Business Law Articles
Hamburg, Germany, 31 March 2020 - While we are actively fighting the corona virus around the globe and health must be our first focus as society, the international business committee needs to find solutions to attenuate the economic impact.
This is an information about business law developments in Germany this week:
Last week (Friday 27 March 2020), the second chamber (“Bundesrat”) has consented to a law which the German Parliament had passed earlier this week on Wednesday; i.e. an “Act to Attenuate the Consequences of the COVID-19 Pandemic in Civil, Insolvency and Criminal Procedure Law” (“COVID-19 Pandemic Attenuation Law”). Meanwhile, the law was executed by the President of the Federal Republic of Germany and has come into force with retroactive effect as of 1 March 2020.
The law contains a bundle of modalities whereby it focuses on how to generate cash for consumers and small companies with less than ten employees.
What does this law mean for DOING BUSINESS IN GERMANY?
First of all, the law contains a bundle of instruments available for any employees in need, in their capacity as consumers. Consumers may presently refuse payment on long term consumer contracts, such as contracts on living space, electricity, gas, telecommunication, and sometimes water.
From a business perspective, the more important impact lies in the rights which the statute - technically set out in a new article 240 of the Introductory Law to the German Civil Code – grants to anybody in Germany, including all your German business partners. This includes suppliers and customers.
If you have an affiliate in Germany, it can also rely on these rights; but this will relate only to a minority of foreign entities. For this reason, the analysis hereinafter focuses on the perspective of a foreign company doing business with German companies.
- Pursuant to the new art. 240 § 2 of the Introductory Law to the German Civil Code, any business partner might generate cash by withholding rental payments for rented space until 30 June 2020 if it can argue in a plausible way an existing relationship between the COVID-19 pandemic and its economic difficulties of payment. In such circumstances, its landlord cannot use the argument of non-payment as a reason to terminate the rental agreement. The business partner then has until 30 June 2022 to pay back, belatedly, the rent due between April and June 2020.
However, the statute excludes only the landlord’s right to terminate the rental agreement. The tenant might still be in default, with all other consequences that may contractually or legally be foreseen. This e.g. means logically that the landlord may claim for interests at the applicable statutory rate.
- Art. 1 of the above mentioned COVID-19 Pandemic Attenuation Law has created a new statute, i.e. the “Act for a Temporary Suspension of the Duty to File for Insolvency and To Limit the Liability of Management in Case of an Insolvency Situation Caused by the COVID-19 Pandemic” (COVID-19 Pandemic Insolvency Suspension Act).
Business partners may be in need to rely on this tool. This includes both small and large German business partners with a limited cash cushion, including e.g. first tier OEMs in situations in which a foreign entity is working as a second-tier supplier to a German customer.
When doing business with such companies, the new act invites to be cautious:
- Watch out for the following risk: Pursuant to art. 1 § 1 of the COVID-19 Pandemic Insolvency Suspension Act, the obligation to file for insolvency is suspended until 30 September 2020. Thus, if the financial situation would require filing for insolvency, the normal time limits to file for insolvency would start to run on 1 October 2020 so that the insolvency needs to be filed latest on 21 October 2020 in usual circumstances. The act creates a risk of a series of insolvencies throughout Germany in the second half of October/early November.
- It is against this context to remember, as noted above at 1., that the obligation to pay rent for April through June remains in existence even if the business partner does not pay its rent.
- Positive: Under German insolvency law, a trustee for insolvency can usually challenge the payments made three months preceding an insolvency proceeding and claim back such payments. The new German COVID-19 Pandemic Insolvency Suspension Act eliminates this risk. If you receive payments from a German business partner for deliveries of goods or services until 30 September 2020 in the ordinary course of business as contractually agreed, § 2 subpara. 1 no. 1 of the COVID-19 Pandemic Insolvency Suspension Act eliminates the risk that a trustee in insolvency later challenges such payments. The provision explicitly states that such payments are considered as being made in the course of ordinary business and with the prudence of an ordinary careful business manager, in particular if such payments keep up the ordinary business.
- According to the same § 2 (at subpara 1 no. 3 and 4) of the COVID-19 Pandemic Insolvency Suspension Act, the trustee for insolvency may also not attack later any credit decision or action to receive security in line with existing contractual agreements (or at the occasion of concluding new contracts) from that business partner during the time until 30 September 2020.
About Brödermann Jann
Prof. Dr. Brödermann is managing partner of the law firm Brödermann Jahn in Hamburg, Germany. In his practice, Prof. Dr. Eckart Brödermann has concentrated both on international business law (including distribution schemes, M&A, trade, international construction) and on international litigation and arbitration for 25 years. In his teaching at Hamburg University and in his publications, Prof. Dr. Brödermann concentrates on international contract law (including risk management) and on international arbitration. His education includes University of Paris, Harvard Law School, and the University of Hamburg. He is fluent in German, English, French, and Italian. Prof. Dr. Brödermann is a Fellow of the Chartered Institute of Arbitrators, London, and he is a German Bar “Certified Specialist of International Business Law.” Prof. Dr. Brödermann sits as an arbitrator with various arbitration institutions and is listed on several panels around the globe.
Brödermann Jahn is also a member of The International Society of Primerus Law Firms.
Prof. Dr. Eckart Brödermann LL.M., Dr. Philipp von Dietze, Tina Denso LL.M., Dr. York Zieren
Hamburg, 20354 Germany
+49 40 37 09 05 0