Nils Eggers gives a forecast for insolvencies in 2021

BRRS Attorneys-at-Law, Ribnitz-Damgarten, October 2020

Nils Eggers, attorney and partner at BRRS Attorneys-at-Law in Ribnitz-Damgarten, answers questions that many people are asking at the moment. What is going to happen with the obligation to file for insolvency? What can we expect in 2021? Will the number of insolvencies begin to rise again? What does the experienced insolvency administrator see as exceptional about 2020?

What experience are you as an insolvency administrator in the far north of Germany having in 2020? What features have you never before experienced in this form?

We are going through a collapse in many sectors of the economy that is unprecedented in its structure. Despite the crisis, insolvency figures are falling sharply. We would intuitively have expected the contrary trend in the insolvency numbers. Among other factors, however, the actions taken by the legislature have counteracted any such development; particular note must be taken of the suspension of the obligation to file for insolvency and the planned shortening of the residual debt discharge procedure for natural persons.

You have already mentioned it: the obligation to file for insolvency has been suspended in response to the coronavirus pandemic. What exactly does that really mean?

Until February 29, 2020, the Insolvency Code (Section 15a) required the official representatives of legal entities (e.g., stock corporations, limited liability companies) and others to file for bankruptcy in the event of overindebtedness or insolvency. The petition for insolvency had to be filed without culpable delay, but in any case no later than three weeks after the occurrence of insolvency or overindebtedness. Anyone who violated the obligation to file for bankruptcy was liable to prosecution. In response to the coronavirus crisis, lawmakers suspended this insolvency filing obligation per March 1, 2020. The law is called the “Act for the Temporary Suspension of the Obligation to File for Insolvency and to Limit the Liability of Governing Bodies in the Event of Insolvency Caused by the COVID-19 Pandemic.” According to Section 1 of this act, the obligation to file a petition for insolvency has been suspended until September 30, 2020. This suspension is subject to two conditions. It does not apply if the factual insolvency is not a consequence of the COVID-19 pandemic. Nor does the suspension apply if there are no prospects of remedying the insolvency that has occurred.

In other words, the aim is to protect companies that have fallen victim to an economic crisis through no fault of their own as a result of the pandemic. The law is intended to provide to these companies an opportunity to maintain their existence during the pandemic by suspending the obligation to file for insolvency.

The right to file an application has not been suspended, which means that the company is not required to file a bankruptcy petition, but may do so if a reason for initiating bankruptcy proceedings exists (insolvency, imminent insolvency, and overindebtedness of legal entities).

Another postponement of this regulation, i.e., extending companies’ option of not filing for bankruptcy even if the conditions for doing so exist, is under discussion. What do you think about this?

The obligation to file for bankruptcy in the event of overindebtedness remains suspended until December 31, 2020, so even if liabilities exceed assets, there is no requirement to file a bankruptcy petition until the end of 2020. The situation for insolvency has been different since October 1, 2020. Parties who are unable to fulfill their payment obligations are again subject to the previous obligation to file a petition. I believe that this gradual transition toward a normal state of affairs in terms of bankruptcy law is the right way forward. Creditors must be able to trust their business partners to meet their financial obligations.

What actions would you counsel for companies that are currently faced with the choice of filing for bankruptcy or postponing it?

Experience shows that late or postponed filings for bankruptcy worsen the chances of saving a company. For this reason, it is advisable for companies facing this question to conduct a rapid, rigorous, and critical review of their financial situation and future prospects.

What do you believe will happen when the obligation to file for bankruptcy usual in the past is reinstated?

Many experts are talking about the threat of a wave of bankruptcies. It appears today — if there is no further suspension — that the obligation to file for bankruptcy in the event of overindebtedness will also be reinstated per January 1, 2021. We must expect filings for bankruptcy to rise again as these measures expire. In terms of the development of the numbers of bankruptcies, much will depend on how the pandemic develops and how effective the measures implemented to combat it prove to be.

The number of insolvency petitions filed by consumers will certainly increase, probably to a greater degree than for petitions from companies subject to filing requirements. Under the previous insolvency law, natural persons have the opportunity to obtain residual debt discharge six years after the initiation of insolvency proceedings. The German parliament is planning to shorten this period to three years as required by an EU directive. The proposed legislation has been known since early 2020. Since the proposal, insolvency petitions from consumers have declined significantly. This means that many consumers have refrained from filing for bankruptcy in 2020 so that they will benefit from residual debt discharge after only three rather than six years. Once the law to shorten the residual debt discharge procedure enters into effect, a significant increase in insolvency petitions from natural persons, especially consumers, can be expected.

What is your assessment of the year 2021? Will there be a recession? Will the number of insolvencies begin to rise again? Who do you see being more affected — the companies or the private debtors?

The development depends in particular on the course taken by the coronavirus pandemic. For example, if a vaccine becomes available, the disruption to the economy caused by contagion limitation measures will decrease.

Once the suspension of the obligation to file for bankruptcy has expired, we insolvency administrators definitely expect petitions from companies to climb again.