The current corona pandemic poses existential difficulties for small and medium-sized enterprises in particular. Especially through massive collapses in the order situation threatens many the insolvency. From a legal point of view, two criteria are decisive in determining whether a company is insolvent: insolvency and over-indebtedness. If one of these conditions exists, there is so far the obligation to notify the insolvency of the company. You should take this duty very seriously, because in addition to civil consequences, such as a private liability by a GmbH managing director, there is also the possibility of being prosecuted, which can even include prison sentences.

The Federal Government is currently endeavouring to adapt the statutory provisions to the rapidly changing economic conditions in the course of the Corona crisis in order to quickly ease the burden on companies who have entered the crisis through no fault of their own. The COVID-19 Insolvency Suspension Act (COVInsAG), which has now been adopted by the Bundestag, aims precisely at avoiding the insolvency filing obligation that has been applicable in this case. Upon entry into force of the new law, there is the possibility of postponing the filing of an insolvency until 30.09.2020, which means a considerable relief from the current period of a maximum of three weeks.

Insolvency is a Latin term that appropriately describes an economic situation where there is a lack of liquidity. In such a case, the law obliges those affected to make this public. This is to give creditors the opportunity to secure their claims to meet their claims. Often, insolvency is only a temporary state, which leads to an amicable interim solution through appropriate negotiations between creditors and debtors. Moderation by expert insolvency administrators provides both parties with an independent third party with objective neutrality. Nevertheless, the insolvency administrator is also bound by compliance with legal provisions.

This also includes the legal definition of insolvency. This is named in the insolvency law as insolvency (§ 17 InsO). A threat of insolvency is also equivalent to meeting this criterion. However, it should be noted that a company then requests the opening of insolvency proceedings on a voluntary basis, often with the aim of protecting the company from sinking (§ 18 InsO). In the case of legal persons, for example a GmbH or an AG, over-indebtedness may also be relevant as a reason for opening insolvency proceedings (§ 19 InsO). This is the case if the existing liabilities are greater than the available assets.

The Corona pandemic has now caused economic losses for many companies, which leads them to acute financial shortages. These are often so serious that you actually have to find a payment insolvency. Thus, they are just as affected by the effects of the corona pandemic as a company that is in difficulties solely due to its own wrong decisions.

Which obligations apply in the event of insolvency?

If a managing director now finds that the prerequisites for insolvency are met, he has the obligation to apply for insolvency proceedings to the competent insolvency court at the latest after three weeks. This is especially the case if it is foreseeable that a payment of 90% of the current liabilities within three weeks seems hopeless. Although this period is a possibility that allows the managing director to take measures to avoid insolvency, if the insolvency already appears to be inevitable before the expiry of this period, then there is even an immediate need for action. A managing director should also consider that a further postponement is excluded. Moreover, an insolvency caused both unconsciously and consciously can be regarded as insolvency delay if the legal requirements are not complied with and have both civil and criminal consequences.

The Insolvency Act regulates the insolvency procedure with regard to the administration and the effort to satisfy the claims of creditors. The competent insolvency court appoints an insolvency administrator, who is usually a lawyer experienced in insolvency law. Alternatively, a tax consultant, business economist or auditor can also be designated for this purpose. On the one hand, his task is similar to that of a trustee, because he now manages the assets of the company called insolvency assets. It is primarily his goal to convert the assets into liquid funds so that the creditors can be satisfied.

On the other hand, an insolvency administrator also has the opportunity to exploit all options for the continued existence of the company, although this may often mean significant sacrifices. For this purpose, he draws up an insolvency plan with the focus on the insolvency assets determined by inventory. On this basis, depending on the nature and extent of the assets, it is then possible to decide how the different legal aspects and interests can be covered by the insolvency proceedings and thus whether the company is likely to continue. Ideally, this also includes a recovery plan.

Consequences of insolvency delay

If, however, the managing director of an insolvent company fails to comply with his duty negligently or even intentionally, he prevents the rights of creditors from being respected. Basically, this is to be regarded as a fraud in which the creditor is left in faith to receive a promised return, which he will not get at all. It is therefore hardly surprising that the legislature in this regard provides for high consequences, both civil and criminal, in the event of non-compliance with the obligation to file insolvency proceedings. In serious cases, it can also lead to a sentence of long imprisonment. The civil consequences are correspondingly high. As a result, the managing director also bears personal responsibility for financial damages.

However, this also applies in the event of an unjustified attempt by the managing director to transfer parts of the assets on his own authority. Even if by goodwill a satisfaction of selected creditors is done, this is in contradiction with provisions of the insolvency law. Similarly, the process of continuing to pay the salary to the employees would not be possible. And if even such arbitrariness carried out in the good are legally reprehensible, then these are extractions for the own enrichment of the managing director, of course, even more so.

Current legal changes due to the Corona pandemic: COVInsAG

The unexpected economic effects of the Corona pandemic in Germany have prompted legislators to amend the previous provisions on insolvency law. In particular, this is intended to enable undertakings affected by the Corona crisis and the measures combating it, through no fault of their own, to be exempted from the obligation to file for insolvency for a limited period of time. Instead of the previous deadline of three weeks, the COVInsAG adopted by the Bundestag on 25.03.2020 provides that this is now also possible until 30.09.2020, without this being regarded as insolvency delay.

This includes companies that were liquid until 31.12.2019 and are now affected by insolvency as a result of the Corona pandemic. There is also a good deal of hope that the Corona crisis can be overcome by this time without the companies concerned having to go down the arduous path of insolvency. In addition to other measures by the federal and state governments to financially support the German economy, the initiative COVInsAG is a breakwater to protect companies from the hurricane called COVID19. It remains to be seen whether this will succeed.