COVID 19 - What do the German emergency measures mean for my company?

 

On March 25/27, the German legislator passed certain emergency measures in response to the COVIV 19 pandemic. Through various measures in civil, corporate and bankruptcy law, the legal consequences of the COVID 19 pandemic for affected companies shall be mitigated. In addition, the federal and state governments have provided several support measures for companies, including loans, subsidies, guarantees as well as the option to extend the deadlines for paying taxes and social security contributions upon request. The conditions under which short-time work benefits can be applied for have also been expanded.

 

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UPDATE 10.04.2020: 

 

- Simplification of publicly secured loans (Sec. II): From 15.04.2020, companies with more than 10 employees, that have been active on the market since January 2019 and made a profit (on average) in the period 2017 - 2019, can apply for loans for investment and operational cost from their bank, which will be 100 % publicly secured. As banks thus do not have to do an own risk assessment anymore, the handling of applications is predicted to be much smoother and faster. The loan can amount to up to 25 % of the annual turnover of 2019, max. 500.000 - 800.000 EUR (depending on the size of the company). The term is up to 10 year, with no repayment in the first two years.

 

- Civil law obligations (Sec. 5):  Additional wording has been added regarding the handling of civil obligations for larger businesses as well as for the handling of new contracts. 

 

- Corporate Law (Sec. 2): Additional wording has been added regarding the implications for the commonly used GmbH. 

 

 

I. Immediate measures to mitigate the consequences in civil and bankruptcy law

 

1. Tenancy law: Temporary suspension of the right of termination

 

Commercial and private tenants who, due to the COVID 19 pandemic, will no longer be able to pay their rent between April 1 and June 30, 2020 will be protected from terminations of the lease due to these payment defaults.

 

The tenant is obliged to provide credible reason that the inability to pay is caused by the COVID 19 pandemic. This can for example be achieved by an affidavit or by other suitable means. According to the preamble of the law, this could include, for example, evidence of the application or the granting of state benefits or other evidence of loss of income or earnings. Commercial tenants should also be able provide credible reasons by pointing to the fact that the operation of their company has been prohibited or significantly restricted by ordinance or official order. According to the preamble of the law, this applies to restaurants or hotels - but due to the already existing closure orders, it should also be applicable to retailers and other closed companies.

 

Payment arrears from April 1 to June 30, 2020 only entitle the landlord to terminate the lease after June 30, 2022. This means that tenants have two years to compensate for the rental arrears incurred during the period April 1 to June 30,2020. However, it must be taken into account that the rents will continuously remain due and, accordingly, corresponding default interest may have to be paid for the period of non-payment. It is therefore only a postponement of termination, but not an interest-free deferral or even a waiver. Therefore, the landlord's recourse to any provided deposit appears possible, at least in order to enable the landlord to bridge liquidity bottlenecks. A possible right of the landlord to increase the deposit reduced in this way should however also be excluded until June 30, 2022.

 

Important: Other reasons for termination will not be eliminated by the postponement - so if there is any other breach of contract, the contract can still be terminated. This also applies to payment arrears from before April 1, 2020. Also, ordinary termination in accordance with the contractual or legal provisions remains possible.

 

An extension of the currently planned period is possible if the consequences of the COVID 19 pandemic will continue to exist to a significant extent even after June 30, 2020.

 

Recommendation: The regulations of the specific rental contract should be checked to enable a precise legal assessment of the options for both tenants and landlords. It is recommended to seek a discussion and amicable understanding among the contractual parties. If payment of the rent should not be possible due to the economic impact of the COVID 19 pandemic, the temporary suspension of the right of termination provides a temporary protection for tenants.  However, the reasons for the payment difficulties should be documented at an early stage. It should also be noted that the rent remains due and, among other things, default interest may also apply. For landlords with liquidity difficulties due to the lost rent payments, a claim on the security deposit would have to be checked.

 

 

2. Corporate law: making the formal requirements for meetings and resolutions more flexible

 

In order to enable the proper functioning of companies even in times of social distancing and video conferencing, the possibility to hold general meetings, company meetings or issue resolutions by video, e-mail or other means is introduced even if such has not been authorized in the articles of association or the rules of procedure or not all of the shareholders have consented.

 

In addition, the deadlines and convening modalities are made more flexible so that the company is able to react and act even under exceptional circumstances and to avoid a lack of leadership in certain companies. In particular, this concerns the AG (Joint Stock Company) as well as cooperatives, associations, foundations and condominium owners' associations (Wohnungseigentümergemeinschaften).

 

In case of the  GmbH (Limited Liability Company), the necessary flexibility is achieved through the possibility of taking shareholders' decisions in text form or by submitting them in writing even if not all shareholders have consented to such. However, statutory requirements on notarization (e.g. change of articles of association) and voting thresholds as well as other provisions on form and notice periods for the calling of a meeting should still be observed. In addition, all shareholders shall be granted the opportunity to give a statement to the intended agenda (video or telco, written statement, etc.). 

 

Recommendation: The currently implemented contact restrictions do not prevent the convening and holding of company meetings. Decisions essential for the operation as well as other regular decisions regarding annual financial statements, management personnel, etc., do not have to and should not be postponed. Requirements laid down in the law as well as the articles of association as regards form, notice periods, voting thresholds still have to be observed. The correct procedure should be checked for each individual situation based on the articles of association as well as the modified legal provisions. In addition, managing directors should closely check the need for confirming shareholder decisions, if decisions to be taken during the COVID-19 pandemic are out of the scope of normal business operations and thus require the consent of the shareholders

 

 

3. Bankruptcy law: obligation to file for bankruptcy is suspended until September 30, 2020

 

The obligation to file for bankruptcy (usually within 3 weeks of the inability to pay or over-indebtedness) for legal entities and associations will be suspended until September 30, 2020. However, this does not apply if the bankruptcy has not been caused by the consequences of COVID 19 or if there is no prospect of eliminating the bankruptcy. In order to avoid uncertainties in such assessment as far as possible, it is assumed that the bankruptcy is based on the COVID 19 pandemic and there is a prospect of an elimination of the insolvency if the respective company had still been solvent on December 31, 2019. According to the preamble of the law, this presumption is intended to reduce the assessment risk. The refutation of the presumption should therefore only be considered if there can be no doubt that the COVID 19 pandemic had not been the cause of the bankruptcy and that the elimination of the bankruptcy cannot not be achieved.

 

In addition, the law also provides that - during the period in which the filing for bankruptcy is suspended - payments in the ordinary course of business cannot, in principle, lead to liability on the part of the acting person. Also, new loans and collateral with repayment by September 2023 generally do not constitute a disadvantage for other creditors and loan grants and collateral are generally not to be regarded as a prohibited contribution to a delay in insolvency. From a practical point of view, it is also important for the contractual partner that the right to contest legal acts that grant the other part security or satisfaction is partially suspended. The risk of a later bankruptcy challenge is thus generally limited unless the other party was aware that the debtor's restructuring and financing efforts were not suitable to remedy the inability to pay or the over-indebtedness. However, according to the preamble of the law, positive knowledge by the creditor is required for such. Thus, the creditor in general does not proactively have to make sure that the debtor is making suitable restructuring and financing efforts.

 

These privileges also apply to companies that are not required to file for bankruptcy as well as to debtors who are neither insolvent nor over-indebted. By such, also these companies should benefit from the privileges even if they are not subject to the filing requirement or if they have so far only been economically impaired but are not yet insolvent or over-indebted.

 

The suspension of the bankruptcy filing requirement can be extended until March 31, 2021 if the consequences of the COVID 19 pandemic continue beyond September 30, 2020.

 

Recommendation: The existence of an over-indebtedness or an inability to pay should be regularly checked. The reasons for over-indebtedness and inability to pay should be documented early. This also applies to the solvency of the company as of December 31, 2019 as well as to the forecast on the continuation of business despite the temporary over-indebtedness or inability to pay. In this respect, tax advisors and auditors should be involved. Insofar as the conditions for the suspension are met, the options for borrowing as well as performing contractual obligations despite an existing, temporary inability to pay or over-indebtedness should be further examined. Creditors of companies with potential payment difficulties should internally review whether they have positive knowledge that restructuring and funding efforts by the contractual partner are unsuitable for eliminating the inability to pay.

 

 

4. Loan contracts: deferral arrangements and protection against termination (currently only for consumer loans – expansion is possible)

 

The package of measures also provides for a statutory deferral arrangement - currently until June 30, 2020 - as well as a contract adjustment after the deferral arrangement expires and protection against termination for consumer loans that were concluded before March 15, 2020. This applies if the performance of the borrower’s obligations under the loan agreement would be unreasonable in view of the COVID 19 pandemic. However, this does not apply if the deferral or exclusion of termination is unreasonable to the lender, taking into account all the circumstances of the individual case.

 

It is also envisaged that the regulations can be extended to other borrowers by ordinance, in particular to smaller companies (less than 10 employees and less than EUR 2 million annual turnover or annual balance sheet total) .

 

Recommendation: Companies should follow the development and, if the current regulations are extended to companies, assess their personal deferral needs. Lenders should keep an eye on the possibility of an expansion. In the event of foreseeable difficulties, it is also advisable to seek a discussion and amicable understanding between the contracting parties early and regardless of the legal regulations. Existing loan contracts should be checked to assess possible options for actions in advance.

 

 

5. Civil law: moratorium on essential long-term obligations for smaller businesses / options for larger business / caveat in case of new contracts

 

Smaller businesses: Smaller businesses (less than 10 employees and less than EUR 2 million annual turnover or annual balance sheet total) have the right to refuse payments from significant long-term obligations until June 30, 2020, if such obligations were signed before March 8, 2020. However, this only applies if the company is unable to pay due to circumstances that can be attributed to the COVID 19 pandemic or if payment would not be possible without endangering the economic basis of the business.

 

Significant long-term obligations are only those that are necessary for the appropriate continuation of business. According to the preamble of the law, this could include compulsory insurance, contracts for the supply of electricity and gas, telecommunications services as well as civil law contracts for water supply and disposal. According to the preamble of the law, the right to refuse should also apply to non-pecuniary performances of the small business, e.g. services that these businesses owe. The right to refuse performance does not apply to tenancies, loans and employment contracts, where the corresponding special provisions apply (see I.1, I.3 and III). The right to refuse performance also covers claims for damages and reimbursement of expenses as well as restitution claims and is thus intended to provide the broadest possible protection for smaller businesses in order to maintain their business.

 

It is important that the entrepreneur has to claim the right to refuse performance. The entrepreneur also bears the burden of proof that the inability to perform is caused by the COVID 19 pandemic.

 

In addition, it must be taken into account that the right to refuse performance does not apply if such is unreasonable to the creditor. This could be the case if the non-performance would endanger the economic foundations of the creditor's business or the creditor's reasonable livelihood. In this case, however, the debtor has the right to terminate the long-term obligation.

 

The law also provides for an extension of the moratorium if the consequences of the COVID 19 pandemic continue beyond June 30, 2020.

 

Options for larger businesses: Business with more than 10 employees or more than EUR 2 million annual turnover / annual balance sheet, should check their contracts in order to establish if and how to react  to the current crisis. If the contract contains "force majeure" or hardship clauses, certain options exist, depending on the actual scope of the clauses. If such clauses do not exist, German law provides for certain concepts, such as impossibility of performance (Unmöglichkeit) or disruption of the basis of business (Wegfall der Geschäftsgrundlage). However, the thresholds to such are rather high. The options at hands have to be assessed based on the individual case. 

 

Caveat for new contracts: Special care has to be taken when negotiating new contracts. As the COVID-19 pandemic can no longer be classified as an unexpected event, usual clauses on "force majeure" or hardship may be of no help. The situation should thus be assessed based on the individual case in order to find a proper wording that continously covers potential implications from the pandemic. 

 

Recommendation: If your company has less than 9 employees and less than EUR 2 million annual turnover or annual balance sheet total, it should be checked whether the moratorium can be used for such contractual obligations that are essential for the operation of your company. The prerequisite is that the payment difficulties are caused by the COVID 19 pandemic - appropriate documentation should thus be prepared at an early stage. As a creditor, you should check whether you can claim that a refusal of performance claimed by your debtors is unreasonable. Here, too, it is recommended to seek discussion among the contracting parties in order to enable an amicable solution. This also applies to companies with more than 10 employees or more than EUR 2 million annual turnover / annual balance sheet total. The contractual provisions of the respective contracts should be checked in order to evaluate possible options for action. Special care should be taken when negotiating new contracts in order to find a proper wording that still covers implications from the now known COVID-19 Pandemic. 

 

 

II. Financial support from the federal and state governments

 

Against the backdrop of the COVID 19 pandemic, the largest aid package in the history of the Federal Republic has been launched to stabilize the economy and support companies as well as the self-employed.

Funding measures are offered by both the federal government and the federal states.

 

kfW special program: At the federal level, the focus is particularly on funding from the kfW Bank. The special program is intended to directly support companies with an annual turnover of less than EUR 5 billion through various loans. The funding opportunity is therefore available to all small and medium-sized companies. However, it is a prerequisite, among other things, that as of December 31, 2019 there were not already economic difficulties and that the difficulties caused by the COVID 19 pandemic are substantiated. Applications for funding are to be made through the house banks or banks operating in Germany. In addition, the kfW also provides syndicated financing from EUR 25 million upwards.

 

From 15.04.2020, the process will be simplified decisively for certain loans: Companies with more than 10 employees, that have been active on the market since January 2019 and made a profit (on average) in the period 2017 - 2019, can apply for loan for investment and operational cost from their bank, that is now 100 % publicly secured. As banks thus do not have to do an own risk assessment, application handling is predicted to be much smoother and faster. The loan can amount to up to 25 % of the annual turnover of 2019, max. 500.000 - 800.000 EUR (depending on the size of the company). The term is up to 10 year, with no repayment in the first two years.

 

Further information can be found here.

 

Protection shield for the self-employed, freelancers and smallest companies: For the self-employed, freelancers and smaller companies (up to max. 10 employees) there is the possibility to receive a one-time grant of up to EUR 15,000 to pay the operating costs for a period of 3 months. The corresponding applications must be submitted to the respective business development banks of the federal states (see below).

 

Funding programs by the German federal states: In addition to the federal funding programs, the federal states have also launched additional funding measures. Information on the individual programs can be found on the website of the business development bank of the respective state (an overview with links to the banks can be found here).

 

Deferred payment for taxes and social security contributions: Upon application to the responsible tax office, income, corporate and sales tax can be deferred without interest. Advance payments can also be reduced on request. This also applies to the trade tax. The enforcement of overdue income, corporate or sales taxes should in principle be waived until the end of the year. Also, late payment interest should be waived. However, a prerequisite for this would also be a notification to the tax office from affected entrepreneurs. Companies should contact their tax advisor or the relevant tax office for further details. There is also the option of having the social security contributions deferred upon prior request. The respective social insurance institutions are responsible for this.

 

Recommendation: The various funding programs are basically open to every company. With the newly added 100 % risk assumptions by kfW for certain loans, a much smoother and faster handling of the applications is predicted. It is advisable to submit applications early if there is a need. Due to the strong demand, application for individual funding programs of the federal states have partly been suspended (e.g. Berlin). It is therefore advisable to continuously monitor the situation regularly and to take action as early as possible.

 

 

III. Short-time work

 

One of the most successful instruments for coping with the last financial crisis in Germany was the short-time work or the state-subsidized short-time work benefits.

An employer can introduce short-time work if there is a non-permanent labor shortage, i.e. if there is a temporary reduction in working hours.

 

Access to short-time work benefits has been made easier during the current COVID 19 pandemic. An application can already be made if at least 10 percent of employees have lost more than 10 percent of their earnings.

 

The purpose of short-time work is to prevent permanent layoffs (and unemployment) in the event of a temporary loss of work. A company can partially (e.g. 50%) or completely reduce working hours if short-time work is established.  

 

However, it is important to note that short-time work cannot be ordered unilaterally. If the introduction of short-time work has not yet included in the employment contract or an applicable collective agreement or if it is not agreed upon by the works council of a company, a mutually agreed additional agreement must be concluded with the respective employees. Short-time work cannot be ordered without the consent of the employees. In practice, however, employees in Germany are very open to short-time work due to past successes.

 

An application for short-time work benefits must be submitted to the Federal Employment Agency (Bundesagentur für Arbeit) immediately, latest within 3 months. Short-time work benefits then cover up to 60% of the lost net salary (67% in case of maintenance obligations for children). In addition, the Federal Employment Agency also reimburses 100% of the social security contributions for lost working hours to the company.

 

Recommendation: If a loss of work due to the COVID 19 pandemic is foreseeable, the possibilities to arrange short-time work should be checked based on the existing employment contracts. If a mutual agreement with the respective employees is needed, a corresponding addendum to the employment contract should be concluded. A timely application to the Federal Employment Agency must be ensured. If a mutually agreement on short-time work should not be possible, further options should be examined in individual cases.

 

The above summary serves as a first, non-exhaustive orientation on several German emergency measures for the COVID 19 pandemic (per March 29, 2020). However, it cannot replace legal advice in individual cases.

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