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German restructuring advisors have welcomed the German government’s plans to ease insolvency filing requirements, but with a recession expected, several argued that further steps are needed to support companies struggling with rising energy costs.

On 9 September 2022, Germany's justice minister Marco Buschmann said he was planning a temporary relaxation of insolvency rules to help keep companies afloat that have fundamentally sound business models but are struggling with high energy costs, according to reports.

According to the German insolvency law, managing directors of companies are required to file for insolvency based on illiquidity (if the company is unable to pay its debts when they fall due) or an over-indebtedness test (if the company's assets are not sufficient to cover the company's liabilities).

For the over-indebtedness test, for many years companies were required to show that they are solvent at least in the current and for the following financial year. With new insolvency legislation in place since 1 January 2021 the respective period under review was shortened to 12 months. Buchmann’s plan would reduce the time horizon for which companies need to show they are solvent from 12 months to four months.

The initiative comes as many German businesses are struggling with rising energy costs and supply chain issues, which contributed to a 26% rise in insolvency proceedings in Germany in August compared to the prior year, the IWH economic institute said on 6 September 2022.

In response to the onset of Covid-19, on 16 March 2020, the German government suspended the requirements for companies to file for insolvency until 30 September 2020. But this came alongside a hefty package of support measures for business, including liquidity support through loans from KfW. The government also set up a €600bn Economic Stabilization Fund or Wirtschaftsstabilisierungsfonds (WFS), used to bail out companies like Lufthansa and Tui.

The suspension of the obligation to file was further extended until January 2021, and subsequently extended to 30 April 2021 (if the affected company had filed for financial aid from 1 Nov 2020 until 28 February 2021).

Certain German restructuring practitioners have been given access to the draft changes to the insolvency filing requirement in order to gather opinions on the proposals. Comments from stakeholder groups to the Federal ministry of justice were due on 21 September 2022, so it’s reasonable to expect a final proposal in parliament in the next couple of weeks, one of the sources said.

One restructuring lawyer based in Frankfurt told 9fin that he thinks it's a good idea to shorten the requirement to four months as this is “still enough time to manoeuvre”.

They added: “Acting too soon may destroy value as we don’t know what’s going to happen in the next eight months.”

Managing directors can be criminally liable for losses incurred for the late filing of requests to courts to open insolvency proceedings, according to the Hamburg Chamber of Commerce. By easing this requirement it reduces the personal risk for managing directors, the lawyer added.

“Higher prices, supply chain issues, inflation and interest rates rising will eat into the numbers. With this easing of [going concern] requirements the companies can take it step by step and focus on liquidity,” he said.

Daniel Splittgerber from Latham & Watkins echoed that sentiment saying: “This is certainly a good first step towards helping issuers address liquidity forecasting issues in light of rising uncertainties on supply chains, energy prices and consumer spending.”

“The next few months will show whether it’s sufficient or whether the German government will need to consider additional measures from their Covid toolbox,” Splittgerber added.

Another restructuring lawyer said they thought the proposed measure is “necessary, as it is not possible to expect boards to assess the group’s performance for the next 12-months” given the level of uncertainty in the market. “They need a crystal ball,” they said.

They added that building a cash flow model based on that forecast is also flawed, and that four months might still be difficult to forecast given how volatile the market is at the moment.

A financial advisor based in Munich said: “It’s clever to shorten this period to help these companies and avoid a massive wave of filings, as we don't know what the energy price is going to be and what impacts a further potential Covid-19 wave may have.”

“No-one has seen this situation before,” they added. “We don't know what the energy price is going to be".

Some restructuring practitioners, encourage companies to maintain a long term view on financial stability.

Marc Niclas, partner at Eight Advisory, said: “We see the shortening of the forecasting period to assess over-indebtedness from 12 to four months as critical, and these measures must be, if at all, only temporary and short-term. Otherwise, it would increase the risk of more zombie companies.”

“The question is whether companies can pass on energy price rises to customers, and the danger is where the time lag is too long,” he added.

On 21 September 2022, the Verband Insolvenzverwalter Deutschlands (VID), the Registered Association of lnsolvency Administrators in Germany, said: “We consider shortening the planning period to four months to be critical but reasonable.”

They caveated this by cautioning that “it must be ensured that the planning is not limited to the four month period, but that either a revolving process with ongoing self-administration or a review to be documented is introduced one month before the end of the four-month period comes.”

German insolvency law offers companies the option of restructuring in insolvency procedures under their own management, which is called “self-administration”.

“Otherwise, self-administration can suddenly no longer be possible because it can no longer be financed,” the VID added. “The effects of a sudden change of procedure are often not conducive to insolvency proceedings.”

German representative body of insolvency administrators Gravenbrucher Kreis said that it welcomes the government’s proposal “in principle” but pleads for “purposeful interventions”. Gravenbrucher Kreis said it “supports the temporary and moderate shortening of the relevant restructuring and insolvency and planning periods under insolvency law.”

“Avoiding insolvencies at all costs makes little sense from an economic and entrepreneurial point of view," said Lucas Flöther, spokesman for Gravenbrucher Kreis.

VID also said that the proposed suspension of the obligation to file for insolvency is “problematic” as it has not come with “specific promises of help” from the government, which may leave “affected companies in a helpless state”.

VID proposed that “government aid programs should also be available to companies that can be restructured in insolvency or self-administration proceedings.”

Restructuring practitioners reiterated this saying the proposed measure still does not solve the liquidity issues facing these companies.

“The change isn’t a solution for the companies’ issues, their margins are under pressure and they still require funding,” said Christian Halasz, restructuring partner at Gleiss Lutz. “The question is where this funding is going to come from.”

The restructuring sources, however, do not expect any government liquidity scheme to cover all industries, as during Covid-19, but to focus on systemically important companies like gas importer Uniper which is now 99% owned by the German State. The German government also needs to get all its financial support for companies approved by the European Union.

EU energy ministers met earlier this month to discuss a range of measured to tackle soaring energy prices. The EU competition commissioner Margrethe Vestager told the Financial Times that she planned a consultation with member states on prolonging the EU’s crisis framework for state aid.

Christian Czernay, a restructuring director at Eight Advisory said: "In the case of Uniper it was right to save it to stabilise the energy market to protect consumers.”

Czernay did not think extending blanket support to all companies, as in the pandemic, was the answer.

“In the last two years all businesses were given financing from the government due to Covid-19 so there were some free riders,” he said. “Some companies who didn't even need access to the financing took it anyway for cheaper terms."

Another financial advisor based in Munich echoed this sentient: “It's not smart to throw out money without dividing it properly."

A financial advisor based in Munich expects the government will once again extend KfW loans, previously given out during Covid-19, as they want to avoid insolvencies.

A legal advisor in Frankfurt suggested that the government could put a cap on the rise in energy prices, similar to the 4% cap introduced in France until end December. Yesterday, France extended the cap to 15% for 2023 for consumers, with €3bn set aside for businesses.

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German insolvency requirements easing welcomed — but more help needed

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