Preparations for the phase after the German Coronavirus Insolvency Suspension Act ends - between crisis and normality

The supply chain has broken down, sales have collapsed, investments have failed, and the fixed cost structure was never designed for a crisis. There are many reasons why companies are currently in distress. Where this distress is due to the COVID-19 pandemic, the suspension of the obligation to file for insolvency provides time for reorganisation and adjustment (click here for further information on the necessary connection between the reasons for the insolvency and the coronavirus from our colleagues Dr Marcus Backes, Reinhard Willemsen and Dr Philipp Honisch). If measures are taken in this context to generate liquidity and reduce costs, these must present real restructuring opportunities and be drafted in a legally “clean” manner. In other words: the large number of liquidity support measures available were devised with the desired result in mind; however, the path to this result remains formalistic and, therefore, can harbour various pitfalls.

The possible consequences of formal errors only recently manifested themselves again for example with Air Berlin. Incorrectly submitted mass dismissal notifications led to the ineffectiveness of a large number of terminations. If the airline had not already been in crisis, this avoidable formal error would have cost it millions of euros.

Rapid but proper action was and is the order the day. There is no way around the forms, especially when it comes to obtaining state subsidies and relief aid made available at short notice. Almost every entrepreneur and personnel manager had to think about introducing “short-time work” in the spring and filled out the form provided by the Federal Employment Agency for the notification of loss of working hours. That was quick and uncomplicated; that was also the intention of the aid - to be granted quickly. But, was it also clear to everyone what the consequences would be if they put a cross in the box “business as a whole” or “business unit”?

Anyone with only a smattering of knowledge who acted offhand quickly sent the application spiralling. Put simply: they didn’t receive any “short-time work” allowances from the Federal Employment Agency. This is just one example where the correct completion of forms is crucial - and where not much can be saved afterwards.

As is now a well-known fact, it was not enough to just simply report the loss of working hours in connection with short-time work. The application for the allowance for short-time work must be made anew for each calendar month. Absolutely necessary for this is a very carefully kept and transparent record of the working hours which the Federal Employment Agency can comprehend. Anyone who has made mistakes here over months could be faced with significant holes being made in their balance sheets by recovery notices issued by the Federal Employment Agency in its final audit six months later. As overpaid short-time work allowances cannot be reclaimed from employees, it is in the own interests of every company to ensure that when they apply for the short-time work allowance there are no errors and the records that must be kept are impeccable.

Form follows function - this may apply to product design and perhaps architecture, but it certainly does not apply to the documentation of the approval conditions for liquidity support and the application for short-time work allowances.

When making DIY applications, management should also bear in mind their own risk exposure. This is because if any claims for reimbursement or for damages arise because short-time work allowances were granted without justification, the employer will be liable to the Federal Employment Agency – and “employer” means the management for these purposes, even if, for example, the HR department was internally responsible for applying for the short-time work allowances. Any mistakes made by the latter can be attributed to the management. Similarly, the formalities involved in mass dismissals or in the transfer of a business in connection with structural reorganisation models do not normally form part of the core business dealt with by managers or HR departments. However, as with many other legal issues related to the organisation of a business, ignorance is no defence against (civil) liability. Management must ensure that the business is organised appropriately and must procure the required specialist knowledge.

To this must be added the management’s liability resulting from the company’s right of recourse. If the company is held liable by the Federal Employment Agency for any failure on the part of its management, the company may be able to hold its managing director personally liable if he/she committed a breach of duty.

Finally, if any payments are made whose timing and causes are directly related to the company’s (impending) illiquidity or over-indebtedness, these may also result in the company’s management being liable under insolvency law. In this respect, the German Coronavirus Insolvency Suspension Act currently still works as a protective shield – but one that is set to expire. The end of the privileges in the area of insolvency law in less than three months’ time thus also affects in multiple ways the acts and decisions that have been taken during the past weeks and months. Therefore, however important pragmatism, entrepreneurship and a hands-on way of doing things may be, the significance of completing all formalities correctly should never be disregarded. The remaining time until autumn should be used to critically examine the processes and goals within the company in order to benefit as best as possible from the existing design opportunities whilst avoiding any liability pitfalls in the process.

More on this in the next article.