This article was written by Dr. Tilmann Becker, Daniel Ehret, Rudolf Haas and Rüdiger Knopf.
With impressive speed, federal ministries, the German Parliament (Bundestag) and the Federal Council of Germany (Bundesrat) have drafted and on March 27, 2020 passed two laws that are intended to remove some of the uncertainties caused by the global COVID-19/corona pandemic. With the aim of enabling additional stabilization measures for affected companies in Germany, this legislation contains:
the law to mitigate the consequences of the COVID-19 pandemic in civil, insolvency and criminal proceedings, and
the law establishing an economic stabilisation fund.
The individual provisions of the laws entered into force by the end of March 2020, and with regard to the adjustments in insolvency law and related provisions, even retroactively as of 1 March 2020. In the following, we will briefly present the key points of the new regulations, insofar as they are relevant for companies. We will not go into changes to the Code of Criminal Procedure and relief for consumers and micro-enterprises (up to 9 employees and annual turnover of up to € 2 million), such as a temporary right to refuse performance (moratorium) in the case of continuing obligations and the temporary possibility of suspending payments under consumer loan agreements.
Temporary suspension of the obligation to file for insolvency
The obligation to file for insolvency in case a company becomes insolvent or overindebted is initially suspended until September 30, 2020. The suspension of the obligation to file for insolvency can be further extended by statutory order until March 31, 2021 if there is still a general need to use the public funds made available to stabilize the companies or if it otherwise appears promising to stabilize and reorganize the companies affected by the COVID 19 pandemic outside insolvency proceedings.
The temporary suspension of the obligation to file an application does not apply (and then the maximum three-week period already applicable remains) in case
the insolvency and/or over-indebtedness is not due to the consequences of the COVID 19 pandemic, or
there is no prospect of eliminating an existing insolvency.
For those companies that were solvent on December 31, 2019, it is legally assumed that an insolvency occurring now is based on the effects of the COVID19 pandemic and that there is a prospect of eliminating this insolvency.
Insolvency applications by creditors should only lead to the opening of an insolvency petition if the company was insolvent or overindebted on 1 March 2020. This is to ensure that companies are given sufficient time to find, negotiate and implement financing or restructuring solutions and that this cannot be torpedoed by creditors.
Limitation of liability for managers
If and as long as the conditions for suspension of the obligation to file for insolvency are met, then
there is no room for personal liability of responsible managing directors or board members due to omitted or delayed filing for insolvency, and
all payments which are made in the ordinary course of business, in particular those payments which serve to maintain or resume business operations or to implement a reorganisation concept, are permitted and do not trigger any liability of the managing directors or members of the Management Board for breach of the otherwise existing statutory payment prohibitions in the crisis of the company.
Facilitation of shareholder and other financing
In order to create incentives for both shareholders of a company and existing third-party financiers (e.g. banks) to quickly provide companies with the liquidity often needed in the current situation, there are further simplifications of the rules that otherwise have been in force up to now. For example, shareholder financing granted to a company affected by the COVID 19 pandemic during the suspension of the obligation to file for insolvency is not subordinated in the insolvency of the company if an application for the opening of insolvency proceedings is filed for the assets of the company by September 30, 2023 - despite all stabilisation efforts. The avoidance of repayments on these newly granted shareholder loans or equivalent claims is also excluded. However, the granting of any security interests granted for the new shareholder financing remains subject to clawback risks. Insofar as subordination for shareholder loans is currently contractually agreed and this also applies to future shareholder loans, these agreements take precedence. If necessary, such agreements would have to be adjusted with regard to new shareholder financing so that these do not become subordinated.
Financing of companies in crisis by banks or other financiers is usually associated with considerable liability risks. Lenders could later, if the financed company becomes insolvent, be confronted with the accusation that the financing was not sufficient for a sustainable restructuring and that the bank had therefore contributed immorally to the delay of insolvency in order to secure its own position, thereby harming other creditors. In addition to the obligation to pay damages, the financiers are then threatened with an additional challenge to the collateral provided as well as to interest and redemption payments already received. In order to avert these risks, companies in crisis are often only financed if a suitable and tested restructuring concept with a positive going concern forecast confirmed by an expert opinion is available.
All this takes time. In view of the current uncertainties and rapid developments, it is uncertain whether a resilient restructuring concept can be drawn up at all in the short term and then confirmed externally. On this backdrop, aiming to nevertheless ensure the liquidity of affected companies, the legal regulations to mitigate the COVID 19 pandemic order that
loans and securities granted during the period of the suspended obligation to file for insolvency are not to be regarded as an immoral contribution to the delay in filing for insolvency and
collateral provided for these financing arrangements as well as interest and principal payments on such loans from the company's assets up to September 30, 2023 are deemed to be not contestable in a subsequent corporate insolvency.
The relief described above applies not only to loans from banks, funds and other third-party financiers, but also to trade credit and similar forms of performance on credit terms. It is important to note that all privileges to such shareholder and/or third-party financings only apply to new loans. In the case of a mere novation or prolongation and other circumstances, which are commercially similar or amount to a mere back-and-forth payment, for example, these privileges do not apply. The primary objective is to motivate banks and other lenders to provide additional liquidity to companies in crisis.
Temporary protection against dismissal for tenants
If a tenant does not pay - or if such tenant pays only partially - the agreed rent or lease for privately or commercially used land or premises from April 1 to June 30, 2020, the tenancy or lease cannot be terminated if the non-payment is due to the effects of the COVID 19 pandemic. This is to prevent the expected negative economic effects from causing tenants to lose their residential premises and tradesmen to lose their rented premises and space, and thus the basis of their gainful employment.
It should be noted that if the non-performance of the tenant or lessee is based on other reasons or if his inability to pay is due to causes other than the COVID 19 pandemic, a termination of the tenancy/leasing relationship will still be possible under the general rules. It is the tenant's or lessee's responsibility to prove to the landlord the connection between non-payment of the rent or lease and the COVID-19 pandemic. All appropriate means can be used to provide credibility (e.g. an affidavit in lieu of oath, a certificate from the employer or other proof of income/loss of earnings). For example, tenants of commercial properties can regularly substantiate the connection between the COVID 19 pandemic and non-performance by pointing out that the operation of their company has been prohibited or significantly restricted by legal ordinance or official order in the context of combating the SARS CoV-2 virus.
The protection against termination as described above is valid until June 30, 2022. If the arrears of rent from the period from April 1 to June 30, 2020 have not been paid by then, the rental/leasing relationship can be terminated again in accordance with the general rules as of July 1, 2022.
Changes in company law
In view of the fact that a number of general meetings have been postponed due to the Corona restrictions, company law has made it easier to hold general meetings, especially for stock corporations (or KGaA and SE). In particular, with the approval of the supervisory board, the management board can decide, even without a corresponding express authorization in the articles of association, that shareholders either have the option of attending a general meeting in person online only (amendment of § 118 of the German Stock Corporation Act, AktG) or that the entire general meeting is held virtually only, provided that certain requirements are met. Further simplifications are that the period for convening general meetings and related periods (e.g. record dates) have been shortened and that general meetings can take place within the entire fiscal year, in deviation from § 175 (1) sentence 2 AktG.
Certain relief was also provided for other forms of companies. For example, in limited liability companies (GmbH), shareholder resolutions can be passed in text form or by written vote. Similar simplifications have also been regulated for cooperatives, associations and foundations.
The new laws also contain other relief: For companies which plan measures according to the German Transformation Act (the so-called Umwandlungsgesetz) it is also important that the registration of a transformation measure remains possible, in deviation from § 17 para. 2 Transformation Act, even if the measure is based on a balance sheet which is based on a reference date which is at most twelve months (previously: eight months) prior to the registration of the transformation measure. Like other changes, this provision brings more flexibility and also opens up new possibilities for structuring. However, it should be noted that this facilitation only applies to conversion measures. For example, the implementation of mergers is facilitated by the extension of the time limits described above; on the other hand, the extension of the time limit does not apply, for example, to measures under stock corporation law: Thus, the eight-month period remains applicable in the case of capital reductions of stock corporations (Section 209 para. 1 of the German Stock Corporation Act has remained unchanged).
Economic Stabilisation Fund
The new German Economic Stabilisation Fund (the so-called Wirtschaftsstabilisierungsfonds "WSF") offers the possibility to quickly support companies in the “real economy" if this becomes necessary due to the current crisis. A total volume of €500 billion is available for such measures. Of this amount, €400 billion is designated to provide guarantees for borrowing, particularly via the bond market. Another €100 billion is available for equity or quasi-equity contributions directly through the WSF.
In principle, all capital market instruments are available to the WSF and strengthening can also be carried out at any point on the balance sheet: "genuine" equity, preferred shares, profit participation capital, silent partnerships or subordinated bonds are all conceivable. "Normal" pari passu liabilities will most likely not be assumed via the stabilisation fund - there is no advantage here compared with financing under other available KfW programmes.
Who can apply for stabilisation?
- The new law is expressly not aimed at small and medium-sized enterprises. The enterprise must have met two of the following three criteria in the last two completed financial years:
- balance sheet total of more than €43 million
- revenues of more than €50 million
- more than 249 employees on an annual average.
It can be assumed that issuances via special purpose vehicles or financing companies are possible, provided that this achieves the stabilisation of a group that meets the size criteria. This must be clarified with the competent authority in each individual case.
- Companies in the financial sector and credit institutions are excluded. The aim is to support the real economy. The stabilisation of production chains and the safeguarding of jobs are at the core of the statutory mandate.
What are the requirements for an application?
The company must not have been "in difficulty" as of December 31, 2019, which would be the case if (i) insolvency or comparable proceedings had been opened or the conditions for opening such proceedings were met, (ii) more than half of the equity capital had been eaten up by accumulated losses, (iii) rescue aid had been granted and not yet been fully repaid, or (iv) the book value-based gearing ratio was more than 7.5 and the ratio of EBITDA to interest expenses was less than 1.0;
There must be a clear, independent going concern forecast for the company after Corona; and
There must be no alternative means of support. In particular, this should mean that a stabilization measure is t necessary if "normal" borrowing is possible - possibly also within the framework of the support measures that were also introduced in connection with the crisis.
Are costs associated with the stabilisation measure?
Yes. The stabilisation measure should be carried out at market appropriate conditions. This does not necessarily involve a massive short-term outflow of liquidity (which would be counterproductive in many cases), but the stabilisation fund should be able to pay for itself in the long term through the returns on its investments.
Do other restrictions result from the stabilisation measure?
Yes. Further provisions are provided for to ensure that the company also acts in the interest of the stabilisation fund following the stabilisation measure. In particular, the assumption of other liabilities may be limited and must expect restrictions with regard to capital outflows (dividend payments, remuneration of executive bodies, etc.). Reporting obligations will certainly also be provided for either in a regulation or in the individual agreement.
What instruments are available?
The law allows state participation through any conceivable form of equity or hybrid capital (volume €100 billion), as well as support for borrowing from third parties through state guarantees (volume €400 billion).
Depending on the legal form of the applicant, the new German Economic Stabilisation Fund can subscribe for ordinary or preferred shares, convertible bonds, profit participation rights, silent partnerships or subordinated bonds. In this context, the existing capital structure of the company must be taken into account.
What are the main facilitations provided by the new law?
A rapid implementation of the stabilisation measures is ensured by simplifications under company law. In certain cases, for example, no annual general meeting resolutions will be required or majority requirements are reduced. The possibilities for legal challenge are also significantly restricted. Registration requirements in the commercial register are partially suspended and, where still necessary, the registration procedures are accelerated.
There have also been simplifications in capital market regulations, such as the obligation to list newly issued securites of a listed class on the stock exchange or extend mandatory offers under the German Securities Acquisition and Takeover Act.
How long are the stabilisation measures available?
Measures can initially be approved until December 31, 2021. A maximum term of 60 months is envisaged for the guarantee of bonds. There is no statutory restriction on the term of equity instruments; by its very nature, equity is long-term. However, it is also clear that the stabilisation fund does not want to remain invested in a large number of companies on a permanent basis.