Bundestag once again sends restructuring and insolvency law into crisis mode

The current fluctuations on the energy and commodity markets are making planning increasingly difficult for companies. However, budgeting is an essential component of the going concern forecast in the case of over-indebtedness under insolvency law. Companies are also required to submit financial planning in debtor-in-possession and restructuring proceedings. In order to facilitate such planning, the German parliament passed amendments to the Insolvency Code and the Corporate Stabilization and Restructuring Act (StaRUG) on October 20, 2022. Their aim is to make corporate planning easier for management and to prevent essentially healthy companies from filing for insolvency due to forecast uncertainties.

Shortened forecast period in case of over-indebtedness

When examining an over-indebtedness under insolvency law, the management must generally base its going concern forecast on a twelve-month forecast period. For such period, the company’s continued existence must be secured. Due to the current uncertainties, in particular the sharply rising energy prices, a reliable forecast for a period of twelve months is, however, quite difficult. Therefore, the Federal Parliament’s decision intends to shorten the forecast period to four months. Consequently, the company’s continued existence as a going concern must only be secured for the next four months. Such regulation is limited until December 31, 2023. Currently, it is not certain how the examination is to be performed for transitionary periods, for example, if a company determines that its continued existence is secured for the next four months but not beyond such period. 

The amendments take immediate effect: If a company is currently over-indebted according to the previous forecast period but if the deadline for filing for insolvency has not expired yet, the obligation to file for insolvency will no longer apply if a four-month forecast can be provided.

In order to eliminate grounds for insolvency: Extended period to file for insolvency in case of over-indebtedness

If a company (corporation) becomes overindebted, the management must file an application to open insolvency proceedings immediately. The management may file the petition up to a maximum of six weeks after the occurrence of overindebtedness only if there is a prospect of eliminating the grounds for insolvency. This period may only be utilized as long as it is used for promising efforts to eliminate the reasons for insolvency. 

Now, and also limited until December 31, 2023, such period is extended to eight weeks. Such period’s extension is supposed to take account of the fact that, due to the current situation, the preparation of restructuring efforts may take longer than usual. It is doubtful, however, whether an additional two weeks will actually represent a significant improvement.

Planning periods for debtor-in-possession management and restructuring

Finally, an access to debtor-in-possession management or restructuring proceedings requires from the management to prepare and submit financial planning. For such financial planning, the planning period will be reduced from six to four months. This change, too, is intended to take account of the current forecast uncertainties and facilitate access to judicial restructuring proceedings. Both proceedings serve to preserve and restructure corporate value creation if out-of-court measures are no longer sufficient, and management is exposed to substantial penalty and liability risks. It is therefore correct to facilitate access to such proceedings with the currently existing planning uncertainties. 

Practical advice: Obtain legal advice in the event of overindebtedness

Over-indebtedness as ground for insolvency plays a much lesser role in practice than illiquidity. Therefore, the amendment’s practical effects will remain manageable. If the responsible executive bodies cannot rule out over-indebtedness beyond doubt, they are strongly advised to seek legal support. Prior to judicial restructuring proceedings, dutiful and punishable actions are very close to each other – before and after the recent amendment of insolvency and restructuring law.

It is important that the management does in no case assume that the obligation to file for insolvency is generally suspended. The over-indebtedness as ground for insolvency still exists. Only the forecast periods are being shortened which will facilitate the going concern planning.

In contrast to Corona-related suspensions and restrictions of the filing obligation, this does not require for the economic difficulties to be caused by a certain event, for example, higher energy prices. The facilitation applies to all companies which are obliged to file for insolvency in case of an over-indebtedness. 

In the event of insolvency, the obligation to file for insolvency without delay, within three weeks at the latest, remains. Unlike in the Corona pandemic, there is no relief in this case.