Corona: temporary legislative measures in insolvency, loan and tenancy law
This article is part of our continually updated corona resource center.
With the draft of the Corona Insolvency Suspension Act - CorInsAG (BT-Drucks. 19/18110), a comprehensive package of measures for the protection of companies, tenants and borrowers passed through the Bundestag today. The Bundesrat is expected to approve the law next Friday. The measures are essentially limited in time until 30 June 2020, but due to the unpredictability of the course of the Covid 19 pandemic, the Federal Government will be given the opportunity to extend measures until 30 September 2020 and possibly beyond.
The interventions are very far-reaching. Specifically:
Suspension of the obligation to file for insolvency
The officially decreed suspension of operations and the economic developments of the Corona pandemic could lead to acute liquidity problems for commercial enterprises and entrepreneurs.
In the case of corporate bodies with limited liability, this quickly leads to the obligation of the managers to file for insolvency without culpable hesitation, at the latest three weeks after the occurrence of insolvency or over-indebtedness (§ 15a InsO). This duty is subject to punishable by law and with liability. In addition, there are payment prohibitions under company law if insolvency has occurred (§ 64 S. 1 GmbHG, § 92 Paragraph 2 S. 1 AktG, § 130a Paragraph 1 S. 1, also in connection with § 177a clause 1 HGB and § 99 clause 1 GenG). The executive boards of associations are also subject to obligations to file for insolvency with liability (§ 42 Paragraph 2 BGB).
The CorInsAG takes this as a starting point and suspends the obligation to file for insolvency and the payment prohibitions until 30 September 2020, unless the insolvency is not due to the effects of the Covid 19 pandemic or there is no prospect of eliminating an insolvency that has occurred. If the debtor was not insolvent on 31 December 2019, it is assumed that the insolvency is due to the effects of the Covid 19 pandemic and that there are prospects of eliminating an existing insolvency.
The suspension of the payment prohibitions is technically effected by the fact that payments which are made in the ordinary course of business, in particular those payments which serve to maintain or resume business operations or to implement a restructuring concept, are deemed to have been made with the diligence of a prudent and conscientious manager within the meaning of § 64 sentence 2 GmbHG, § 92 para. 2 sentence 2 AktG, § 130a para. 1 sentence 2, also in connection with § 177a S. 1, HGB and § 99 S. 2 GenG are also to be considered compatible.
The suspension of the obligation to file for insolvency represents an effective protective measure from the point of view of the companies as well as from an economic point of view.
The change is also to be welcomed from the point of view of lenders. After all, lenders generally have an interest in ensuring that their borrowers do not have to file for insolvency due to events beyond the control of the lenders which are triggered by extraordinary temporary circumstances.
Suspension of the right to file for insolvency
For a three-month transitional period, the right of creditors to request the opening of insolvency proceedings will also be suspended. The suspension of the obligation to file for insolvency as well as the regulation on the reason for opening insolvency proceedings in the case of creditor insolvency applications can be extended by ordinance until 31 March 2021.
It is true that the exclusion of the creditor application right protects the borrowers. For lenders, however, this suspension represents a material restriction in certain loan structures. Especially in the case of commercial real estate financing, the insolvency of the property company (Property Company / PropCo) and the conclusion of a realization agreement or an agreement on cold forced administration (Realization Agreement) are the preferred realization strategy.
Suspension of the insolvency challenge
For lenders, the granting of loans to borrowers who are close to insolvency is associated with the risk that the collateral must be returned in the event of the subsequent insolvency of the borrower.
This risk is to be reduced by the CorInsAG by stipulating that legal acts which have granted or enabled the other party to grant security or satisfaction which the other party could claim in the type and at the time are not contestable in subsequent insolvency proceedings.
This does not apply, however, if the other party was aware that the debtor's restructuring and financing efforts were not suitable for eliminating an insolvency that had occurred. The exclusion of rescission shall apply accordingly to performance in lieu of or on account of performance, payments by a third party on the instruction of the debtor, the provision of security other than that originally agreed if this is not more valuable, the shortening of payment terms and the granting of payment facilities.
This also applies to loans granted by KfW and its financing partners or by other institutions under government aid programmes in the wake of the Covid 19 pandemic, even if the loan is granted or secured after the end of the suspension period and for an unlimited period of time for their repayment.
This is intended to create incentives to continue to provide loans to companies that get into difficulties as a result of the Covid 19 pandemic.
Suspension of subordination under insolvency law
If shareholders grant a company a loan, the claims of the shareholders in the insolvency of the company are generally subordinate (section 39 (1) no. 5 InsO). Payments to the shareholder are correspondingly contestable (section 135 (1) InsO), and there are restrictions in the case of guarantees or securities of the shareholders (section 135 (2) InsO, section 44a InsO).
CorInsAG takes this as a starting point and determines that the repayment of a new loan granted during the suspension period by 30 September 2023 and the provision of collateral to secure such loans during the suspension period is not considered to be detrimental to creditors. This also applies to the restitution of shareholder loans and payments on claims arising from legal acts which correspond economically to such loans, but not to their collateralization; § 39 (1) no. 5 and § 44a InsO do not apply in this respect in insolvency proceedings concerning the debtor's assets which have been applied for by 30 September 2023.
Only limited addressing: Lender Liability
The granting or extension of loans to companies in situations close to insolvency is in principle associated with increased risks for lenders. In the extreme case, liability for aiding and abetting the protraction of insolvency and liability for immoral deliberate damage (§§ 138, 826 BGB) may be imminent due to the granting or extension of a loan (so-called lender liability).
CorInsAG intends to mitigate this risk by stipulating that the granting of a loan and the provision of collateral up to 30 September 2023 is not to be regarded as an immoral contribution to the delay in filing for insolvency. This also applies to loans granted by KfW and its financing partners or by other institutions in the context of government aid programmes in connection with the Covid 19 pandemic, even if the loan is granted or secured after the end of the suspension period, and for an unlimited period for their repayment.
However, it can be assumed that the provision only partially reduces the risks of lender liability, but by no means eliminates them completely. The new granting or extension of loans to companies in sectors particularly affected by the Corona crisis is still possible in principle and also economically necessary. In such cases, however, the banks should continue to incur increased auditing and documentation costs. Please feel free to contact us at any time.
Suspension of the failure to grant residual debt discharge
In the case of natural persons who are not subject to an obligation to file for insolvency, the omission of an insolvency petition can lead to the refusal of residual debt discharge in accordance with section 290 (1) no. 4 InsO.
The CorInsAG therefore stipulates that section 290 (1) no. 4 InsO is to be applied to natural persons as debtors with the proviso that no refusal of residual debt discharge can be based on the delay in the opening of the insolvency proceedings in the period between 1 March 2020 and 30 September 2020.
Deferral of credit claims
Background, regulatory purpose and scope
The Covid 19 pandemic is already leading to this and will in future lead even more to a situation where private individuals and companies are no longer able to make interest and repayment payments under loan agreements on time or at all. As a result, the most important reason for termination of loan agreements is usually non-payment.
In this situation, CorInsAG wants to protect the borrowers and prevent that loans are cancelled due to default and that the collateral provided is realised. Contrary to the government draft of 20 March 2020, the following regulation only applies to consumer loan agreements, but not to loan agreements with entrepreneurs. However, the Federal Government is given the option of extending the provisions to other groups of borrowers (in particular micro-enterprises as defined in Art. 2 (3) of the Annex to EU Commission Recommendation 2003/361/EC) by way of a regulation.
The following provisions shall apply accordingly to settlement and recourse between joint and several debtors pursuant to § 426 BGB.
For the above purpose, it is provided that for loan agreements concluded before 15 March 2020, claims of the lender for repayment, interest or principal payments due between 1 April 2020 and 30 June 2020 shall be deferred for a period of three months from the due date if the borrower suffers a loss of income as a result of exceptional circumstances caused by the spread of the Covid 19 pandemic which make it unreasonable to expect the borrower to perform the service owed.
In particular, he shall be deemed to be unreasonable if his "reasonable subsistence" or the "reasonable subsistence of his dependants" is at risk. While the government bill of 20 March 2020 still provided for the presumption of a link between the Covid 19 pandemic and the loss of revenue, this presumption is no longer contained in the current bill.
During the aforementioned period, the consumer is entitled to continue to make his contractual payments on the originally agreed service dates. Insofar as he continues to make payments in accordance with the contract, the aforementioned deferral shall be deemed not to have been granted.
The conditions of application of the regulations are essentially defined by general clauses. The question of when "reasonable subsistence" is "at risk" will have to be determined in each individual case and currently raises legal uncertainties.
In addition to the deferral of the receivables, it is provided that the lender cannot terminate the loan on the grounds of default or a significant deterioration of the borrower's financial situation under the above-mentioned conditions before the end of 30 June 2020.
This means that the most important reason for termination under loan agreements temporarily no longer entitles the borrower to terminate the agreement.
The deterioration of the financial circumstances constitutes a statutory reason for termination (§ 490 para. 1 BGB). This reason for termination is therefore also suspended by the aforementioned regulation.
It can be assumed that the aforementioned exclusion of termination also applies to contractual termination provisions which concretize or reflect the statutory termination rule of Section 490 of the German Civil Code. This applies in particular to the MAC Clause (see below), but possibly also to termination rights due to the violation of financial ratios (see below). The latter clauses are only provided for in the case of loans to entrepreneurs; the aspect could therefore gain importance if the Federal Government, in exercising its powers by decree, extends the aforementioned provision to commercial loan relationships as well.
In the event of a deterioration of the borrower's assets, a claim by the lender to demand a strengthening of the collateral is often also agreed. If the borrower does not comply with the obligation to provide additional collateral, this usually constitutes grounds for termination (see below). The lender's right to demand additional collateral should not be affected by the provisions of the CorInsAG. However, the lender's rights of termination in the event that the request for additional collateral is not complied with are again subject to suspension by the CorInsAG.
The parties to the contract may make different agreements, in particular regarding possible partial payments, adjustments of interest and repayment of principal or debt rescheduling. However, the borrower may not deviate from the exclusion of termination.
Restructuring and term extension
The lender "should offer the consumer a discussion on the possibility of an amicable arrangement and on possible support measures". For this purpose, means of distance communication may also be used.
Talking about an amicable restructuring should be the rule anyway and is recommended in any case.
However, the CorInsAG also provides that the contract term will be extended by three months if a mutually agreed arrangement for the period after 30 June 2020 is not reached. The respective due date of the contractual services will be postponed by this period. The lender must then provide the borrower with a copy of the contract, which takes into account the agreed or legally determined contract amendments.
None of the exceptions apply if the Lender can credibly demonstrate that deferral or exclusion of termination is unacceptable to the Lender taking into account all circumstances of the individual case, including changes in general living conditions caused by the Covid 19 pandemic.
By way of a general clause, the lender is thus given the opportunity to assert a case of hardship. The wording of the law thus allows lenders to avoid the sword of CorInsAG. However, in view of the clear decision of the legislator to give preference to the interests of the borrowers when weighing up the interests, the exception is likely to be extremely difficult to enforce.
The effects of the aforementioned regulations are significant for the lender side, as they lead to the fact that lenders have to accept the loss of expected cash flows without having remittances available that were previously contractually and legally provided for.
Suspension of terminations under lease agreements
The Covid 19 pandemic is already leading to this and will in future lead even more so to private individuals and companies being unable to make rental payments or to make them in full on time.
According to the legal regulation of § 543 para. 1, para. 2 p. 1 no. 3 BGB, tenancies can be terminated without notice for good cause if the tenant is in default with the payment of the rent or a not inconsiderable part of the rent for two consecutive dates, or in a period extending over more than two dates is in default with the payment of the rent in the amount of an amount that reaches the rent for two months.
In this situation, CorInsAG wants to protect the tenants and prevent that tenancies are terminated due to default.
Accordingly, it is provided that a landlord may not terminate a lease of land or premises if the tenant fails to pay the rent in the period from 1 April 2020 to 30 June 2020 despite the fact that it is due and the failure to pay is due to the effects of the Covid 19 pandemic. The connection between Covid 19 pandemic and non-payment is presumed. Other termination rights remain unaffected. Furthermore, the basic obligation of the tenants to pay the rent remains unaffected.
The scheme is only applicable until 30 September 2022.
The effects on tenancies differ depending on whether they are residential or commercial:
Housing leases are usually concluded for an unlimited period. In case of the tenant's default of payment, a landlord usually has an interest in terminating the tenancy and concluding a new tenancy agreement with a solvent follow-up tenant (possibly combined with a rent increase). Against this background, the provisions of the CorInsAG constitute an important protective mechanism for tenants.
In commercial tenancy law, on the other hand, a fixed term is usually agreed. The primary interest of landlords is usually to secure the cash flow of rental income over the entire fixed term. Landlords are therefore generally not interested in terminating the lease with a tenant in the event of late payment, but rather in enforcing their payment claims. For commercial tenancies, the suspension of the right of termination by CorInsAG is therefore less drastic. More significant in this context is the suspension of payment obligations (see below).
For commercial real estate financing, the regulation means that the borrower/lessor must expect losses in the forecast rental income. This, in turn, can have a corresponding impact on his ability to service the debt.
Right of refusal of services for consumers and micro-entrepreneurs
Debtors who are consumers or micro-enterprises should have a temporary right to refuse performance of their existing continuing obligations if they are unable to fulfil their contractual obligations due to the circumstances caused by the COVID 19 pandemic. This is intended to help, for example, consumers whose household income has been temporarily or permanently reduced or lost due to the pandemic. The aim is to help micro-enterprises that are unable to meet their service obligations because they cannot contact the beneficiary, because their workers cannot or are not allowed to come to work or because their service provision has been temporarily suspended.
In the case of consumers, this applies in relation to consumer contracts where they would not be able to perform (regularly pay) without jeopardising their livelihood or that of their dependants. The right to refuse performance exists in relation to all material continuing obligations of the consumer. Essential are those continuous obligations which are necessary to be covered by services of general interest. These include, for example, compulsory insurance, contracts for the supply of electricity and gas or for telecommunications services, and, to the extent regulated by civil law, contracts for water supply and disposal. In the case of micro-enterprises, a precondition is that the enterprise cannot provide the service or that the service cannot be provided without jeopardizing the economic basis of its commercial operations.