We have summarized the most important modifications for you as follows:
Suspension of the duty to file for insolvency in January 2021
For companies affected by the COVID-19 pandemic, the duty to file for insolvency is suspended in January 2021 for both mandatory insolvency grounds (i.e. illiquidity and over-indebtedness). The suspension will inter alia apply, if the company filed an application for financial aid under a COVID-19 state aid program in November or December 2020 or would have been entitled to apply for respective state aid. The suspension however does not apply, if there were no prospects of obtaining state aid or if state aid would not have eliminated the company's insolvency.
Modifications with regard to debtor in possession proceedings
As reported, in principle it will become more difficult from 1 January 2021 onwards to enter debtor in possession proceedings as significantly more documents must be submitted to the court when filing an application for debtor in possession proceedings. In 2021 this new rule will however not apply to companies which became illiquid and/or over-indebted due to the COVID-19 pandemic. That the company has been affected by the COVID-19 pandemic will inter alia be assumed, if (i) the company was neither illiquid nor over-indebted at the end of 2019, (ii) the company showed a positive result in 2019, and (iii) its turnover decreased in 2020 by more than 30 percent. If these requirements are met, a company which is already insolvent may also be granted access to the so-called protective shielding period in 2021.
Modifications with regard to the stabilization and restructuring framework
The SRF is the centerpiece of the new law and allows restructuring the company in cooperation with the company's creditors, before insolvency proceedings must be initiated. Compared to the former draft legislation the following important amendments have been implemented in relation to the SRF:
Under the former draft the restructuring court was allowed to terminate mutual contracts which had not been fully performed by both parties draft upon application of the debtor company, if the contracting party had not complied with the debtor company's request for a modifications or termination of the contract. In particular the Federal Council objected to this regulation, so that all corresponding rules have been deleted in the new law in the end. Mutual (partly) unperformed contracts may therefore not be terminated without the contractual party's consent, except for in insolvency proceedings.
The draft also contained new directors' duties in case that the company is pending illiquid. The draft envisaged that in case of pending illiquidity the management of the company should (primarily) be obliged to preserve the interests of the company's creditors. These draft regulations which had been debated quite controversially, have been rejected as well. Under the new law the management is obliged only to conduct the restructuring with the diligence of a prudent business manager and insofar to preserve the creditors' interests.
Moreover, according to the final version of the new law, the possibilities to impair securities granted by other companies of the group have been expanded. In future it will not only be possible to impair upstream securities, but also all securities which have been provided by affiliated companies.
As far as the restructuring plan of the debtor company applies to the claims of all creditors, the restructuring court may under certain preconditions install a creditors council. Such council supervises and supports the debtor company's management.
It is expected that this new regime will have a major impact on German restructuring practice.