Avoidability temporarily suspended

With the drastic restrictions on the economy brought about by the coronavirus crisis, many companies are concerned about keeping their business operations afloat for as long as possible. This can entail risks for their business partners, such as where, in the case of subsequent insolvency proceedings, the insolvency administrator avoids payments that have been made to them. Using the tool of avoidance in insolvency, the insolvency administrator normally can undo certain transactions that were entered into prior to the commencement of insolvency proceedings. This includes payments received by individual creditors, repayments of shareholder loans, and measures in connection with restructuring loans made by banks.

Avoidability temporarily suspended

In order to provide legal certainty to lenders and contract partners of companies struggling with the coronavirus pandemic, the Bundestag and the Bundesrat have adopted the following temporary suspensions on the ability to avoid transactions in order to protect those creditors in the event that a subsequent restructuring ultimately fails.

  • If a company receives a loan in the period 1 March to 30 September 2020, known as the “suspension period”, all repayments that are made against that loan through 30 September 2023, as well as all collateral that is (subsequently) granted in the period 1 March to 30 September 2020, will not be subject to avoidance. They will not be classified as prejudicial to creditors.
  • For shareholder loans granted during the suspension period, repayments that are made through 30 September 2020 also will not be subject to avoidance. This does not however apply to any collateral that is provided.
  • Congruent coverage – i.e. payments or collateral that the recipient needed to claim in that manner and at that time –will not be subject to avoidance in subsequent insolvency proceedings. In the same way, certain types of incongruent coverage transactions that are listed in the law, such as payments by third parties, will as a rule not be subject to avoidance However, the privileged status enjoyed by congruent and certain types of incongruent coverage does not apply if the recipient was aware that the debtor’s restructuring efforts were not suited to remedying its illiquidity.

However: Suspension is subject to a limitation!

Also in the case of avoidance in insolvency, the suspensions occasioned by the coronavirus pandemic apply only where the obligation to apply for insolvency proceedings has also been suspended for the affected company. In order to qualify for a suspension, the company’s material insolvency has to be the result of the coronavirus pandemic, and it must be likely that current illiquidity is only temporary. In all other cases, the existing statutory arrangements apply.

This is intended to prevent so-called “zombie companies” with no chance of survival irrespective of the coronavirus crisis from receiving artificial life support from government assistance measures, which would then cause further damage to their creditors and contract partners.

It remains to be seen how a company will be able to demonstrate that it met the described conditions for a freeze on avoidance in the event that insolvency proceedings are subsequently initiated, possibly years later. In any case, we recommend that contract partners of crippled companies thoroughly document why they believed that the given company met the conditions for a suspension of the obligation to apply for insolvency proceedings. In that way, they can avoid subsequent evidentiary problems.

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