COVID-19 – will the coronavirus accelerate crises and insolvencies?

COVID-19 - better known in Germany as the "coronavirus" - has now spread in Germany as well. Events are currently being cancelled or postponed on a large scale. At the same time, the impact of the virus is by no means limited to trade fairs, events or other gatherings, but is increasingly affecting many other economic operators on a massive scale.

Companies directly affected by event cancellations (hotels, restaurants, caterers, booth builders, service providers, etc.) are suffering from loss of income due to the virus. The number of insolvencies of businesses active in the accommodation and catering industry is rising steeply.

But the manufacturing industry also has to fear massive losses: Hundreds of millions of Chinese were or are directly or indirectly affected by isolation measures. Many millions of Chinese may not leave their homes, or only to a limited extent. Industrial production in China has not only come to a standstill in Hubei province, but is also limited beyond that - enormous logistics problems within China do the rest. This has a very significant impact on the global economy and thus also on Germany.

Many German companies - especially from the mechanical and plant engineering sector, but also from the automotive supply industry, the textile industry and also the food industry - depend on continuous supplies from China. If these supplies stop - as is currently the case - there is a very rapid threat of supply bottlenecks or even interruptions of supply to the respective customers. The same applies when employees stay at home for fear of infection - or simply because they are already ill: This may also delay deliveries.

Particularly in the highly time-sensitive automotive supply industry ("just in time deliveries"), supply bottlenecks at individual suppliers very quickly lead to line stoppages at the next in the supply chain up to the manufacturers, with corresponding consequences for both manufacturers and suppliers. In most cases, it will probably not be possible to switch to other suppliers in the short term, as experience shows that this requires a lead time of several months.

Even if it is possible to fend off claims for damages by customers against their suppliers with regard to the lack of fault ("force majeure"), the fact remains that no (or at least significantly lower) sales can be generated due to the missing parts. At the same time, overhead costs (wages, salaries, social security, rent/lease, electricity), remain more or less unchanged. It is obvious that a company cannot financially cope with such a situation for very long.

The only option left to the companies concerned is therefore to try to reduce their current costs (and in particular wage costs). The instruments of short-time working are an option here. In the short term (and if the other conditions are met), it is possible to reduce wage costs this way. To this end, the German Federal Government has decided to drastically increase the short-time working allowance.

Payment agreements with creditors (lessors, utility providers) or deferrals are also possible. Additional provision of funds by the financing banks can be a further measure to bridge liquidity shortages.

It remains to be seen whether it will be possible to convince the legislator to decide on a temporary suspension of the obligation to file for insolvency (as was the case with the major flood disasters at the time). From what we hear, 'liquidity support for affected companies is currently being examined', whatever that means exactly. Even the fiscal measures that have become known so far tend to remain rather cosmetic in nature.

In any case, the managing directors/board members of the companies affected by COVID-19 are well advised to seek help early on and not to wait until the missing parts have an immediate impact on liquidity. On the one hand, this is due to liability reasons and, on the other, to practical considerations: the earlier crisis consulting starts and instruments provided for this purpose are used, the sooner the measures will be crowned with success.