that the application of public aid or serious financing or restructuring proceedings indicate reasonable prospects of rehabilitation of the company.
This is intended to prevent companies from having to file for insolvency before the applications for state aid are processed, or other promising restructuring negotiations are concluded within the otherwise three-weeks long period.
It is still unclear which concrete requirements are to be provided by the management as evidence that the current threat to the company was triggered by the COVID-19 Pandemic, and that the company is capable of being restructured and that the other above-mentioned requirements are also met. A cut-off date regulation is contemplated, according to which, if insolvency is triggered on or after March 13, 2020, it is assumed that it is due to the COVID-19 Pandemic. Such arrangement would be welcomed since it would avoid uncertainties which could otherwise be to the detriment of the personal liability of the persons involved. For the same reason, from consulting perspective, its also recommended that -in order to avoid liability risks for managing directors, board members, lenders and consultants - supplementary regulations shall be introduced, e.g. suspending the process of introducing an emergency management for affected companies when crisis occurs and loosening the requirements for restructuring loans.
The German Federal Government supports the EU-Commission’s plan to set up a so-called “Corona Response Initiative” which entails an aid package of EUR 25 Billion that shall be distributed to help companies affected by COVID-19 Pandemic throughout Europe in the event of illiquidity. The European Banking Authority (EBA) has also announced that a certain financial leeway can be used to ensure that the banks can provide the real economy with liquidity in a reliable manner. For this purpose, the European Central Bank also plans to take extensive measures to provide the banks with necessary liquidity.
Short-Term Recommendations for Companies
In the short term, we recommend the following actions so that affected companies can get through the upcoming phase of economic weakness and preserve room for manoeuvre:
Update existing (or prepare) short- and middle-term liquidity plans and adjust them continuously, preferably on a daily basis.
Review appropriate operational measures for liquidity management, e.g. by (i) introducing more restrictive internal approval mechanisms for planned investments, expenses or orders, (ii) negotiating longer payment terms with suppliers or deferral of due debts to suppliers, (iii) making intensively use of factoring lines,(iv) optimizing warehouses, and (v) negotiating with landlords on the deferral of rent payments or rent adjustments.
Check whether any contractual retention or even termination rights may be applicable in the case of contractual relationships that have not yet been fully implemented or are of a longer-term nature, e.g. due to loss of transaction basis / Force Majeure.
Consider the introduction of short-time work (ideally with retroactive effect from 1 March 2020).
Keep records of the implications of the COVID-19 crisison the liquidity and other developments of your business in order to verify as seamlessly as possible the correlation between (i) liquidity gaps on grounds of declining revenue, orders, bookings, or productions, and (ii) the Pandemic and the measures that have been taken to contain it.
Apply for fiscal liquidity supports at the relevant financial authorities (see above), adjustment or deferral of advanced tax payments and, if needed, a prompter payment of the expected tax refunds.
Talk to your financing banks about:
- a temporary (i) suspension of principal repayment (Tilgungsaussetzung) and interest, (ii) suspension of agreed financial ratios, and (iii) non-application of termination rights on grounds of material adverse changes (so-called MAC-Clause) or cross defaults in other financing agreements,
- the possibility of applying for financial support from the KfW, other state-owned development banks and guarantee banks, and
- the granting of bridge loans until a final decision on public aid is made.
- Check whether there are claims against your insurer, e.g. for all-risk policies, business interruption/shutdown insurance, contingency insurances.