Germany's crisis legislation nears its expiry date

August 15, 2023

Grave uncertainties following the war in Ukraine and the lingering effects of the pandemic had inspired German lawmakers to pass a series of legislative measures to soften the ramifications of multiple crisis factors for the national economy. Part of the crisis legislation (SanInsKG) was a temporary modification of one of the two insolvency triggers provided for under German insolvency law. The legislation is about to lapse and this is what managing directors now need to know.


Background of the crisis legislation

German insolvency law provides two principal grounds for insolvency; “Illiquidity” and “over-indebtedness”. In the event of the occurrence of either of these, managing directors must immediately file for insolvency to avoid personal liability and criminal prosecution.

  • Illiquidity occurs when a company is not able to pay its debts as they fall due.
  • Over-indebtedness occurs when the debtor’s assets at liquidation value no longer cover its liabilities (balance sheet over-indebtedness), unless there is a positive cash flow-based prognosis of the company retaining sufficient liquidity to cover its liabilities within the next twelve months (going-concern prognosis).

As a consequence, under ordinary German insolvency law provisions, managing directors must at all times monitor and document that they have sufficient financing for the coming twelve months. Under Germany’s crisis legislation implemented on 9 November 2022, this forecast period for the going-concern prognosis was temporarily shortened from twelve to four months. The reasoning behind this legislative approach was to account for the uncertainties businesses had to face in light of the multifaceted crisis catalysts. Managing directors should not be forced to predict the unpredictable and face criminal prosecution if they fail accurately to do so. The efficacy of this legislation to avoid insolvencies and provide relief for troubled businesses was widely criticised.


An inaccurate expiry date

Although the shortened forecast period technically applies until 31 December 2023 - as defined by the relevant SanInsKG provisions, it is important to note that the effects of this deadline may become relevant far sooner. In the explanatory memorandum issued by German legislators upon the introduction of the SanInsKG, this issue had been alluded to in rather nebulous terms, whereas it was stated that “it should be borne in mind that the provisions may forfeit some of their practical effectiveness even before they expire.” There continues to be a lack of clarity on this issue from the German Ministry of Justice. It appears that the consensus among the majority of restructuring experts is that as we move past September, a prognosis period of a mere four months is no longer deemed sufficient.

The widespread understanding entails that if it becomes evident for a company less than four months before 31 December 2023, i.e. from 1 September 2023, that it will not be fully financed for the twelve months following 1 January 2024 (as then the ordinary forecast period will again apply), this finding must already be taken into account from 1 September 2023. In other words, this means that effectively the end of the shortened forecast period cannot fall onto a date on which the forecast period is no longer only four months long. As a consequence, from 1 September 2023 the forecast period reverts to twelve months.

While there are certainly other ways to interpret the law, the suggestions made by the German legislators in this regard rule out an understanding whereas companies could still claim on 31 December 2023 that they are not insolvent, even though their forecast shows insufficient liquidity from May 2024 onwards.


Consequences for managing directors

The expiry of the SanInsKG provisions is a “must know” for every managing director of legal entities with their centre of main interests in Germany. In light of the unclear legal situation they should err on the side of caution: Going forward, from 1 September 2023 at the latest, a rolling liquidity forecast for the coming twelve months must be on hand at all times. As it is crucial for the second insolvency trigger - illiquidity - to adequately monitor the liquidity status for the next three weeks, all financial forecasts should be structured on a week-by-week basis. In enterprises comprised of a group of companies, such liquidity forecast must be available for every individual subsidiary. As every forecast is inherently plagued by uncertainties, no liquidity plan can be definitive. Hence, insolvency law merely requires a prevailing probability that a company will be able to fulfil its liabilities within the relevant prognosis period. In other words, a probability of more than 50% is sufficient. However, in order to avoid liability risks, managing directors are well advised to base their financial plan on plausible, realistic and sufficiently conservative assumptions and to duly document and frequently update these assumptions.