Legislator restricts obligations

The Financial Market Stabilisation Act (FMSTG) eliminates the capital requirement. This is because the legislator has now restricted the obligation for all companies in Germany to file for insolvency. What this means for practice.

The financial market crisis is a fundamental turning point for all companies. Many companies have already been driven into insolvency. Many more companies are facing this development. The legislature has acted. To put it bluntly, companies that have actually long since gone bankrupt can continue to operate with peace of mind – until they reach a state of insolvency.

The relevant statutory provision is § 19 II of the Insolvency Code (InsO), which now reads as follows:

“Over-indebtedness occurs when the debtor’s assets no longer cover its existing liabilities, unless it is overwhelmingly likely under the circumstances that the business will continue as a going concern.”

After that, even the Ponzi scheme of a Bernard Madoff would have almost been a solid enterprise, as long as he could probably still find enough new investors with whose money he could pay off the old ones. The amendment to the Insolvency Code means first of all that every manager of a corporation whose company has fallen into a state of over-indebtedness no longer has to fear being punished for missing the deadline for filing for insolvency or being liable with his private assets. However, the most important prerequisite for this is that an independent tax advisor or auditor has attested in writing to a positive prognosis for the continuation of the company.

In addition, it is advisable to initiate the reorganization and to ensure legal support. Indeed, criminal offences may well be committed when entering into new contracts, such as fraudulent misrepresentation of solvency in the future.

 

Significance for small and medium-sized enterprises

For entrepreneurs or business managers, this offers an option to review their own business model even after the occurrence of over-indebtedness, to discontinue unprofitable activities and to counteract over-indebtedness through further restructuring measures. The state continues to receive tax payments from over-indebted companies – those creditors whose claims are not backed by loan collateral are at a disadvantage if the company later goes bankrupt. The result: no business partner can any longer rely on the fact that he is dealing with a solvent company with a strong credit rating. Distrust in the business community is on the rise. Supplier credits tend to be restricted. Banks are more reluctant to extend new credit. By increasing opacity, policymakers have achieved exactly the opposite of what they claim to be aiming for: facilitated lending and market confidence. In addition, even with its “rescue packages”, the legislator has not ensured that financial institutions have effective risk management in place, including for recovery purposes. The obligations to do so have been in the code since 1998. Banks and insurance companies are not obliged to file for insolvency in the narrow sense. They only have to notify the financial supervisory authority that they are ready for insolvency. The latter then decides whether to file for insolvency. Under the new rules, Mannheimer Lebensversicherung, which was ultimately absorbed by the industry solution Protektor, would probably still have been considered sound.

 

Real losses

In addition, since 2002 and 2008, lawmakers have introduced regulations to ensure that financial firms do not have to report their “real” losses from toxic securities or stock market casino bets on their balance sheets. Numerous financial institutions, including those in German-speaking countries, are still unaware of the extent of their risks and losses. From the point of view of bank and insurance customers, it is important to dispose of the less solvent financial houses in good time. Even long-term contracts and contracts that cannot be terminated per se can be terminated by customers without notice. Where in the past there would have been a ban on payment due to insolvency, the customer may now encounter a now “solvent” company and still be able to withdraw his money. Insurers are not defenceless, however: if too many customers terminate, they can further reduce surrender values to bring them in line with the market value of their investments and discourage customers from terminating. The actuaries of the German Association of Actuaries (DAV) are currently working out a concrete indication of how surrender values can be additionally reduced. This is legally possible according to § 169 (6) VVG – and in any case already according to the regulation on the current value applicable to old contracts. However, this also makes the value of life insurance as loan collateral questionable.

 

by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm

by courtesy of

www.performance-online.de (published in Performance 03/2009, page 86-87)

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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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