Obligation to file for insolvency only suspended in cases of over-indebtedness, not illiquidity

Michael RainerManaging Partner, MTR Rechtsanwälte

There has been a limited extension until December 31, 2020 to the suspension of the obligation to file for insolvency due to the coronavirus pandemic. However, this only applies to cases of over-indebtedness, not illiquidity.

 

To mitigate the effects of the coronavirus pandemic and prevent a wave of insolvencies, Germany’s federal government decided in March to suspend the obligation to file for insolvency until September 30, 2020. The measure has since been extended until the end of 2020 but with an important caveat that needs to be borne in mind: the suspension of the obligation to file for insolvency is now only applicable to cases of over-indebtedness. If, however, the party in question is already insolvent (illiquidity), we at the commercial law firm MTR Rechtsanwälte would stress the importance of filing for insolvency as soon possible.

 

A company is deemed to be illiquid if it is no longer able to meet its payment obligations as they fall due in the form of wages, salaries, invoices, and loans. In the case of over-indebtedness, the debts exceed the total value of the company. Because there is still hope with overindebted companies of permanently averting insolvency, the obligation to file for insolvency remains suspended in these instances. Companies that already find themselves unable to pay their debts are required to file for insolvency. According to the German government, this serves to maintain the necessary level of trust in business and commerce.

 

Suspension of the obligation to file for insolvency for overindebted companies remains conditional on there being a causal relationship between the coronavirus pandemic and the financial difficulties. Suspension buys companies more time to consolidate their businesses.

 

Board members and managing directors are nonetheless well advised to precisely document the negative impact of the pandemic – in the form of outstanding payments, cancelled orders, supply shortages, etc. – in order to be able to demonstrate that COVID-19 is the reason behind the over-indebtedness.

 

In addition, it needs to be confirmed that there is in fact no evidence of illiquidity. The impact of the pandemic might have already resulted in a number of companies experiencing significant liquidity problems. If illiquidity is already a reality, then the insolvency paperwork must be filed without delay. If there is still legitimate hope of being able to successfully address the grounds of insolvency, filing for insolvency can be put off for up to three weeks. It is nevertheless important to always bear in mind that it is potentially a criminal offense to delay filing for insolvency.    

 

Lawyers with experience in the field of insolvency law can advise businesses.