Prolongation of the suspension of the insolvency application obligation in case of over-indebtedness

The German insolvency law stipulates that the management of companies that are illiquid and/or over-indebted is obliged to file for insolvency. This obligation to file for insolvency was temporarily suspended until September 30, 2020, in order to avoid a dramatic wave of insolvencies due to the effects of the Covid-19 pandemic. The obligation to file for insolvency has now been further suspended until 31.12.2020 only in the event of over-indebtedness. If a company is illiquid, however, the management is obliged to file for insolvency again by October 1, 2020 at the latest.

The legislator justifies this differentiation by stating that the prospects of restructuring and reorganization are much lower for an illiquid company than for a company that is merely over-indebted. In addition, the continuation forecast is of central importance for the over-indebtedness assessment and can hardly be reliably provided in the uncertain times due to Covid-19.

This distinction has considerable implications for the economy. For in most cases, the application for the opening of insolvency proceedings has to be filed due to illiquidity.

1. Suspension of insolvency application obligation for over-indebted companies

Even after 30.09.2020, the obligation to file for insolvency remains suspended until 31.12.2020 for companies that are "only" over-indebted. This is still subject to the precondition that the over-indebtedness is based on the effects of the Covid-19 pandemic and that there are prospects that an over-indebtedness that has occurred can be overcome. Only if and as long as these preconditions are met, the obligation to file for insolvency will not apply.

2. Obligation to file for insolvency for illiquid companies

However, if a company is (also) illiquid, the privilege is no longer applicable. As before, the management must now immediately file for insolvency proceedings when illiquidity occurs. In case of doubt, an application for insolvency should also be filed before October 1, 2020 if the company is already illiquid and it is foreseeable that the illiquidity cannot be eliminated by September 30, 2020. As in this case the preconditions for the suspension of the obligation to file for insolvency are not (or no longer) met; even under the regulations that apply until 30.09.2020. Thus, the insolvency application must be filed immediately pursuant to Section 15a of the German Insolvency Code (InsO).

3. Further legal consequences

If in the case of over-indebted companies the obligation to file for insolvency remains suspended, the associated privileges also continue to apply; in particular (i) the limitation of the liability of the management, (ii) the restriction of the provisions for challenge payments within business relationships and (iii) the privileging of new loans. Should the company be illiquidity, however, the management will again bear the full liability risk in the event of a late filing for insolvency, and the provisions for challenge payments are also fully applicable.

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