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Last remains of the German suspension of the obligation to file for insolvency to finally end in April 2021

Mayer Brown
10/03/2021

With each extension, the scope of the suspension of the obligation to file for insolvency which was first introduced in March 2020 became more and more limited. Now, it might finally cease to exist, so that managing directors of a German limited liability company (Gesellschaft mit beschränkter Haftung) will be once again obliged to file for the opening of insolvency proceedings if the company is illiquid (zahlungsunfähig), or over-indebted (überschuldet), regardless of whether or not such illiquidity or over-indebtedness is based on the consequences of the COVID-19 pandemic and whether or not there is a prospect of eliminating the existing reason for insolvency through recourse to state aid.

In March 2020, the German Parliament passed the law on the temporary suspension of the obligation to file an insolvency petition and to limit the liability of executive bodies in the event of insolvency caused by the COVID-19 pandemic (Gesetz zur vorübergehenden Aussetzung der Insolvenzantragspflicht und zur Begrenzung der Organhaftung bei einer durch die COVID-19-Pandemie bedingten Insolvenz), as part of the law to mitigate the consequences of the COVID-19 pandemic in civil, insolvency and criminal procedure law (Gesetzes zur Abmilderung der Folgen der COVID-19-Pandemie im Zivil-, Insolvenz- und Strafverfahrensrecht) to help companies that had become insolvent or were experiencing financial difficulties as a result of the COVID-19 pandemic.

In a nutshell, by suspending the obligation to file for insolvency until 30 September 2020, companies were given additional time to eliminate the reason for insolvency, for example by taking advantage of state aids or by making financing or restructuring arrangements in order to continue their business. Consequently, neither companies whose reason for insolvency was based on other reasons than the COVID-19 pandemic, nor companies with insufficient prospect of eliminating the reason for insolvency were able to invoke the suspension. In this context, it was however assumed that a company had become insolvent as a consequence of the COVID-19 pandemic if it had not been insolvent on 31 December 2019, and, thus, was able to invoke the suspension.

Even though the law already provided for an option to extend this suspension until 31 March 2021, at the latest, in September 2020, the legislator decided to only partially extend it further until 31 December 2020. Therefore, as of 1 October 2020 only such companies which were over-indebted without being illiquid could continue to benefit from the suspension. Managing directors of illiquid companies on the other hand became once again obliged to file for insolvency and were no longer able to invoke the COVID-19 legislation.

With the end of the year 2020 and, thus, the end of this first extension approaching, the suspension was expected to finally come to an end. This even more so, as the German Parliament was at the time working on the Act on the Further Development of Restructuring and Insolvency Law (Gesetz zur Fortentwicklung des Sanierungs- und Insolvenzrechts), which was to introduce a comprehensive legal framework for preventive, out-of-court restructurings in Germany. However, with the enactment of the Act on the Further Development of Restructuring and Insolvency Law which, as of 1 January 2021, provided for a new possibility of restructuring without the consent of all stakeholders outside of formal insolvency proceedings, the German legislator once again partially extended the suspension to file for insolvency until 31 January 2021. The extension was due to the fact that financial aids under state aid programs from November and December 2020 had to a large extent not yet been paid to the applicants and it was expected that a large number of companies would have to file for insolvency solely as a consequence of these payments being delayed. Therefore, as of 1 January 2021, such companies which in the period during 1 November 2020 and 31 December 2020 had applied for financial aid under state aid programs to mitigate the consequences of the COVID-19 pandemic or for whom it had not been possible to submit an application within that period for legal or factual reasons, were able to continuously benefit from the suspension and therefore refrain from filing for insolvency.

As the delay in paying out these financial aids continued throughout January 2021, the suspension to file for insolvency was once again extended until 30 April 2021. Currently, companies which had applied for financial aid (or due to legal or factual reasons were unable to do so) until 28 February 2021 are exempted from the obligation to file for insolvency, if, through the recourse to state aid, there is a prospect of eliminating the existing reason for insolvency.

With the end of April fast approaching, this last part of the suspension to file for insolvency should now finally come to an end, so that as of 1 May 2021, all managing directors will once again be obliged to file for insolvency without undue delay following the occurrence of illiquidity or over-indebtedness of the company. The non-compliance with this obligation constitutes a crime and can be punished with a fine or imprisonment of up to three years. Furthermore, managing directors violating their obligation to file for insolvency may be liable for damages vis-à-vis the company as well as its creditors.