First German Legislative Support Due to COVID-19 and Granting Liquidity Lifelines

1. Introduction

   The situation due to the coronavirus has resulted in a massive disruption and to some extent even in a complete standstill of public and social life with far-reaching consequences for the national and international economy. The recent border closures will have a further impact on the movement of people and goods.

   As a result, the German Federal Government has announced that it will provide several instruments to reduce the impact of the situation:

2. Improved Short-Time Work Compensation (Kurzarbeitergeld)

   On Friday, 13 March 2020, the German Bundestag unanimously adopted a temporary improvement in the regulations for short-time work compensation.

   The regulation comes into (retroactive) force as of 1 March. Consequently, the short-time work compensation is available as a crisis instrument retroactively from 1 March on.

   The short-time work compensation in fact requires a considerable loss of work. These pre-requisites are met if the loss of working hours:

   In addition to the short-time work compensation, employers will receive reimbursement in full for the social security contributions which they have to pay even in the event of short-time working.

   The short-time work compensation is primarily intended to support companies that are suffering from supply bottlenecks or have to be closed down by the authorities due to health concerns. Given current developments, it is conceivable that this instrument will also be of interest to other companies.

3. Liquidity Support

   As part of the package to tackle the corona crisis, the German Federal Government has adopted further measures:

   1. Tax deferrals and other tax measures

      In order to improve the liquidity of companies by tax measures, the German Federal Government has facilitated the deferral of tax payments. As a further measure, advance tax payments can be reduced for the benefit of the respective taxpayers. It was also announced that the enforcement of defaulting taxes and the imposition of surcharges for late payment will be waived for the time being. In other words: either the liquidity situation is directly improved or already existing tax liabilities do not have to be taken into account when a company has to undergo the insolvency test. 

      Finally, the statutory default interest of 6% p.a. on tax liabilities will be waived for the time being.

   2. Liquidity assistance through KfW (a German state-owned bank)

      Furthermore, companies are to receive facilitated liquidity support. To this end, the existing programs for liquidity support provided by KfW will be expanded and made available to more companies, for example through KfW- and ERP-loans. These liquidity supports are not grants but loans.

      Companies can obtain loans for investments, among other things, but especially also to fund ongoing operations.

      Financing is generally provided through intermediary house banks and financing partners under the existing KfW programs. For these loans KfW assumes the default risk.

      In addition, KfW is commencing special new programs. Under these programs, KfW will increase its risk assumption. Moreover, KfW is poised to offer syndicated structures.

   3. Other liquidity assistance provided by Federal States (Bundesländer)

      In addition to federal aid, some Federal States have also promised to provide additional support. In Bavaria, for example, a ten billion euro aid package has been put together to support the economy. Among other things, special guarantee frameworks and immediate financial aid between 5,000 and 30,000 euros will be available to support smaller businesses.

4. Suspension of the duty to file for insolvency

   The German legislature is also preparing a change in law to suspend the duty to file for insolvency in order to protect companies that fall into economic and thus financial turmoil due to the corona epidemic.

   Under German insolvency law, a company is obliged to file for insolvency without delay, but at the latest within three weeks, if a reason to file comes into existence (due to bankruptcy and/or over-indebtedness). A violation of this duty to file for insolvency may lead to criminal prosecution of the responsible manager(s) and to personal liability.

   To mitigate these legal and economic consequences, the German legislature is planning a suspension of this duty to file for insolvency until 30 September 2020 in order to give the companies concerned time (i) to take advantage of the state aid measures envisaged and (ii) thus to ultimately avert insolvency.

   The pre-conditions for the suspension of the duty to file for insolvency will most likely be that:

   • the reason for insolvency is based on the effects of the corona epidemic, and
   • there are reasonable prospects of remediation of the insolvency situation (i.e., a positive going concern prognosis).

We will continue to inform you as soon as this measure comes into effect or further information becomes available.