COVID-19 in Germany: Director and shareholder-friendly measures

Where the law to mitigate the consequences of the COVID-19 pandemic in civil, insolvency and criminal proceedings (COVInsAG) is concerned, the German Parliament has introduced rules regarding the suspension of a managing director’s obligation to file for insolvency. It has also issued important statements regarding the liability of managing directors and the legal position of new loans, especially shareholder loans.

In the event that the obligation to file for insolvency is suspended:

• Pursuant to COVInsAG, payments made "in the ordinary course of business” will be considered as payments made "with the diligence of a prudent businessman". A managing director can be personally liable for almost every payment made when the company is illiquid or over-indebted, unless the payment is made "with the diligence of a prudent businessman". Therefore, COVInsAG is essentially aligning managing directors' liability in making payments with their obligation to file for insolvency. 
• COVInsAG states that when new loans are granted during the suspension of the obligation to file for insolvency, repayments of these new loans are not to be challenged, as they are not detrimental to creditors. Importantly, this applies to new loans from shareholders, as well. The shareholder loans also enjoy a different legal position pursuant to COVInsAG – shareholder loans are no longer subordinated claims (although security given to shareholders can still be challenged). This measure actively encourages shareholders to further fund distressed companies by allowing shareholders to deploy a wider scope of action.

Utilising these instruments will be crucial for companies trying to stay “healthy” under the current COVID-19 circumstances.