corona: (pre-)insolvency legal key points in the use of state financial aid

Companies that face liquidity problems due to the corona crisis should be able to resort to state financial aid. In this regard, the German government has decided on a protective shield (Schutzschild) that is intended to stabilize companies in the crisis by means of cost reductions (through labor, tax and social law measures) and short-term loans. Additional measures are currently being developed at the individual state level. The background to this is as follows: while the measures described in detail below are effective means of reducing expenditures, payments on principal and accrued interests or payments from ongoing long-term debt relationships (such as rent and leases) can continue to put a strain on liquidity. The decline in operating business in the wake of the corona crisis does not, in principle, offer the company either a special right of termination or a right to refuse performance, with the exception of (pre-) insolvency law structuring measures. Whether and to what extent MAC-clauses are triggered also depends on the structure of the individual case and is associated with legal uncertainties.

The injection of fresh liquidity by providing additional credit financing and the short-term suspension of the obligation to file for insolvency constitute effective means of avoiding the insolvency of “healthy” companies, at least temporarily. However, their application and use also requires caution and close coordination. Rapid and targeted intervention is the key to success, especially in the corona crisis. Rushed actions, on the other hand, can have the opposite effect. Drawing on state aid loans can ensure liquidity, but in return it increases the level of indebtedness and thus in the long term, beyond the suspension of the obligation to file for insolvency, the danger of over-indebtedness. Professional support by crisis-proof legal experts from the fields of restructuring, corporate, employment and finance is  therefore essential.

The following measures have already been announced and/or implemented at federal and state level:

Interim financing

The corona-loans of the Federal Government are based on KfW's1 development programmes and are issued to the companies through credit institutions (usually the house bank). KfW assumes up to 80% of the risk, 20% is borne by the respective banks. KfW's assumption of risk is an incentive for the banks to grant loans freely within the limits of the retained risk.

An overview of the granting of loans:

• KfW financing under the existing KfW development programme (at conditions adapted to corona conditions)
• KfW-Entrepreneur Loan and ERP-Start-up Loan for freelancers and SMEs with an annual group turnover of up to EUR 500 million for working capital of up to EUR 200 million and a minimum term of 2 years
• KfW Loan for Growth for large enterprises with an annual turnover of up to EUR 2 billion
• Individual support for companies with an annual turnover exceeding EUR 2 billion
• KfW special programme
• Short-term additional special programmes for enterprises that do not have access to the existing promotional programmes without further assistance. It should also be possible for enterprises that have temporarily experienced financing difficulties due to the crisis (crisis-appropriate increase in risk tolerance) to take part in the programmes. At present, these special programmes have not yet been launched.

Financial assistance from the federal states

There is also an increased response at individual state level: State governments and state-owned development institutions are facilitating access to existing and additional financing in order to secure the liquidity supply for companies. Cooperation between the development banks and the guarantee banks of the individual federal states is designed to create short-term credit solutions to support small to mediumsized enterprises in particular. We would be pleased to advise you on the respective country-specific offers individually tailored to your needs.

Short-time work

In response to the crisis, the German parliament (Bundestag) passed the "Work for Tomorrow Act" on Friday, 13 March 2020 in a fast-track procedure, which considerably strengthens the effectiveness of the short-time work allowance and greatly relieves companies. With the short-time work allowance, companies affected by the loss of work can reduce their personnel costs to zero in the short term – if necessary. The following has been decided:

• Reduction of the quorum of employees affected by absenteeism in the company to up to 10 %
• Partial or complete waiver of building up negative working time balances
• Short-time allowance also for temporary employees
• Full reimbursement of social security contributions by the Federal Employment Agency

Tax advances and social security contributions

The pressure of insolvency and criminal law from major creditors such as tax offices and social security institutions is particularly heavy on the shoulders of companies in crisis situations.

In view of the current corona crisis, the tax authorities intend to offer tax relief. According to the Federal Ministry of Finance, the possibility of reducing tax advances is to be improved in order to secure the liquidity situation, so that the outstanding tax burden for the second quarter of 2020 can be adjusted to the earnings expectations, which have fallen most rapidly. This application should be combined with an application for an interest-free "technical" deferral in order to eliminate the (insolvency law) maturity. With regard to the deferral, the tax authorities may waive the usual deferral interest of 0.5 % per month in individual cases, either partially or completely. The coordination with the federal states required for this has already been initiated by the Federal Ministry of Finance. In addition, the tax authorities are

to waive enforcement measures and default surcharges until the end of 2020 if the company is directly affected.

In summary, the following package of measures is intended to improve the liquidity of companies:

• Facilitated granting of deferrals
• Easier adjustment of advances
• Enforcement measures (e.g. attachment of accounts) or late payment surcharges will be waived until 31 December 2020 as long as the debtor of a tax payment due is directly affected by the effects of the corona Virus

With regard to due social security contributions, under the conditions of § 76, Subsection 2, Sentence 1, No. 1, SGB IV, an application for deferral can also be made to eliminate their due date at short notice if the company is in serious financial difficulties due to the corona crisis.

Obligation to file for insolvency and the problem of over-indebtedness

In addition, the statutory obligation to file for insolvency is to be temporarily suspended until 30 September 2020. However, the obligation to file for insolvency does not generally cease to apply, but only if the reason for insolvency is based on the effects of the corona crisis and there is a reasonable prospect of restructuring. Under which conditions managers can waive the filing of an insolvency application for the time being must be evaluated in detail. At the same time, the underlying considerations require thorough documentation if liability is to be avoided in the long term.

Furthermore, it has not yet been taken into account that the planned corona aid is able to heal cash-flow deficiency in the short term, but that at the same time new liabilities arise through the raising of new debt capital, which can contribute to a possible over-indebtedness. This poses the risk of material insolvency in the period after the end of the postponement of the obligation to file for insolvency and before the scheduled repayment of the loan, thus great caution is still required with regard to the reasons for insolvency.

We have compiled on our website comprehensive information and recommendations for action in response to the legal implications arising from the coronavirus pandemic: Coronavirus - legal issues