Current economic situation, insolvencies and financial loss liability insurance

Crises put pressure on companies

The German economy is facing major challenges in these continuing times of crisis.

To some extent, companies have the opportunity to face the demands and even emerge stronger from a crisis. For example, renewal in terms of the organisation within the context of mobile and flexible working, forced on lots of companies during the coronavirus pandemic, has in many cases sustainably increased their productivity and flexibility. The energy crisis is accelerating necessary innovations in the field of renewable energies. According to an initial estimate by the German Federal Statistical Office, gross domestic product in 2022 grew by 1.9% compared to the previous year (2021 +2.6%) despite all the pressures.

However, significant inflation, the energy price shock, disrupted supply chains, high sickness rates, shortages of skilled personnel, site closures at times in Russia and in war zones, statutory regulations regarding legally compliant company management, as well as other events and framework conditions are something that besets every company.

The state aid packages in the form of monetary aid, enabling reduced working hours, deferred rent payments, a temporary suspension of the obligation to file for insolvency and further temporary relief in the new SanInsKG (Sanierungs- und insolvenzrechtliches Krisenfolgenabmilderungsgesetz [German Restructuring and Insolvency Law Crisis Consequence Mitigation Act]) were able to, and did, decisively calm the insolvency events since 2020. In 2021, the number of insolvencies was even at the lowest level since 2009.

Number of company insolvencies will increase significantly

According to the German Federal Statistical Office, the total number of company insolvencies in 2021 was 13,993. There was no clear trend in 2022; compared to the previous year, the figures fluctuated sharply and were only higher by a few proceedings at the end of the year.

Government aid has a positive effect, but different parties fear and are also criticising the fact that a considerable number of companies would not have been able to and will not be able to stay afloat without help. The problems of many companies did not arise in the first place due to the crisis and remain at their core. Thus, insolvency for them may only be postponed. Similar to government aid, many years of low interest rates have helped to keep afloat for a dangerously long time significantly indebted firms, called “zombie companies” – the economically undead. “Dangerous” because they additionally endanger the critical economic situation by withdrawing resources and labour from sustainable companies and causing financial damage to third parties sooner or later. Similar developments in the other developed countries further degrade the outlook in terms of the international structure.

In view of all the circumstances, forecasts are now unanimously moving towards a significant increase in corporate insolvencies in the coming years. The healthcare clinic industry is already fearing a wave of insolvency in 2023. The construction industry was already the industry with the most insolvencies in 2022 with 1,970 cases by September alone [Press portal of the German Federal Statistical Office, 12/12/2022] and a continuation of the development is not unlikely.

“We are preparing for more insolvencies – but that’s the way back to normality. We are coming from an abnormal situation”, said recently Jochen Böhm, member of the management of the credit insurer, Coface [news reports, 28/12/2022]. The industry association of credit insurers forecasts a 15 to 20% increase in corporate insolvencies this year. Credit insurers see increased risks in almost all sectors. According to the GDV (Gesamtverband der Deutschen Versicherungswirtschaft [Association of German Insurers]), the number of defaults that were absorbed by German commercial credit and security insurers in 2022 was 50% higher than the previous year, at EUR 700 million, which reveals the growing financial problems of the companies.

The President of the German Institute for Economic Research (DIW – Deutsche Institut für Wirtschaftsforschung), Marcel Fratzscher, expects a significant increase in insolvencies in 2023/2024 due to the ongoing economic downturn.

Around 2,000 persons working under the German Insolvency Code (InsO) and the German Corporate Stabilisation and Restructuring Act (StaRUG), most of which are specialist lawyers in insolvency law, are available to provide support.

Proceedings before and during insolvency

Corporate insolvencies are generally referred to as “normal insolvencies”. In self-administration, the management of the debtor company may run the company through insolvency, whereupon the insolvency court will provide them with a trustee as an insolvency expert. The companies also frequently commission external consultants who prepare the insolvency plan with them, accompany them through the crisis and are sometimes even appointed by the company to executive roles as restructuring managing directors, Chief Restructuring Officer (CRO) or general representatives.

Since 2012, companies have already been able to apply for self-administration in the preliminary proceedings and – exclusively in the preliminary proceedings – use the “protective shield procedure” in self-administration. In January 2021, the legislator adopted a rescue instrument with the Corporate Stabilisation and Restructuring Act (StaRUG) to avoid insolvency through possible timely pre-insolvency restructuring measures.

The “new” procedures promise a faster agreement between debtors and creditors, lower procedural costs and less negative publicity – lower burdens create better conditions for a successful continuation of the company and the safeguarding of creditor interests.

In 2021, however, the number of approved self-administrations was only 210 (2020: 382) [IfM Bonn] and the number of requested StaRUG proceedings was only 22. Nevertheless, self-administrations, including the provisional protective shield procedure, are present because they were used in some of the prominent insolvencies filed in 2022, such as those of Galeria Karstadt Kaufhof and Görtz.

Property insurance against financial losses

Insolvency administrators, trustees, restructuring officers, creditor committees or colleagues in other roles require pecuniary loss liability insurance relating to the proceedings as quickly as possible after their appointment by the court. Your legal liability applies directly to your appointment – and is not limited to your private assets. Quotes for pecuniary loss liability insurance must therefore be obtained as quickly as possible after appointment.

Finlex has created a solution for this that is unique to the German market.

With risk carriers AXA and Zurich (via HVR GmbH), Finlex offers transparent insurance cover in a smart way for the best premium and conditions. Binding quotes for insured sums up to EUR 15 million can be obtained by brokers with only a small amount of information and the court order. Prepared proposal letters with a synopsis can then be made available to prospective parties within a few minutes.

The insurance cover constitutes the only asset protection of the personally appointed activities according to InsO and StaRUG. The best possible protection is therefore in the interests of the policyholder, the creditor and also the appointing courts.