Suspension of the obligation to file for insolvency for companies affected by the flood disaster - a toothless tiger

With the Act on the Temporary Suspension of the Insolvency Filing Obligation Due to Heavy Rainfall and Floods in July 2021 (Gesetz zur vorübergehenden Aussetzung der Insolvenzantragspflicht wegen Starkregenfällen und Hochwassern im Juli 2021), which is part of the Reconstruction Assistance Act 2021 (Aufbauhilfegesetzes 2021), the German Federal Parliament and the German Federal Council have decided to suspend the obligation to file for insolvency retroactively as of 10 July 2021. However, the final consequence of these regulations, in particular presumptions in favor of the affected companies or protective regulations in favor of the acting managing directors are missing.

Companies whose illiquidity or over-indebtedness is due to the effects of the heavy rainfall or the floods in July of this year are exempt from the obligation to file for insolvency as long as they are conducting serious financing or restructuring negotiations and there is a reasonable prospect of restructuring. Unlike the suspension of the obligation to file for insolvency for companies that had become insolvent or were in economic difficulties as a result of the COVID-19 pandemic, which was still partially in effect until 31 April of this year, this law does not provide for any presumptions in favor of the affected companies. Accordingly, companies seeking to invoke this provision must be able to demonstrate not only that the reason for insolvency is due to the effects of the heavy rains or flooding, but also that serious financing or reorganization negotiations are underway and that there is a reasonable prospect of reorganization. The latter in particular will often be difficult to assess, so that affected companies are advised to obtain appropriate confirmation from their respective negotiating partners and also to be able to convincingly demonstrate that the expected financial support will be sufficient for restructuring. Otherwise, in case of doubt, it would be advisable to nevertheless file for insolvency.

Unfortunately, the legislator has also failed to regulate the consequences of the suspension of the obligation to file for insolvency. In the Act on the Temporary Suspension of the Obligation to File for Insolvency and on the Limitation of Directors' Liability in the Event of Insolvency Caused by the COVID 19 Pandemic (Gesetz zur vorübergehenden Aussetzung der Insolvenzantragspflicht und zur Begrenzung der Organhaftung bei einer durch die COVID-19-Pandemie bedingten Insolvenz), the legislator had expressly stipulated that with the suspension of the obligation to file for insolvency, it is presumed in favor of the managing directors that all payments made in the ordinary course of business, in particular payments which serve to maintain or resume business operations or to implement a reorganization concept, are compatible with the due care of a prudent and conscientious businessman and thus enabled managing directors to make payments without being exposed to the risk of personal liability. Such a provision is missing here. As a consequence, managing directors of companies affected by the flood disaster are therefore well advised not to make any payments in order to avoid such liability in subsequent insolvency proceedings.

The obligation to file for insolvency is suspended until 31 December 2021. However, the law already provides for an authorization of the Federal Ministry of Justice and Consumer Protection to extend the provisions until 31 April 2022.

Overall, the Act on the Temporary Suspension of the Insolvency Filing Obligation Due to Heavy Rainfall and Floods in July 2021 (Gesetz zur vorübergehenden Aussetzung der Insolvenzantragspflicht wegen Starkregenfällen und Hochwassern im Juli 2021) - despite all its good intentions - is likely only able to achieve the intended protective effect for companies and their management to a limited extent. In this respect, it would have been desirable for the legislator to have been more closely aligned with the COVID-19 legislation.