Insolvency and Restructuring18.03.2020 Newsletter
Coronavirus and the risk of insolvency: What I (now) need to know as managing director
(Last update: 18 March)
Note: In order to protect companies that get into financial difficulties as a result of the corona pandemic, the German Federal Ministry of Justice has announced legislation to suspend the obligation to file for insolvency (see below). As soon as the legal regulation is available, we will invite you separately to an online presentation on this topic (in German).
1. What do I now have to do as managing director?
2. What immediate measures can be taken to improve the liquidity situation in the near-term?
3. Which crisis-specific duties do I have as managing director?
4. When do I have to file for insolvency?
5. When is the company deemed unable to pay?
6. When is the company deemed over-indebted?
7. Under what circumstances do I not have to file for insolvency despite the company’s inability to pay and/or over-indebtedness?
8. What liability risks do I have in the current situation?
9. What are the advantages of instituting insolvency proceedings at an early stage?
1. What do I now have to do as managing director?
Since the consequences of coronavirus are not yet reflected in the corporate planning assumptions (liquidity, earnings, assets), you should adjust your planning immediately. You have to ensure that, even taking the consequences of coronavirus into account, the company is neither unable to pay nor over-indebted.
2. What immediate measures can be taken to improve the liquidity situation in the near-term?
Firstly, you could urge creditors to defer the repayment of debts due. However, it is questionable whether creditors will agree to a deferral at present as they themselves are dependent on liquidity as a result of the current crisis. A request to health insurance companies for the deferral of social security contributions have better prospects of success, provided that the payment difficulties are only temporary. A timely inflow of funds can also be achieved by selling one’s own receivables by means of factoring.
Fast liquidity can also be generated through so-called sale-and-lease-back transactions, where assets (e.g. real estate, machinery, etc.) are available which can be sold and then leased back immediately. Potential for liquidity reserves also often presents itself in the company’s buying and selling conduct. If stocks are well filled, new purchases can often be suspended for a certain period of time. A similar effect conversely occurs when the company’s warehouse is filled with its own finished products. In this case, a rapid (possibly discounted) sale-off of goods can also achieve a swift improvement in the liquidity situation.
The "classic way" to close a short-term liquidity gap is a trip to the bank. However, in the current situation, companies will often already have strained their current account overdrafts and have no further collateral, with the result that banks will regularly be unwilling to follow this up with "fresh money". There are market participants who specialize in providing companies in crisis situations with short-term liquid funds. These debt funds demand correspondingly high interest rates due to the increased risk.
Last week, the German Federal Minister of Economics [Bundeswirtschaftsminister] announced that state financial aid in the form of loans "in unlimited amounts" would be made available to recipients ranging from "the smallest taxi driver, the creative industries, to the really big companies". These are to be awarded via the German reconstruction and loan corporation Kreditanstalt für Wiederaufbau (KfW).
Finally, both the liquidity situation and the equity base can be strengthened if the shareholders are willing and able to provide new equity capital - if necessary also in the form of shareholder loans.
3. Which crisis-specific duties do I have as managing director?
Managing directors must ensure that are always aware of the company’s economic situation. This duty of constant self-control increases with the first signs of crisis. If a managing director realises that the liquidity of the company may not be sufficient, he must immediately check the company’s solvency by means of a liquidity balance sheet. If there are signs of possible over-indebtedness, the managing director must immediately obtain an overview of the assets situation by drawing up a statement of assets and liabilities. The managing director acts negligently if he does not procure in good time the information and knowledge required to examine the obligation to file for insolvency; if he does not have the necessary expertise, he must seek expert advice.
4. When do I have to file for insolvency?
The period for filing for insolvency generally begins to run with the occurrence of the company’s inability to pay and/or over-indebtedness. It is irrelevant whether the managing director knew or only should have known that the company was insolvent. The three-week application period is a maximum period. It may only be exploited insofar as concrete and verifiable chances to restructure the company exist (by means of a restructuring plan).
5. When is the company deemed unable to pay?
A company is unable to pay if it cannot meet its payment obligations when due. The liquidity check is made on a day-specific basis. In simple terms, whether the available liquidity is 100% sufficient to meet the due liabilities is checked on a daily basis. If this is not guaranteed, a forecast must be made for the next three weeks. Only if the liquid funds available within the forecast period are sufficient to service 90% of the liabilities falling due in the forecast period is the company not deemed unable to pay.
6. When is the company deemed over-indebted?
Over-indebtedness exists when the assets of the company no longer cover the existing liabilities (keyword: negative equity), unless the continuation of the company is most probable (so-called continuation forecast). For a positive continuation forecast it has to be ensured that the company will not become unable to pay over the next 12 to 24 months in all probability (more than 50%), i.e. that it will always have sufficient liquid funds to meet its due liabilities.
7. Under what circumstances do I not have to file for insolvency despite the company’s inability to pay and/or over-indebtedness?
The German Federal Ministry of Justice [Bundesjustizministerium] has announced that it is preparing a legal regulation to suspend the obligation to file for insolvency in order to protect companies getting into financial difficulties as a result of the corona epidemic. The obligation to file for insolvency is to be suspended for a period until 30 September 2020. This aims to prevent affected companies from having to file for insolvency solely due to the fact that the processing of applications for public aid or financing or restructuring negotiations in the current exceptional situation cannot be completed within the three-week period of the obligation to file for insolvency. The precondition for such a suspension shall be that the grounds for insolvency are based on the effects of the corona epidemicand that there are reasonable prospects of restructuring on grounds of an application for public aid or serious financing or restructuring negotiations by the party obliged to file the application.
8. What liability risks do I have in the current situation?
In the event of the company’s inability to pay and/or over-indebtedness, all payments by the company fundamentally have to be stopped. This even applies to (incoming) payments by customers to a debit account of the company. If the managing director violates this obligation, he can be personally sued for the repayment of all payments made.
In addition, the managing director is liable vis-à-vis creditors for any delay in filing for insolvency if he has failed to file for insolvency in due time. The delay in filing for insolvency is also punishable by law - as is the failure to pay employees’ social security contributions. The payment of the latter is possible - and necessary – without liability even after the company has become insolvent. Finally, the managing director commits fraud if he is aware that he will not be able to fulfil the performance promised to his business partners.
Whether the liability risks will be minimized by the planned suspension of the obligation to file for insolvency is unclear at the present time. A logical step in the event of the temporary suspension of the obligation to file for insolvency would be to also exempt payments from liability after the company has become insolvent.
9. What are the advantages of instituting insolvency proceedings at an early stage?
As the crisis situation worsens - be it at the liquidity level or at the asset level - the management's room for manoeuvre decreases. If an out-of-court restructuring no longer appears possible, insolvency proceedings initiated at an early stage under self-administration can lead to a restoration of the capacity to act. For example, the insolvency money paid by the German Federal Employment Agency [Agentur für Arbeit] to protect employees can make a positive contribution towards the restructuring, as the company will not actually incur any personnel costs for up to three months as a result. In addition, the shorter notice periods (3 months) applicable in insolvency proceedings for terminating certain contracts can also facilitate restructuring at the operational level.
In order to stay in the driver's seat during the insolvency – as well as afterwards - it is advisable to administer the insolvency yourself. In this case, the insolvency proceedings are conducted under the supervision of a trustee by the management of the company, with the involvement of restructuring consultants. The aim of a self-administered restructuring is to conclude an insolvency plan, which regularly provides for waivers of claims by creditors and can, under certain conditions, also be enforced against the will of creditors.