Introduction
Government measures


Introduction

Due to the COVID-19 crisis, all German airlines have had to significantly reduce their number of flights (eg, 700 of the Lufthansa Group's 763 aircraft have been parked). Thus, Lufthansa is currently operating only 5% of its flight programme due to flight restrictions by many countries and low demand for passenger flights. In order to assist, among other things, airlines, the government implemented a new law to mitigate the consequences of the COVID-19 pandemic in civil, insolvency and criminal procedures (the COVID-19 Act). This is also relevant for aircraft lessors that have leased aircraft to German airlines and fear that in case of an airline's insolvency, they may have difficulties repossessing their assets. Through the COVID-19 Act, the threat of insolvency filings will be reduced.

Government measures

Change of insolvency law
Pursuant to Section 15a(1) of the Insolvency Code, members of the board of directors must file a request to open insolvency proceedings if their company becomes illiquid or over-indebted without undue delay, but at the latest within three weeks of the company having become illiquid or over-indebted. Under Section 15a(4) of the Insolvency Code, any responsible person that does not file a request for the opening of insolvency proceedings, fails to correctly file such a request or fails to file a request in due time will be punished by a fine or up to three years' imprisonment.

Article 1 of the COVID-19 Act implements a law on the temporary suspension of the obligation to file for insolvency and limits the liability of the directors in the event of insolvency caused by the COVID-19 pandemic. Through this new law, the obligation to file for insolvency pursuant to Section 15a of the Insolvency Code is suspended until 30 September 2020 (this deadline may be extended until 31 March 2021 at the latest). However, the law does not apply to a company if the illiquidity or over-indebtedness is not due to the consequences of the spread of COVID-19 or if there is no prospect of eliminating the financial crisis of the respective company. Conversely, the law states that if a debtor was not considered illiquid or over-indebted as of 31 December 2019, it is assumed that the current illiquidity or over-indebtedness is due to the effects of COVID-19 and that there are prospects of eliminating the existing financial crisis.

Further, the new law provides for the following consequences if the obligation to file for insolvency is suspended:

  • Payments which are made in the ordinary course of business, in particular those payments which serve to maintain or resume business operations or to implement a reorganisation concept, will be deemed to be compatible with the diligence of a prudent and conscientious manager and are not considered detrimental to other creditors with the danger of claw-back proceedings.
  • The repayment of a new loan until 30 September 2023 at the latest which was granted during the suspension period as well as the provision of collateral to secure such a loan during the suspension period will not be deemed to be disadvantageous to the other creditors.
  • The grant of a loan and provision of security under the conditions of the second bullet will not be regarded as an immoral contribution to the delay in filing for insolvency.
  • Legal acts which have granted or enabled the other party to grant security or satisfaction which the other party was entitled to claim in the manner and at the time (eg, suspension or delay of monthly lease payments) cannot be contested in subsequent insolvency proceedings; this will not apply if the other party was aware that the debtor's restructuring and financing efforts were not suitable to remedy an illiquidity or over-indebtedness which had occurred.

Moreover, the second and fourth bullets above will apply to companies which are not (yet) subject to an obligation to file for insolvency and companies that are neither illiquid nor over-indebted.

Finally, a creditor may during this period not request that an insolvency proceeding is opened against the company if the insolvency did not already exist prior to 1 March 2020.

Employment law issues
An airline could – as any other company – apply to obtain funding from the Employment Agency if it does not fire employees, but just reduces their working hours for a certain period. The requirements to obtain such funding have been recently relaxed because a company may apply for such funding if at least 10% of its employees are ordered to work less than their regular hours. If an employee does not work at all, the employer must pay only 60% or 67% (depending on whether that person has young children) of their net wage and can have that money reimbursed by the Employment Agency. In addition, the employer is entitled to pay the employee the difference between 60% or 67% and the 100% net wage. If an employee works at least part-time and their working hours are reduced by 50%, the Employment Agency will reimburse 60% or 67% (as applicable) of the 50% of the net wage on application by the company.

Government-backed loans
According to its own statement, the government will provide "through the KfW without limitation loan programmes to secure the lending activities of the house banks". The KfW (Kreditanstalt für Wiederaufbau) is the largest national development bank in the world and the third largest bank in Germany in terms of total assets. It was founded in 1948 in order to assist re-building Germany after the war. Moreover, KfW provided the government-backed loans for Air Berlin and Condor after those airlines filed for insolvency.

With this government-backed programme, existing loan programmes will be expanded and conditions eased. The measures that have been initiated are aimed at supporting enterprises of all sizes and in all sectors. In addition, the Landesförderbanken (state financing institute) has expanded its programmes and offers short-term working capital lines as part of the promotional loans in different German counties.

Thus, companies should receive liquidity support via their own house banks, with German government entities assuming the greater part of the default risks – in extreme cases even up to 90%.

For further information on this topic, please contact Christine Kranich at Arnecke Sibeth Dabelstein by telephone (+49 403 177 9756) or email ([email protected]). The Arnecke Sibeth Dabelstein website can be accessed at www.asd-law.com.