Covid-induced changes to German insolvency law creating legal minefield

Suspensions applied to German insolvency law in response to the Covid-19 pandemic ended on 30 April 2021. However, Dr Kai Engelsberg, member of the executive board at Aon Credit Solutions, suspects their effects may be felt for some time yet.

At a recent conference on credit risks organised by the German association of risk and insurance managers GVNW, Dr Engelsberg argued that the legislative measure known as COVInsAG presented “a massive paradigm shift and distortion of German insolvency law”.

That is because COVInsAG, which ran until 30 April 2021, enabled companies not to file for insolvency when they were unable to pay their bills or were overindebted. The idea was to give business some breathing space to adjust to the pandemic conditions.

As understandable as that is, Dr Engelsberg said that creditor protection, the basis of German insolvency law, was at risk of being overlooked. “It [COVinsAG] is the polar opposite of what the legislation actually aims to achieve,” he said.

In addition, the whole insolvency regime became “extremely confusing”, said Dr Engelsberg.

From October to December 2020, COVInsAG did not apply to companies that were illiquid, but only to those that were overindebted.

From 1 January to 30 April 2021, as the legislator realised the pandemic was far from over, the measure reverted to its original form, i.e. exemption for illiquid and excessively indebted businesses.

The plot thickens further still. For example, Dr Engelsberg pointed out that the exemption is contingent on a company being able to prove that its financial issues are due to the pandemic.

That raises the question of how to define an acceptable level of proof. Will the insolvency administrator have the same understanding of “acceptable” as the company bosses?

The company must also have applied for government aid between November 2020 and February 2021, otherwise it is ineligible for the exemption.

The upshot is “an extremely confusing situation”, said Dr Engelsberg, adding that insolvency is a rather complicated legal field at the best of times.

Dr Engelsberg finished on a cautionary note. He warned that some directors may not have been aware that they actually should have filed for insolvency in 2020 and 2021, i.e. they continued trading when they shouldn’t have done.

“The insolvency ratio is low but it is also due to massive interventions, which may come back to haunt us,” he concluded.