German Proposal Seeks to Avoid Bankruptcy Wave Due to CCP Virus

German Proposal Seeks to Avoid Bankruptcy Wave Due to CCP Virus
German Justice Minister Christine Lambrecht addresses a news conference after a virtual meeting with the EU Ministers of Justice in Berlin on July 6, 2020. (Kay Nietfeld/Pool via Reuters/File Photo)

BERLIN—Germany would relax insolvency rules under proposals set out Sept. 19 to help avert a wave of bankruptcies in Europe's biggest economy, provided companies hit by the coronavirus crisis have a robust business model.

Keen to avoid bankruptcies and mass layoffs, Chancellor Angela Merkel's government has begun a range of stimulus and relief measures as Germany braces for its biggest slump since World War II, having shrunk by an unprecedented 9.7 percent in the second quarter.

"Companies that can show creditors a realistic prospect of restructuring should be able to implement their concept outside insolvency proceedings," Justice Minister Christine Lambrecht said in a statement.

Under the proposal, which would take effect at the start of 2021, the deadline for firms to file for insolvency would be extended to six from three weeks and authorities will apply more relaxed benchmarks when examining over-indebtedness.

The government has already taken steps such as allowing firms in financial trouble due to the pandemic to delay filing for bankruptcy until the end of the year, extending an original deadline of the end of September.

Helped by these measures, the number of firms declaring insolvency in Germany fell 6.2 percent to 9,006 in the first half of this year from the year-earlier period. Critics say suspending insolvency delays, but doesn't prevent, the collapse of "zombie companies" artificially kept afloat.

However, defenders of insolvency protection steps say they have helped to spare Germany deeper economic contraction and prevent a spike in unemployment.

By Madeline Chambers