As we reported in a previous blog the German legislator in November 2022 introduced the Law on the Temporary Adaption of Restructuring and Insolvency Law Provisions to Mitigate the Consequences of the Crisis (SanInsKG).

The Law on the Temporary Adaption of Restructuring and Insolvency Law Provisions to Mitigate the Consequences of the Crisis (SanInsKG) was published in the German Federal Gazette (Bundesanzeiger) today (8 November 2022) and will become effective in German law tomorrow (9 November 2022), following a very quick legislative process.

Purpose of the SanInsKG

SanInsKG is intended to address the difficulty of companies assessing their solvency in the current economic climate.

1. State of the Restructuring Market

1.1 Market Trends and Changes

State of the Restructuring and Insolvency Market

There were 27,359 insolvencies in France as of the end of September 2021, down 25.1% from the same period in 2020, and down 47.9% from September 2019. Such reduction is relatively stable across all sectors, including those most severely affected by the health-related restrictions, such as accommodation and food services (down 44.2% year-on-year) and trade (down 28.1% year on year).

Fewer Insolvencies for More Opportunities

At the end of 2021, corporate bankruptcies (for most company sizes and in most sectors) were at their lowest level compared to the pre-COVID-19 figures from 2019, with a 50% drop in insolvency proceedings and a 10% decrease in pre-insolvency situations. This was largely due to the temporary impact of government emergency measures and support, including:

After its publication in the German Federal Gazette (Bundesanzeiger) on 29 December 2020, the Law for the Further Development of the Restructuring and Insolvency Laws (SanInsFoG) came into force in Germany on 1 January 2021. The major part of this new law, the Law on the Stabilisation and Restructuring Framework for Enterprises (StaRUG), introduces a new framework for restructurings outside of formal insolvency proceedings, implementing EU Directive 2019/1023 of 20 June 2019 on preventive restructuring frameworks.

On 12 March 2018 the European Commission published a proposal for a Regulation to govern the law applicable to the third-party effects of assignments of claims (the “Assignment Regulation”).

The proposal of the Assignment Regulation adopted by the European Commission deals with which law applies to determine the effectiveness and perfection of the transfer of title – and the creation of other rights like pledges and charges – in relation to claims and receivables vis-a-vis third parties.

In Germany, securitization SPVs, factoring companies and asset based lenders take security over the leased assets owned by the leasing company by way of a security transfer of title. However, in all cases of a leasing company’s insolvency where the leasing company has still possession of the assets, the owner of the security in the leased assets was in the past not seen as being entitled to realise the value of the assets itself.

Under German law, there are strict legal obligations for the managing directors of an insolvent company to file for insolvency. Failure to comply exposes a managing director to civil and criminal liability. It is therefore important for managing directors to know how to test whether their company is insolvent. One of the legal reasons for insolvency is illiquidity and the second senate of the German Federal Civil Court (“BGH”) has, in a decision dated 19 December 2017 (II ZR 88/16), clarified a question regarding the illiquidity test.

A recent ruling of the German Federal Civil Court (Bundesgerichtshof (“BGH”)) is a reminder of the risks which shareholders of a German company can face in an insolvency of their German subsidiary.

German insolvency laws are very strict. The management of an insolvent company is under strict obligations to file for insolvency, and failure to comply with such obligation may result in civil and criminal liability. Other stakeholders, like financing banks or suppliers, who are dealing with a distressed company, require documentation that their contract partner can be restructured, in order to avoid potential liability and claw back risk in case of a future insolvency.