On 27 March 2020, a new legislative package entered into force in Germany, which – even if only temporarily – introduces unprecedented massive changes to civil law. This overview presents the most important changes in civil, insolvency and corporate law:
1. The most important changes
a) Civil law
(i) Performance (payment) obligations under contracts concluded before 8 March 2020 which represent continuing obligations relating to basic services (e.g. electricity, telephone) may be refused until 30 June 2020 if substantial fulfilment difficulties are due to circumstances arising from the COVID-19 pandemic. No interest is due. This also applies to operationally essential continuing obligations of small businesses with fewer than 10 employees and annual revenue or annual gross income of less than two million euros if performance of these obligations would endanger viable continuation of the business. The right to refuse performance, however, shall not apply if the refusal endangers the business of the creditor or causes unreasonable hardship for the creditor. In this case, however, the debtor has the right to terminate the contract.
(ii) Landlords are not permitted to terminate rental agreements due to payment arrears for the period from 1 April 2020 to 30 June 2020 if the tenant can demonstrate that the inability to pay the rent (in full) is due to the COVID-19 pandemic. However, any unpaid rent must be repaid with interest on arrears by 30 June 2022 at the latest.
(iii) Claims of lenders (e.g. for repayment) under retail lending agreements concluded before 15 March 2020 that are due between 1 April 2020 and 30 June 2020 are legally deferred by three months if the consumer cannot (fully) fulfil the contractual obligations due to loss of income as a result of the COVID-19 pandemic. In such cases, the lender is not permitted to terminate the loan agreement until expiry of the deferral period despite default of performance (in particular default of payment).
(iv) After 30 June 2020, the parties to the loan agreement must find an amicable solution to avoid double burdens when both the deferred and the regular instalments fall due. Otherwise, the loan agreement will be extended by three months. However, these exceptions do not apply if this presents an unreasonable hardship for the lender.
(v) Germany’s Federal Government may, by statutory order (i.e. without the participation of the Bundestag and Bundesrat), extend the moratorium referred to in (i) to (iii) until 31 September 2021 or longer. The period of extension referred to in (iv) may be extended by 12 months.
b) Insolvency law
(i) The obligation to file an insolvency petition will be suspended until 30 September 2020 if the insolvency is based on consequences of the COVID-19 pandemic and there are prospects of eliminating the insolvency. Unless the company was already insolvent on 31 December 2019, both of these criteria are presumed satisfied by law.
(ii) Despite the fact that the company is insolvent, the managing director or the board of directors retain broad rights to enter into further transactions and make payments.
(iii) Repayments of new loans and the provision of loan collateral until 30 September 2023 cannot be contested by the insolvency administrator.
(iv) New shareholder loans will no longer be legally subordinated until 30 September 2023.
(v) For three months, creditors may only file for insolvency if the grounds for insolvency were already present on 1 March 2020.
(vi) Contractual partners, especially in the case of continuing obligations (such as lessors or landlords), are generally protected against the possibility that an insolvency administrator may subsequently demand repayment or contest the contract.
(vii) The above protective regulations also apply to companies that are not subject to the obligation to file for insolvency (e.K. and KG with a natural person as general partner).
(viii) The deferral in favour of the debtors as set out in (i) and (v) may be extended until 31 March 2021 by government decree.
c) Company law
(i) In companies with the legal form GmbH, resolutions may be passed in text form (e.g. via e-mail or WhatsApp group) without full shareholder approval.
(ii) The new law creates the possibility of holding general meetings of an AG, SE and KGaA electronically, without the physical presence of shareholders or directors, even if the articles of association do not yet provide for such a procedure. Shareholders’ right to challenge resolutions and ask questions is restricted.
(iii) Amounts reported as profit in the balance sheet may be made available in instalments.
(iv) Similar facilitative measures apply to cooperatives and associations. In addition, the supervisory board can approve the annual accounts of a cooperative.
(v) The management board is now permitted to convene a general meeting with a notice period of 21, instead of 30, days and has four months longer within which to hold it. The period for shareholder submission of additional agenda items has been shortened to 14 days.
(vi) Mergers and spin-offs can now be based on a balance sheet prepared for a reporting date no more than twelve months (previously: eight months) prior to notification.
(vii) The above changes are only valid for 2020, but they can be extended until 31 December 2021 by statutory order.
2. Conclusions and recommendations for action
The previously announced and in some cases already effective aid in the form of the short-time working allowance, various tax deferrals, various suspensions of enforcement, state loans, including state funds, guarantees and grants , etc., were directed at the public sector. With the new legal regulations, the German legislator is intervening in a far-reaching and comprehensive manner in the interactions between individuals and companies in order to guarantee the functioning of the private sector. You should bear in mind the postponement of debtors’ payment obligations and rights of termination for small businesses, as well as interventions in the burden of proof, when planning and concluding future contracts. The breathing space provided in the obligation to file for insolvency and the temporary elimination of the obligation to stop payments, as well as the protection against challenging your claims as a creditor, provide you with a variety of options with far-reaching financial consequences. What results is a broad array of necessary adaptations and opportunities to make use of these measures and any unexpected new possibilities they create.
We will be happy to support you in adapting to the current situation and advise you on how to take advantage of new opportunities that arise. Please note that the above information is meant to provide an abstract overview of the changing legal situation and does not constitute legal advice.
Frankfurt, 27 March 2020
Kai Schadbach