Managing a crisis

By Kai Bandilla, David Loszynski and Gao Sen, Heuking Kühn Lüer Wojtek

Exploring the key developments for restructuring and insolvency strategies in Germany

The current situation in nearly every economy is a challenge for even well-established enterprises and business models. Lack of liquidity in recent months, usually caused by decreasing demand and interrupted supply chains, requires carefully monitoring of the financial situation of your enterprise.

In addition to most other countries, the COVID-19 crisis has also severely impacted Germany. Slowly recovering from lockdown measures, most German companies are more or less affected by the government’s strategy of preventing an uncontrolled spread of the virus, and subsequently an overload of the German health system.

Kai Bandilla
Heuking Kühn Lüer Wojtek
Hamburg Office

Many experts expect up to 30,000 bankruptcies as a result of COVID-19 and the lockdown measures in Germany. For Chinese investors in Germany, the crisis is a challenge with several aspects. While there is a nearly global common understanding of many aspects, for example in contract law, yet insolvency-related legal frameworks differ from country to country, even within Europe, and follow different principles – they are local and often linked to the personal responsibility of acting representatives. It is therefore essential to understand some key obligations of German insolvency law.

German insolvency law stipulates a quite strict duty for managing directors, for example of limited liability companies (GmbHs), to file for insolvency if grounds occur, and managing directors and even shareholders need to keep an eye on the financial and economic situation of their company. A managing director, or the managing board of a juristic person – e.g., a GmbH or a stock corporation (AG) – is obliged to file for insolvency if either illiquidity (Zahlungsunfähigkeit) or over-indebtedness (Überschuldung) occurs.

David Loszynski
Salaried Partner
Heuking Kühn Lüer Wojtek
Hamburg Office

A company is illiquid if it is unable to pay at least 90% of its due obligations from its liquid capital and reserves payable within the next three weeks. Pursuant to the current legal definition, a company is over-indebted when its assets no longer cover its liabilities, unless there is a predominant probability that the business can financially recover and continue. Such probability is determined by way of a continuation forecast (Fortführungsprognose), which determines whether the financial strength of the company is sufficient to ensure its economic survival.

The forecast must be prepared at least for both the current and the subsequent financial years, verifying that the company will be able to keep itself liquid to an acceptable degree. If continuation is not predominantly probable (e.g., illiquidity is imminent within the current or the following financial year, or other circumstances will prevent continuation of the business), the over-indebtedness must be determined by way of a pre-insolvency balance sheet test (Überschuldungsstatus).

Pre-insolvency balance sheet assets must be valued at their liquidation values, i.e., at their present market value under the assumption of a liquidation sale, thus including possible hidden reserves not shown in the commercial balance sheet, and taking into account the regularly very substantial discounts on book values that are realized under liquidation sale conditions.

There are measures to avoid the occurrence of illiquidity or over-indebtedness, but the necessary steps need to be taken as early as possible to avoid any disadvantage. Illiquidity can be avoided with two major measures: (1) keeping the company sufficiently liquid by contributing the necessary working capital; or (2) avoiding the increase of unpaid liabilities due for payment to a level that the company cannot cover in the amount of at least 90%, for example by achieving deferment agreements with creditors.

Over-indebtedness can be prevented by either sustaining the continuation forecast or avoiding actual over-indebtedness. Keeping a positive continuation forecast can be achieved by frequently contributing the necessary working capital, or at least providing a “hard” letter of comfort (Patronatserklärung) covering the forecasted continuation period.

An actual over-indebtedness may be avoided by either contributing further equity or lowering the debts, e.g., by at least subordinating debts. As the above-mentioned potential measures may have to be implemented within a short time, Chinese investors are advised to verify that such measures, especially contributions, can be effected without any delay, e.g., due to Chinese capital transfer restrictions.

Faced with the COVID-19 crisis, Germany’s federal government issued a law to confine the economic consequences of the pandemic and associated lockdown – the COVID-19 Suspension of Insolvency Act. A key part of this law is the partial suspension of any obligation to file for insolvency. The law aims to facilitate the continuation of companies that have become insolvent, or that have economic problems, due to the pandemic and the lockdown.

The obligation to file for insolvency, and according restrictions for managing directors concerning disbursements from the company’s estate, shall be suspended until 30 September 2020, unless the insolvency is not based on the pandemic, or there is no perspective for an elimination of the occurred illiquidity. As far as the obligation to file for insolvency is suspended, so legal acts in that timeframe granting satisfaction or security to a creditor shall not be avoidable/challengeable, if these legal acts are congruent (granted as owed).

German legislators also wanted to exempt shareholders of their risk of being granted new/further securities for securing further contributions to their companies by restricting the opportunity to challenge, especially in restructuring and recovering cases.

There is also an exception to this rule, if the company’s efforts for financing and restructuring are not suitable, or will not be successful. The law, as well as the legislators’ substantiation of that law, leave enormous uncertainties in respect of how the courts/insolvency administrators will deal with these regulations in the coming months and years.

So, even if the legislators wished to create the most certainty for managing directors, shareholders and creditors in this unprecedented situation, certain risks will remain that companies may not successfully refer to the above-mentioned law (exception from legal duties and challengeability).

The continuing pandemic and the consequences of the lockdown measures will have their impact on German companies. Managing directors, shareholders and investors are well advised to keep an eye on the financial and economic situation of their company, or target.

Kai Bandilla is a partner at Heuking Kühn Lüer Wojtek’s Hamburg office. He can be contacted on +49 4035 5280-95 or by email at

David Loszynski is a salaried partner at Heuking Kühn Lüer Wojtek’s Hamburg office. He can be contacted on +49 40 35 52 80-66 or by email at

Gao Sen is a senior associate at Heuking Kühn Lüer Wojtek’s Hamburg and Düsseldorf offices. He can be contacted on +49 4035 5280-700 or by email at


Heuking Kühn Lüer Wojtek
Neuer Wall 63
20354 Hamburg
Tel: +49 40 35 52 80-0