Covid-19 and the wave of insolvencies – new rules apply from October

Since October 1, 2020, insolvent companies have once again had to file for insolvency immediately, while the suspension of the obligation to file for over-indebtedness will continue until the end of 2020. This regulation is intended to regulate ‘zombie companies’ that have only survived due to the coronavirus moratorium. It is important for entrepreneurs to observe the obligation to file for insolvency in order to avoid penalties, whereby insolvency can also serve as an opportunity to restructure and reposition the company.

Entrepreneurs who relied on the temporary suspension of the obligation to file for insolvency in March will have to deal with new framework conditions from October 1. All companies that meet the first insolvency criterion of inability to pay, i.e. can no longer pay wages, materials, rent, taxes or other payment obligations on time, are (again) obliged to file for insolvency immediately from October 1. The suspension based solely on the second insolvency criterion of over-indebtedness still exists, but it is estimated that in over 90% of insolvency filings, insolvency is clearly triggered by inability to pay rather than over-indebtedness. The media are therefore currently reporting that a wave of insolvencies is expected from the fourth quarter of this year.

What exactly does this mean for the individual entrepreneur?

As one of the first measures in favor of companies at the beginning of the coronavirus crisis, the German government decided to temporarily suspend the obligation to file for insolvency. The prerequisite was that companies were in an economically healthy situation before the time of the corona crisis, to be precise before January 1, 2020, which cannot be described as insolvency maturity. This relates to the two insolvency criteria: Over-indebtedness and (imminent or existing) insolvency.

As of October 1, 2020, the obligation to file for insolvency was amended to the effect that the suspension will only continue with regard to over-indebtedness, namely currently until the end of 2020. An extension of this moratorium is conceivable, but has not yet been confirmed. The general rule is that insolvency must be filed within three weeks. However, it should be noted that the three-week rule represents a maximum period (within which you must take steps to avoid insolvency), but that the period begins on the day on which the company becomes insolvent. And in the vast majority of cases, this day was probably weeks or months ago.

The changes to insolvency law described above were enacted by the German government in the spring in order to prevent a corona-related wave of insolvencies at that time. A permanent suspension was of course not to be expected. You may have read the pejorative term ‘zombie company’ in the media. This refers to companies that would actually (have been) ready for insolvency, but were allowed to continue to exist due to the moratorium; to the detriment of other companies (creditors) and ultimately also the general public. The expiry of the insolvency regulation was therefore foreseeable and absolutely necessary. The timing is of course unfavorable due to the ongoing crisis – but what better time?

As very few insolvencies have been filed in recent months compared to the previous year and at the same time many companies have been and will be permanently damaged by the coronavirus crisis, a wave of insolvencies can be expected.

The entrepreneur must take the obligation to file for insolvency seriously, as otherwise there is a risk of severe penalties (usually for the managing directors personally). What understandably appears to the individual as the destruction of existence and life’s work can also be seen as a liberating blow through a change of perspective. Insolvency – primarily designed to protect creditors, of course – can also be a way to reduce the company’s debt and completely restructure it, for example in the form of self-administration. A global crisis like Covid-19 is hitting many companies with full force. However, it always offers a unique opportunity to those company managers who use the crisis to restructure cleverly and strategically and subsequently emerge from the crisis stronger than their competitors.

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