The German government is reacting to the worsening economic crisis (for the current economic situation, see here) and – possibly out of fear of the wave of insolvencies yet to be seen (for the current development of insolvency figures, see here, in German) – is “remodeling” the previous “COVinsAG” (for more details, see here) into the “Act on the Temporary Adjustment of Restructuring and Insolvency Law Provisions to Mitigate the Consequences of the Crisis (Restructuring and Insolvency Law Crisis Consequences Mitigation Act” (for the full German title, cf. below, hereinafter refered to as “SanInsKG”). Below is a brief initial overview of the content of the planned regulation, the current status of the legislative process and the first comments.
The draft of the SanInsKG – which has been “hitched” to a bill to reform family law – serves to implement the “3rd relief package to secure an affordable energy supply and strengthen incomes” announced by the German government on September 3, 2022 (more details here, in German). According to the accompanying reasoning, “companies that are essentially sound and also viable in the long term under the changed framework conditions should also be able to adapt their business models. Therefore, relief from the insolvency filing requirement will be provided.“
However, the actual impetus for the regulation now planned seems to have come from TMA Germany well before the German government’s decision (“The German government is thus complying with a demand made by the Turnaround Management Association (TMA). Several TMA board members had already approached Justice Minister Buschmann several months ago and suggested shortening the continuation forecast – but even down to three months.”, Handelsblatt report here (in German).
The core of the regulation is the shortening of the forecast period in § 19 (2) s. 1 InsO (and of the planning periods regarding the financial plans in self-administration proceedings (§ 270a (1) no. 1 InsO) and in restructuring proceedings (§ 50 (2) no. 2 StaRUG) from twelve (or six) months to a uniform period of four months according to § 4 SanInsKG. In addition, the newly inserted § 4a SanInsKG extends the maximum period for filing an application in the event of over-indebtedness from six to eight weeks. The new provisions are to enter into force on the day after promulgation and apply until December 31, 2023.
Last week, the Social Democrats delivered further headlines by calling for a limited suspension of the entire obligation to file for insolvency, i.e. also related to illiquidity, as long as “the aid programs are not yet callable” (cf. here, in German).
Comments from business associations
Despite the short notice (Ministry of Justice letter dated 16.09., deadline 21.09.22), numerous associations have commented on the planned reform.
From theses statements, the German Association of insolvency administrators (VID)’s statement (here, in German) that the draft does not contain a definition of the “crisis” to which the consequences planned by the draft are to be linked is as succinct as it is explosive. The draft itself espressly refrains from “(…) tying the scope of application of the provision to a corresponding prerequisite, in particular introducing a causality requirement that relates the forecast uncertainties back to the developments on the energy markets,” since more or less all economic operators are at least indirectly affected by the current conditions.
The renaming of “COVInsAG” as “SanInsKG” suggests that policymakers have recognized the need for a so-called “bad weather insolvency law” (as already proposed by Prof. Dr. Paulus already several years ago (“Gutwetter-Insolvenzrecht und Schlechtwetter-Insolvenzrecht: Über die ökonomischen Grundbedingungen des Insolvenzrechts,” ZIP 2016, p. 1657 ff.). However, the rushed legislative process rather reflects the fear of those in power of a wave of insolvencies (see again here, in German). In other words, the name alone does not make a new regime.
The practical relevance of the planned regulation for the German insolvency scene is also likely to remain rather marginal – after all, traditionally only a small number of insolvency applications are based on overindebtedness (2021: 162 out of 13,993 insolvency applications, see Federal Statistical Office (Destatis), Fachserie 2 Reihe 4.1, 12/2021, Table 10, here). Also from this perspective, the actionism is more likely to be understood as a populictic signal rather than a well thought through reform. However, the project would become highly questionable – and this can be seen from the various statements – if the relaxation of the application obligation were to be extended to include illiquidity, which is apparently being propagated by parts of the German Social Democrats. If at all, such a further relaxation would only work if – as with Corona – it were flanked by appropriate liquidity support for the companies. The Social Democrats proposal is also indeed aimaed at bridging the time until state liquidity assistance programs take effect.
On the one hand, however, the question is whether the hectically acting politicians will even be able to muster up enough focus to adopt liquidity-boosting funds in the necessary amount, precision and timeframe before the wave of insolvencies hits the German economy. If policymakers miss this window of opportunity, the economy will be further burdened by companies operating in a state of insolvency while at the same time other companies, already making huge gains in this market, get an additional liquidity booster.
Finally, even an easing of the insolvency application deadline by the SanInsKG in its current form, accompanied by tailor-made liquidity support, will encourage the increasing zombification of the German economy. The proportion of zombie companies among German companies has already risen sharply in the Corona era (see recent study by A.T. Kearny, chart p. 8, available here, in German). The “bazooka” of the then Finance Minister Scholz probably played a not insignificant role in this growth (see here). The reluctance to provide financial aid at the beginning of this crisis (“shock absorbers” and “protective shields” instead of “bazooka”, here) has been noticeably abandoned by policymakers. But this is likely to reinforce the zombiefication tendencies in the German economy, and the process of Schumpeterian “creative destruction” will be postponed once again. Not a good choice for Germany in the long run.