From an economic perspective, Germany has weathered the pandemic quite well until now—at least if success is measured in low unemployment and insolvency figures. How that was achieved, what changes were made to the German legal restructuring framework, and what may follow after the national elections are summarized in this article.
Following the outbreak of the pandemic, the German legislature reacted swiftly and effectively with a whole package of measures to buffer the impact of the pandemic and the subsequent lockdowns on businesses and citizens alike. The most significant were the following.
Suspension of the obligation to file for insolvency. One of the first measures taken was to suspend the obligation to file for insolvency. For companies affected by the COVID-19 pandemic, the obligation to file for insolvency was—to an increasingly lesser extent—suspended until the end of April 2021.
The suspension was conditional on a debtor applying for financial assistance under state COVID-19 assistance programs between November 1, 2020 and February 28, 2021. It is commonly thought that many businesses in financial difficulty took advantage of these COVID mitigations even when not eligible to benefit from them.
Concessions for tenants at the expense of landlords. The legislature suspended tenants’ obligation to pay rent from April 1 to June 30, 2020, if the failure to pay was caused by the COVID-19 pandemic. Tenants must pay off any arrears by 30 June 2022.
In some cases, tenants’ ability to use premises has been restricted by the need to control the risk of COVID infections. The legislature has introduced an assumption that the need to address COVID risk amounts to a substantial change to the relationship between a tenant and its landlord. To recognize this, the German parliament has obliged tenants and landlords in such situations to reach a negotiated settlement with each other.1
Reduction of tax burdens. Tax burdens have also been reduced in the following ways:
Tax enforcement measures can also be deferred until at the latest 30 December 2021.
State financial aid. In addition to the mitigation of tax obligations, federal and state legislators have come up with a series of state aid measures to help ease the burden of the pandemic.
The Economic Stabilization Fund (Wirtschaftsstabilisierungsfonds) is designed to support companies that were healthy and competitive before the pandemic and whose survival as going concerns has significant relevance for Germany as a business location or on the labor market. This is a 600-million-euro fund that is intended to improve liquidity and provide guarantees and other funding. Guarantees and recapitalizations can take place until December 31, 2021.4 Prominent applicants were Lufthansa,5 which received 5.8 billion euro, and TUI,6 which received 1.25 billion euro.7
While the Economic Stabilization Fund is aimed at big players, COVID Emergency Aid (Soforthilfe) is aimed to aid all business, in particular small and medium-sized companies. Emergency aid was followed by Bridging Aid I to III (Überbrückungshilfen I bis III). Bridging Aid I and II were fixed-cost subsidies for Corona-related declines in turnover. In addition to that, Bridging Aid III increases the maximum funding contribution and extends the group of eligible applicants as well as the catalog of reimbursable costs.8
KfW, a German state-owned investment and development bank, supports enterprises of all sizes and from all sectors in difficulty.9 KfW provides low-interest loans for investments and operating equipment. Companies can seek these loans from their own or any other bank that participates in on-lending on behalf of KfW. These banks pass KfW loans on to their own customers.
According to the federal ministry of economics, a stimulus of about 100 billion euros has been granted or paid out as of 25 May 2021.
Safeguarding jobs. The legislature quickly expanded the existing rules on short-time allowances (Kurzarbeitergeld), an instrument already successfully used in the economic crisis of 2008/2009. The short-time allowance gives companies partial compensation for a loss of work and pay caused by the COVID-19 pandemic and thus to avoid layoffs.
The German Labor Agency pays the short-time allowance as partial compensation for lost wages due to a temporary work stoppage. It pays some of the income lost through COVID. Employees without children are paid 60 percent of their income, whereas employees with children receive 67 percent of their income. In the meantime, short-time allowances have been increased (on a sliding scale) to up to 80 or 87 percent. The maximum period of entitlement for such allowances has also been extended to up to 24 months (limited until the end of 2021).10
Even before the Corona pandemic, the legislature was obliged to put the EU Restructuring Directive (Directive (EU) 2019/1023) into national law. Facilitated by the Corona crisis and the impending national elections, German lawmakers accelerated the legislative process and implemented the Act on the Stabilization and Restructuring Framework for Companies (StaRUG) as of January 1, 2021.
The new Stabilization and Restructuring Framework (Stabilisierungs- und Restrukturierungsrahmen – SRR) enables a company to be restructured with the participation of its creditors before insolvency proceedings must be filed. The core component of the SRR is the preparation of a restructuring plan by the company or its acceptance by the company's creditors.
The restructuring plan enables far-reaching intervention in the liabilities and contractual relationships of a company in crisis as well as in shareholder structures. The plan may reduce the claims of the creditors concerned (e.g., haircut or deferral), formulate amendments to contracts between the company and its creditors, amend shareholders' share and membership rights, and regulate creditors' claims to intragroup third-party collateral. A restructuring plan may even allow for the introduction of new financing.
The creditors concerned shall be divided into groups based on appropriate criteria and treated equally within their groups. The plan will come into effect if it is accepted by the affected creditors, and in principle, an approval rate of at least 75% (voting rights according to the amount of the claim) must be achieved in each group. If individual creditor classes do not consent, they may be made the subject of a cross-class cram down.
In principle, a restructuring plan can take effect without court involvement. The Restructuring Act thus gives the debtor a comparatively discrete restructuring option. However, a restructuring plan only becomes effective against opposing creditors if it is confirmed by the court.
The restructuring courts can also reduce a company’s liabilities. For example, the prohibition of payment under § 15b InsO is relaxed in restructuring proceedings if a company has notified the court of its insolvency and/or subsequent overindebtedness. A court-approved restructuring plan cannot, in addition, be overturned in any subsequent insolvency.
In certain cases, a restructuring officer must be appointed, while in other cases such an appointment is optional. German lawmakers are notoriously sceptical of any restructuring that allows for a cram down or limitation of rights and is not closely controlled by a court and an insolvency administrator.
Accompanying the introduction of the StaRUG, general adjustments were made to German insolvency law and, among other matters, to the insolvency application regulations.
As of 1 January 2021, legislative changes were made to differentiate better between overindebtedness as a mandatory reason to file for insolvency and impending illiquidity, which is a voluntary reason for filing. Overindebtedness and impending illiquidity overlap in many cases through the two-fold test for overindebtedness.
An entity is overindebted if its assets no longer cover its liabilities and if it lacks a positive going concern prognosis. In almost all cases, a positive going concern prognosis confirms liquidity; thus, if a company faces imminent illiquidity, that company will also lose its positive going concern prognosis.
Hence, to differentiate better between mandatory and voluntary reasons for filing, as of 1 January 2021, a forecast period of 24 months applies to determine impending illiquidity, while the test for the positive going concern prognosis needs only to extend over a 12-month period.
Access to self-administration proceedings has been made fundamentally more difficult through the requirement for a material number of additional documents.
These further measures will be inapplicable in the 2021 calendar year to companies whose overindebtedness or illiquidity is due to the COVID-19 pandemic.
A company’s management must continuously monitor developments that may threaten that company’s continued existence and take appropriate countermeasures to mitigate this. The implications of this new provision remain the subject of intense discussion.
Summer has arrived, Corona seems at bay, and businesses are getting back to normal. There is no mood for an economic crisis. Consequently, the much-anticipated rise in insolvency filings seems less likely. In May 2021, sentiment in the executive suites of the German economy improved noticeably. The ifo Business Climate Index, which is the most prominent indicator of sentiment in the German economy, reached its highest value since May 2019.12
Will it last? It probably will, at least for now. Many Corona aid measures have severely distorted the market. One must suspect these measures have saved many companies from the worst. Yet, federal elections and the retirement of Angela Merkel loom. With uncertainty about COVID rates in the coming winter, the German economy may not yet be out of the woods.
1 dserver.bundestag.de/btd/19/253/1925322.pdf; hoganlovells-blog.de/2020/12/14/covid-19-aenderung-zum-wegfall-der-geschaeftsgrundlage-im-gewerbemietrecht-geplant/; http://hoganlovells-blog.de/2020/12/21/staatliche-covid-19-massnahmen-ku...
3 bundesfinanzministerium.de/Content/DE/Gesetzestexte/Gesetze_Gesetzesvorhaben/Abteilungen/Abteilung_IV/19_Legislaturperiode/Gesetze_Verordnungen/2021-03-17-Drittes-Corona-Steuerhilfegesetz/0-Gesetz.html; ec.europa.eu/germany/news/20210105-beihilfen-fuer-tui_de
5 bmwi.de/Redaktion/DE/Pressemitteilungen/2020/20200525-bundesregierung-verstaendigt-sich-auf-finanzielle-unterstuetzung-fuer-die-lufthansa.html; hoganlovells.com/de/news/hogan-lovells-beraet-bundesrepublik-deutschland-finanzagentur-gmbh-bei-den-stabilisierungsmassnahmen-fuer-die-deutsche-lufthansa-ag
6 bundesregierung.de/breg-de/suche/tui-hilfen-aus-wsf-1824696; bmwi.de/Redaktion/DE/Pressemitteilungen/2020/12/20201202-zitat-sprecherin-bmwi-zu-tui.html