In March, due to the corona pandemic, the federal government released insolvent companies from the obligation to report bankruptcy to the court for half a year. The Association of Associations Creditreform and other institutions then expected a wave of bankruptcies in the autumn. Now these experts assume that there will be another postponement and even worse progress because last week the federal government extended the suspension of the bankruptcy filing period for over-indebted companies until the end of the year.
A company can become insolvent due to excessive indebtedness or insolvency. Over-indebtedness is an internal company statement. It is different with insolvency, because third parties see and feel that their claims are not paid. For insolvent companies there is no more deferment from October, they have to report their insolvency due to Corona to the court again from October.
Increasing danger from “zombie companies”
“With the suspension of the insolvency obligation in the case of over-indebtedness, the risk of zombie companies that operate at the expense of competitors, although they make a loss and are not viable,” says Klaus-Heiner Röhl, Senior Economist at the Institute for Economic Research Cologne IW. It could be an estimated 4,300 companies that continue with no prospects due to the extension. If unsuspecting companies do business with over-indebted companies, they run the risk of their claims not being paid.
Bad debt losses are the result, which can lead to subsequent bankruptcies of thousands more companies. “If the extension ends in 2020, then we will see a drastic increase in bankruptcies in the first quarter of 2021,” says Röhl. However, it is to be feared that the federal government will extend the suspension until after the federal election in order to be better off before the election, speculates Röhl. Such a policy makes healthy companies sick and only delays the end of unsuccessful companies.
Big wave from spring 2021
“From an economic point of view, the differentiated reporting requirement is initially positive, because from October the bankruptcy backlog will be partially resolved because the market adjustment is starting again,” says Patrik-Ludwig Hantzsch, head of economic research in the Association of Creditreform Associations. The fact is that the majority of troubled companies file for bankruptcy because of insolvency and not because of over-indebtedness, says Hantzsch. The latter is a vague term and in practice affects only a few companies.
Hantzsch assumes that from October a particularly large number of small self-employed people, traders and small to medium-sized companies will have to file for bankruptcy because they are illiquid. “In addition, there is a large number of companies that are quietly disappearing from the market, who do not thaw out bankruptcy statistics, but pay their bills and close the shop.” These are companies from the fields of culture, sport, recreation, tourism and the hotel industry. However, the association does not expect the large wave of insolvencies until spring 2021, because the local courts under Corona conditions need longer than usual to process the applications.
Postpone a crisis instead of fighting it?
According to Hantzsch, the current rescue policy preserves a situation that is counterproductive in terms of a sustainable economic upturn. “The automotive industry, mechanical engineering and also the stationary retail trade had massive difficulties even before Corona. That is why we should invest massively in the future-oriented orientation of our economy and not save ailing structures.”
The strategy of the federal government merely postpones the crisis instead of fighting the real problems. “It seems that the federal government is acting according to the motto: Don’t look, then the problem won’t be there,” says Röhl. In order to mitigate the impending wave of insolvency, he advises converting corona loans into grants depending on the maintenance of jobs and training positions. This lowers liabilities and promotes liquidity.
“Preferably until after the federal election”
The suspension of filing for bankruptcy in the spring has helped many companies survive the lockdown. “With the extension that has just been decided, the suspicion arises that politicians are trying to postpone the impending wave of bankruptcies in the SME sector for as long as possible, preferably until after the federal election,” says Mario Ohoven, President of the Federal Association of SMEs. 99.5 percent of all companies in Germany are small and medium-sized companies.
Ohoven considers the government’s action to be a “highly dangerous route” if bankruptcies no longer have to be reported. “Because an important function of the insolvency procedure is temporarily suspended: the stop signal.” Banks and business partners are withheld information on how the company is actually doing economically. They run the risk of being dragged into the abyss at the start of the bankruptcy wave, although they would have survived if the business relationship had been terminated on time.
According to Ohoven, the separation between over-indebted and insolvent companies only serves to limit damage. “Ultimately, however, over-indebted companies should also consider the possibility of bankruptcy proceedings as early as possible,” recommends the association’s president. His justification for this: In all insolvency proceedings that are applied for immediately after the end of the suspension period due to insolvency, the suspicion that the application was made too late should otherwise exist. If this is the case, there is a risk of criminal proceedings for delaying bankruptcy.