I. Insolvency Law

The current pandemic and the restrictions on public life ordered by the government are partly having drastic effects on the liquidity of companies. Quite a few of them have reached the stage of insolvency. In order to enable companies that are factually insolvent due to the Covid-19-pandemic to continue business and to give them nevertheless the opportunity to clear the situation (i.e. to remove the grounds for insolvency), legislature has now decided to temporarily suspend the legal obligation to file for insolvency. In addition, further flanking measures have been introduced to mitigate companies’ economic difficulties caused by the pandemic. Most of these flanking measures also apply when companies are not (yet) insolvent, i.e. illiquid or overindebted.
All legal measures came into effect retroactively to 1 March 2020 and are, unless otherwise indicated below, limited in time until 30 September 2020; however, the Federal Ministry of Justice has been authorized to extend their validity until 31 March 2021.
In detail:

1. Suspension of the Obligation to File for Insolvency

1.1 Status Quo

The management of companies with limited liability (especially the Limited Liability Company [GmbH] including the Entrepreneurial Company [UG], the limited Partnership with a Limited Liability Company as General Partner [GmbH & Co. KG] as well as the Stock Corporation [AG] and the Societas Europaea [SE]) is obliged to file for insolvency very soon after the occurrence of grounds for insolvency. The request shall be filed without culpable delay, at the latest, however, three weeks after the commencement of illiquidity or overindebtedness. Similar rules apply to the management boards of Associations (Vereinen) and Foundations (Stiftungen). The obligation to request insolvency proceedings is subject to personal liability and, partly, to criminal penalties.

1.2 New Provisions

The obligation to file for insolvency is (temporarily) suspended until 30 September 2020. This suspension is not applicable in two situations: Firstly, if the insolvency (illiquidity or over-indebtedness) does not result from the effects of the Covid-19-pandemic or, secondly, if – in the event of illiquidity – there is no prospect of it being remedied. With regard to these two exceptions, the new legislation contains a presumption rule which is very much favorable to the manager that is responsible to file for insolvency: If the company was not illiquid on 31 December 2019, it is assumed that the insolvency is caused by the effects of the Covid-19-pandemic and that there is prospect of the illiquidity being remedied in the future. This presumption is solely based on the criterion of illiquidity, which is relatively easy to prove, so that there is no need to proof lack of overindebtedness on 31 December 2019 too.
Therefore, companies threatened with insolvency should now initiate the following steps:
1. It should be assessed and documented that there was no illiquidity within the meaning of Sec. 17 of the German Insolvency Statute (InsO) as of 31 December 2019.
2. It should be examined if there is evidence that (a) there would also be a threat of insolvency even without the Covid-19-pandemic and that (b) an impending insolvency cannot be prognostically eliminated, not even with state aids.
3. If no such evidence exists and if there was no illiquidity as of 31 December 2019, the period until 30 September 2020 should be used by the management to assess and implement – also by taking advantage of state aids – financing or restructuring concepts. As a result of the temporary suspension of the obligation to file for insolvency, managers can now take action without the risks of personal sanctions being imposed on them due to a breach of the obligation to file for insolvency.

2. Suspension of Creditors’ Right to Request the Opening of Insolvency Proceedings

To facilitate negotiations with creditors and to foster efforts in restructuring companies affected by the current crisis, the right of creditors to request the opening of insolvency proceedings has to a large extent been suspended for a period of three months. Requests for insolvency proceedings by creditors are now only possible if the company has already been insolvent on 1 March 2020. This applies regardless of whether a company is entitled to claim suspension of the obligation to file for insolvency (see above I.1) or not.

3. Relaxation of Corporate Law-Prohibitions to Make Payments in the Event of Insolvency

3.1 Status Quo

If companies are in crisis, managers are threatened with personal liability not only because of a breach of the obligation to file for insolvency (see above I.1). Further, they are also liable for payments made by the company after the occurrence of illiquidity or overindebtedness. Only if managers are able to prove that such payments were in line “with the diligence of a prudent businessman” despite the company being insolvent, this liability does not apply. This diligence is subject to a very strict test which in practice leads to considerable legal uncertainty.

3.2 New Provisions

To mitigate this legal uncertainty and the difficult situation when it comes to prove compliance with the aforesaid high standard of a prudent businessmen’s diligence, provisions have been adopted according to which payments in the period form 1 March to 30 September 2020 are to be considered “in line with the diligence of a prudent businessman” if these payments are made in the ordinary course of business, in particular if they are made to maintain or resume business operations or to implement a restructuring plan. In this regard, it is particularly helpful for managers that payments for the maintenance or resumption of business operations and for restructuring are expressly mentioned as payments not triggering personal liability of managers. Important: This relaxation of the corporate law prohibition on payments in the event of insolvency only applies to companies that are entitled to claim suspension of their obligation to file for insolvency (see above I.1).

4. Limitation of Contestation Rights and Suspension of the Subordination of Shareholder Loans

4.1 Status Quo

Typically, lenders are willing to grant loans only if there is no risk that the repayment of such loans or the concession of collaterals thereto can be contested by the insolvency administrator after the opening of insolvency proceedings and are thus to be repaid and returned by the lenders. The possibility of the contestation of such transactions must always be taken into consideration if prior to the opening of insolvency proceedings transactions are made that are detrimental to creditors, i.e. that lead to a reduction of the insolvency estate. Transactions are even more likely to be detrimental when it comes to loan repayments and the concession of collaterals close to the opening of the insolvency proceedings. The period of three months prior to the filing of the request to open proceedings is particularly relevant in this regard. Even stricter rules apply to shareholder loans granted to companies with limited liability: their repayment is contestable if it was made within one year prior to the filing for insolvency. For the grant of collaterals for such shareholder loans even a ten-year period applies.
When it comes to insolvency law, shareholder loans granted to companies with limited liability are particularly risky because the claims for repayment of such loans are generally subordinate to claims of other creditors, i.e. such claims may only be repaid after all other creditors have been satisfied; an exception only applies to loans from shareholders who have acquired shares for the purpose of restructuring in the course of insolvency proceedings (so-called restructuring loans). The same applies to financing instruments of shareholders that are economically equivalent to loans (for example deferral agreements and certain sale and lease back-constructions). Insofar as reference is made in the following to shareholder loans, the same applies to such financial instruments that are economically equivalent to such loans.

4.2 New Provisions

In order to avoid that risks of contestation and the subordination of claims for repayment of shareholder loans hamper cash inflow to companies that are in crisis due to the pandemic, the following legal acts are considered not to be detrimental to creditors and do thus not allow for contestation:

• By 30 September 2023: Repayment of loans granted during the period of suspension of the obligation to file for insolvency (i.e. by 30 September 2020); this also applies to shareholder loans.
• By 30 September 2020: The concession of collaterals for such loans; this does, however, not (!) apply with regard to the collateralization of shareholder loans.
• By 30 September 2020: The fulfilment of other contractual obligations despite the knowledge of debtor’s insolvency (except the creditor knows positively that the restructuring and financing efforts of its contractual partner are inappropriate or do not exist); in cases specified in detail in the statue, this applies even if the fulfilment is not congruent, i.e. not as contractually agreed.

In addition, the subordination of shareholder loans and of equivalent financial instruments is now also abolished for loans that are not “classic” restructuring loans (i.e. loans that are not linked with the acquisition of shares by the lender). If such restructuring arrangements are agreed during the suspension of the obligation to file for insolvency, they are not subject to statutory subordination in insolvency proceedings that are filed for by 30 September 2023. For insolvency proceedings filed after 1 October 1 2023, shareholder loans granted during the current suspension period are again to be treated as subordinated to other claims.
The measures presented under this section I.4 apply to companies that are insolvent but that are entitled to claim suspension of the obligation to file for the opening of insolvency proceedings. In addition, however, companies that are not (yet) illiquid or overindebted can also recur on them. Thereby, companies shall be encouraged to early initiate restructuring efforts and legal uncertainty as to the scope of the new provisions shall be avoided. Only if the insolvency is not a consequence of the Codiv-19-pandemic or if there is no prospect of the illiquidity being remedied, the options for restructuring described above do not apply.

II. Corporate Law

The restrictions on public life also affect the ability of companies to deal with corporate law-related issues. Officially ordered contact bans prevent general meetings of stock corporations and shareholders’ meetings of other companies to happen. This causes a broad variety of problems covering the risk of the company to lack a management due to the missing appointment of new board members, the failure to approve the annual financial statements and the preclusion of structural and capital measures. Structural and capital measures in particular can be of existential importance in the course of the current economic crisis. The amendments described below initially apply – irrespective of a company being affected by the pandemic or not – for the year 2020; however, their validity may be extended by the Federal Ministry of Justice until 31 December 2021.

1. Limited Liability Company (GmbH) and Partnerships (GbR, OHG, KG, GmbH & Co. KG)

1.1 Status Quo

In Limited Liability Companies (GmbH) decisions and shareholders’ resolutions are generally carried out in the shareholders’ meeting itself. The same essentially applies to Partnerships for which the GmbH-related provisions on the modalities of shareholders’ meetings and decision making apply analogously. Whether a shareholders’ meeting is also possible without the physical presence of shareholders (i.e. as a video or telephone conference) depends in particular on the wording of the articles of association. In particular when it comes to older articles of association, provisions allowing for such virtual shareholders meetings are often missing.
Resolutions outside shareholders’ meetings are currently possible if (i) all shareholders have voted in text form in favor of a resolution proposal (unanimity with regard to the decision on the merits) or (ii) all shareholders have at least declared their consent to vote in writing (unanimity with regard to the voting mode); in alternative (ii), therefore, no unanimous decision on the merits is needed (§ 48 para. 2 of the German Limited Liability Companies Act [GmbHG]). This exception, however, does not apply with regard to particularly important decision, e.g. decisions in the field of transformation law.

1.2 New Provisions

In the year 2020, shareholder resolutions in text form or by written vote can now – deviating from section 48 para. 2 GmbH – also be passed without the consent of all shareholders. This means that even resolutions in text form (e.g. by e-mail, SMS or WhatsApp) no longer require unanimous consensus on the voting mode.
This new provision refers in its wording only to the law of the GmbH. However, there is no apparent reason why this temporary simplification of the adoption of resolutions should – in accordance with recognized legal practice – not also apply analogously to Partnerships, in particular the GmbH & Co. KG.
In contrast to the law on Stock Corporations (see below II.2), no provisions have been adopted for the GmbH and Partnerships to facilitate the (e.g. unattended) holding of shareholders’ meetings.
Against this background, there is all the more reason to focus on provisions that allow for virtual shareholders’ meetings when drafting future articles of association or adapting existing ones.

2. Stock Corporation

2.1 Status Quo

Stock corporation law does not yet provide for the holding of a general meeting without the physical presence of the supervisory board or the stockholders. In accordance with the legislative concept of the German Stock Corporation Act, the general meeting is designed as a plenary meeting in which shareholders who are not personally present can have their voting rights exercised by means of a power of attorney. In the light of the as yet unforeseeable end of official bans on meetings- and contact, this legal situation becomes even more problematic due to the statutory requirement of the annual ordinary general meeting to be held within the first eight months of a company’s financial year.

2.2 New Provisions

The following legislative measures shall ensure the short-term ability of stock corporations to act:
a) It shall be sufficient if the ordinary (annual) general meeting is held within the financial year. Therefore, it can also take place in the last four months of the company’s financial year.
b) The option of a virtual general meeting, i.e. a meeting without any physical presence, is created. This requires a complete video transmission of the general meeting, the possibility to vote and ask questions electronically and the possibility to object to resolutions.
c) In the event of non-virtual general meetings, the management board can allow for the digital participation (also with respect to the supervisory board) and for electronic voting even if the articles of association do not authorize to do so.
d) The deadlines for convening the general meeting (now: 21st day prior to the AGM), for the submission of requests for additional items of business to be added to the agenda (now: 14th day prior to the AGM), for the information of the custodians (now: 12th day prior to the AGM), the record date for providing evidence of stock ownership (now: 12th day prior to the AGM) and the deadline for receiving this evidence (now: 4th day prior to the AGM) have been shortened.
e) The Management Board may also decide to pay an interim payment out of the prospective net income without authorization by the articles of association. The same applies to compensation payments to be made to external stockholders within the framework of an inter-company agreement.
Any of these decisions of the management board must be approved by the supervisory board. Such approval can be given in writing, by telephone or similarly without physical presence, even if the articles of association or the rules of procedure provide otherwise.
With regard to possible violations of the statutory conditions for holding virtual general meetings or for the digital participation in non-virtual general meetings, the right to bring an action for avoidance is also largely excluded (exception: intentional violations by the company).
The temporary legislative measures above apply to a large extent also to the Partnership Limited by Shares (KGaA) and to the Societas Europaea (SE).

3. Further Legislative Measures

The legislative innovations described are accompanied by a (temporary) change to the permissible closing date of the final balance sheet with regard to measures under transformation law. Whereas this date was previously allowed to be a maximum of eight months prior to the filing of the measure with the commercial register, it shall – for filings in 2020 –, now be sufficient if the balance sheet date is a day which is maximum twelve months prior to the filing with the register.