In April 2020, the government introduced a moratorium on bankruptcies. Those companies that had to reduce or even stop their activities due to the health measures could enjoy a temporary suspension and could not be declared bankrupt if the difficulties encountered were the result of those measures. The intention was to stem the wave of bankruptcies of vulnerable companies. This measure, which resulted in a 30% decrease in bankruptcies, was later prolonged until 31 January 2021. However, the measure is controversial, in part because it could artificially keep so-called “zombie companies” alive.
On January 31, 2021, the measure expires, making it easier for companies to be declared bankrupt again.
In order to avoid a potential wave of bankruptcies following the end of the moratorium, the government envisages a modification regarding the procedure of judicial reorganization, in particular a relaxation of the to be admitted to the procedure. Companies seeking temporary protection from their creditors must submit a list of data to the court to prove they are still salvageable. Many of these documents have to be delivered by accountants. The latter often see the problems ahead and demand immediate payment, which often fails.
The conditions for admission are very strict: If one document is missing, the request for protection is immediately inadmissible. The current idea would be to grant the court the possibility to be more lenient: if the documents are completed shortly after the procedure is opened, a regularization is possible.
There will also be a new procedure of preparatory agreement outside the court (the so-called “silent bankruptcy”), whereby companies can already quietly seek an agreement with a majority of their creditors before it is published in the Official Gazette that they are under judicial supervision. The government is eager to promote this procedure, as it allows for a more subtle way of solving the solvency issues, without creditors or potential investors knowing that there are any.
However, the new legislation still needs to be approved and will not be able to take effect until March 2021 at the earliest. If you are worried that a business partner is under threat of bankruptcy, please consult our series of insights on debtor insolvency here.
We will be following this evolution and any related new legislation closely.