Corona: How Do You Get Through the Crisis?

Lawyer Edwin Grubert explains in an interview for the magazine netzwerk Tirol, issue May 2020 (https://netzwerktirol.at/) how companies can best get through the crisis in the face of financial problems.

Download Interview Edwin Grubert

“Going round in circles”

Might bankruptcy be a good idea?

During our initial talks, you said that challenges can actually be a good thing and always staying on the ball is what makes the most fun.  I can only underline this guiding principle of entrepreneurial thinking. However, the current corona crisis will not make it easy for some small and medium-sized companies to actually live by this guiding principle.

In contrast to the financial crisis a little more than ten years ago, the Corona crisis hit both entrepreneurs and employees in the space of a few days without any possibility of preparing for it. As a result of the directives issued, companies had to close down more or less overnight. Not even open orders could be completed. This meant that all of a sudden operational income was more or less zero. As a result, a number of businesses were unable to act in time, they could only react.

Even if the closure of a company and subsequent further statutory corona measures eliminated some of the fixed costs or temporarily reduced them, in principle existing liabilities remain in full and are currently missing in many companies, with the exception of a few sectors such as the food industry.

The situation is aggravated by the fact that hardly any orders are being placed due to the uncertain times ahead. It is therefore not surprising that that the shock of the Corona crisis has left some entrepreneurs wondering whether it might not make sense to file for bankruptcy.

In my opinion however, insolvency and thus bankruptcy, reorganisation proceedings or debt settlement proceedings, should always be the last resort in entrepreneurial thinking. However, this point is reached when the legislator obliges the entrepreneur to open insolvency proceedings. According to the provisions of the Insolvency Code, the management of a company as well as a sole proprietor, are obliged to file for insolvency with the insolvency court if certain criteria are met.

What are the criteria?

The criteria obliging a company to file for insolvency can be found in the Insolvency Code . They are either insolvency, or in the case of companies without unlimited personally liable partners, excessive debt. In the event of insolvency or excessive debt within the sense of the Insolvency Code, the management of a company and sole proprietors have the obligation to file an application for the opening of insolvency proceedings with the insolvency court within 60 days of the beginning of the insolvency or excessive debt.

To put it simply, insolvency occurs when a company is unable to pay the liabilities that are due, such as loan instalments, tax and duty debts, supplier liabilities, rent, etc., within a reasonable period of around 30 days. This means that the question of solvency is primarily a question of liquidity. However, the possibility of creating liquidity through current income has disappeared for many companies due to closures caused by the Corona crisis.

Since a company has certain fixed costs even if it is partially or completely closed, it has to find another way of generating liquidity when income is lost. Unless savings have been accrued or non-operating assets are available that can be divested short term, the company essentially only has the option of obtaining liquidity through loans.

And this is where we’re going round in circles. Not only for their own commercial interests, but also due to the strict regulatory requirements to which banks and credit institutions are subject, credit checks are of decisive importance when granting loans. In most cases, however, recovery assessment  is linked to a prognosis of the future, especially with regard to income opportunities. However, the corona crisis has led to an uncertain market situation and thus to an uncertain income situation, which hardly allows valid future forecasts, thus logically leading to greater caution when granting loans.

Are there any remedies?

In order to provide assistance, the legislator has introduced a number of liquidity measures, such as the facilitation of bridge financing. In addition by means of the 4th Covid-19 Act, the legislator suspended or extended the period within which an application with the court for the opening of insolvency proceedings has to be filed and has restricted the possibilities of contesting certain bridging loans. This, together with the other legal measures in connection with the Corona crisis, means that even in these times, filing for bankruptcy can and should continue to be considered a last resort. This is also a clear objective of the legislator, as demonstrated by the further measures in the 4th Covid-19 Act. The current corona crisis should not lead to sound companies being forced into insolvency. The measures are also of particular importance in view of the fact that management may become personally liable if it fails to file for insolvency in due time.

However, this is not to say that companies that were already insolvent or over-indebted before the Corona crisis should not take the plunge and file for bankruptcy. These companies had already reached the point of “last resort” before the Corona crisis.

 

Photo: (c) Blickfang