Update on Act to mitigate the consequences of COVID-19

The Government (Bundestag) has adopted the Act to mitigate the consequences of the COVID-19 Pandemic under Civil, Insolvency and Criminal Procedure Law dated 27 March 2020 (the "Covid 19 Act"). The purpose of such legislation was and still is to mitigate the economic impact of the COVID-19 Pandemic and to support all size of companies and credit institutions, but also individuals (e.g. tenants, borrowers) to overcome the crisis. Certain deadlines set out in the Covid 19 Act have already expired or will expire shortly.

Suspension of obligation to file for insolvency

The obligation to file for insolvency has been suspended until 30 September 2020. The suspension of the obligation to file for insolvency applies, if the insolvency is caused by the effects of the COVID-19 Pandemic and there are prospects of resolving an existing illiquidity, provided that the debtor was not insolvent before 31 December 2019. Therefore, payments which are made in the ordinary course of business, in particular payments which serve to maintain or resume business operations or to implement a restructuring concept, are now deemed to be compatible with the due care of a prudent businessperson to the extent that the obligation to file for insolvency is suspended.

However, directors now need to start to carefully consider whether they might be obliged to file for insolvency as of 1 October 2020 when the suspension period expires. A number of insolvency experts expect a huge number of insolvency filings after 30 September 2020. Therefore, it is now discussed in the German government whether the suspension shall be extended until March 2021 in order to give companies more time to elaborate a restructuring concept. The extension shall only apply to companies which are overindebted (überschuldet), but not to companies which are already illiquid (zahlungsunfähig). Some politicians only want to extend the suspension to file for insolvency until 31 December 2021. It remains to be seen what deadline will be agreed, but to avoid a bulk of insolvency proceedings and related economic impacts it is important to give the affected companies more time to recover from the lockdown phase.

Loan Agreements

With respect to consumer loans the claims of the lender for payment of capital and interest has been deferred for 3 months under the Covid 19 Act, if the borrower suffers a loss of income due to exceptional circumstances caused by the spread of the COVID-19 Pandemic which make it unreasonable (unzumutbar) to expect him to make the payments. This applies to loan agreements which have been entered into prior to 15 March and to payments under the loan agreement which become due between 1 April 2020 and 30 June 2020. The parties may negotiate different contractual solutions, but if no solution is found for the period after 30 June 2020 the term of the loan agreement will be extended for 3 months and payment will not become due during this extended period. However, this deadline has not been extended and therefore borrowers need to make scheduled payments according to the relevant provisions of the loan agreement, subject to any different agreements.

Lease Agreements

According to the Covid 19 Act, a lessor may not terminate a lease agreement, if the tenant is not able to pay the rent which becomes due during the period from 1 April 2020 until 30 June 2020 in case that such non-payment is based on the impact of the Covid 19 pandemic.

The restriction of the termination right shall apply until 30 June 2022. As a consequence, the tenant is able to pay the rent (not paid during the period from 1 April 2020 until 30 June 2020) until 30 June 2022 to avoid a termination. However, as of 1 July 2022 the lessor may terminate the lease agreement because of the non-payment according to the general statutory provisions. These deadlines have also not been extended in favor of the tenants and therefore scheduled payments have to be paid as of 1 July 2020.