Covid 19 - Legal effects on corporate financing and what to do now

The consequences of the corona epidemic will affect corporate financing. Companies are well advised to review current financing arrangements and future financing requirements. Now is the time to check existing financing agreements in order to ensure compliance with all relevant provisions in relation to the current situation and to consider what measures may need to be taken if changes persist. Below you will find hints and answers to some of the questions arising in this context.

What legal effects can the corona epidemic have on existing financing agreements?


The corona epidemic will in many cases lead to an impairment of operations and consequently to partly considerable financial losses for companies in various industries. In light thereof, affected companies should review their existing financing agreements and pay particular attention to the regulations concerning financial covenants (please see below), representations and undertakings, information and reporting undertakings as well as events of default that entitle the financing parties to accelerate the loan, particularly as a result of material adverse effects. With regard to representations and undertakings it is necessary to examine the extent to which your company is still able to make these. With regard to reporting obligations (Reporting Undertakings) it must be clarified whether these can be fulfilled in a timely manner in view of the current situation and if not, if special information obligations (information undertakings) may apply. In particular if there are no individual contractual provisions that cover the consequences of the corona epidemic statutory termination rights may apply (please see below).


What needs to be observed and what should be done with regard to financial covenants in financing agreements, if necessary?


If Corona-related revenue losses result in missing the planned company result companies need to examine to what extent the agreed financial covenants can still be met . In this context it should be noted that covenant tests usually refer to the past 12 months, and thus cover several quarters of a business year. Your company may also have a contingency plan which includes financial measures that can prevent a covenant breach. We recommend that you also check whether your financing agreements provide for an Equity Cure-clause, meaning that it is permitted for the shareholders of the borrower to inject additional equity into the borrower (e.g. in the form of a capital increase, a payment into the capital reserves or shareholder loans) and that the relevant financial covenants are retested on a pro forma basis to take into account the additional cash. A breach of financial covenants generally has far-reaching legal consequences, ranging from a rise in interest rates to a right of termination by the lenders. Affected companies should seek an early dialogue with their lenders in order to discuss possible solutions, such as an amendment of the contract or a declaration by the lender waiving the assertion of rights resulting from the breach – this applies in particular as longer processing times can occur also on the banking side in light of the current situation .


Which statutory termination rights may apply?


If the corona-caused crisis leads to a significant deterioration of the financial situation of the borrower or the value of the collateral provided, the lender may have an extraordinary right of termination pursuant to Section 490 German Civil Code (Bürgerliches Gesetzbuch, BGB) due to a significant deterioration of the financial situation. Usually, the general terms and conditions of banks also provide for such a (contractual) termination right.


Does the newly enacted law to mitigate the consequences of the COVID 19 pandemic (Gesetz zur Abmilderung der Folgen der COVID-19-Pandemie im Zivil-, Insolvenz- und Strafverfahrensrecht "Corona-Mitigation-Law") provide for a general deferral of payment for all types of loans?

The Corona-Mitigation-Law provides for the possibility of deferring payment obligations under loan agreements concluded before 15 March 2020 until - initially - 30 June 2020 only for consumer loans. The condition for the deferral is that the consumer is unable to meet his contractual obligations due to loss of income caused by the corona epidemic. If the parties to the loan agreement after 30 June 2020 cannot reach a mutual agreement on how to proceed regarding the deferred payments, the term of the loan agreement will be extended for a period of three months. The termination rights of the lender are very limited until the expiry of the deferral.

Corporate loans are currently not covered by the Corona-Mitigation-Law. However, the German government will monitor further developments and their economic impact and examine whether other groups of borrowers should be included.


What is to be observed with regard to loans, which have been committed but not yet called?


With regard to loans or loan tranches which have been committed but not yet called it is important to check whether the conditions precedent are still met at the relevant draw-down date. If this is questionable and your company has calculated with the funds, it is crucial that you seek dialogue with the lenders promptly and in good time and discuss possible solutions acceptable to both parties at short notice.


Which solutions are available to cover short-term financing needs resulting from the corona epidemic?


The German government has resolved on a comprehensive package of measures to secure the liquidity of companies through new funds available at short notice in the form of grants or loans. This includes direct grants of up to EUR 15,000 over three months for small companies and solo self-employed persons as well as public loan guarantees that can be drawn down by large companies. In addition, an unlimited special loan programme has been launched at the state-owned development bank Kreditanstalt für Wiederaufbau (KfW), which all companies, self-employed and freelancers can use if they were financially stable at the turn of the year 2019/2020, but got into financial difficulties due to the corona crisis and need a loan for investments and working capital. Further information on the various financial aid schemes is available here.


In addition, all the usual short-term financing options are available, although in a phase of economic strain for a company a regular bridge loan may be less relevant than a restructuring loan. It should be noted that the granting of a restructuring loan is subject to special conditions.


Should an insolvency application be filed if public aid is not paid out in time or if financing or restructuring negotiations cannot be finished in time?

Generally, an insolvency application must be filed within three weeks after it has become known that the company is insolvent or overindebted. Besides the financial aids described above, the Corona-Mitigation-Law also provides for the suspension of the obligation to file for insolvency for companies that suffer considerable economic losses as a result of the corona epidemic and fall into a state of insolvency or overindebtedness, if there are prospects of eliminating the insolvency. Correspondingly, the right of creditors to request the opening of insolvency proceedings will be restricted for a three-month transitional period. This suspension of the obligation to file for insolvency is limited until 30 September 2020 and may be extended until 31 March 2021, if necessary.

Pursuant to Section 64 German Limited Liability Companies Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung, GmbHG) and Sections 92 (2) and 93 German Stock Corporation Act (Aktiengesetz, AktG), the management and board may be liable under civil law if they makes payments on behalf of the company after the occurrence of insolvency or overindebtedness. The Corona-Mitigation-Law includes a certain liability relief for managing directors in relation to such payments.

You can find our overview of the effects of the Corona-Mitigation-Law on insolvency law here.

What else should companies consider if it becomes apparent that the economic consequences of the corona crisis will also affect existing financing?

We recommend affected companies to proactively seek open discussions with their financiers and to lay all cards on the table as soon as it is foreseeable that the economic consequences of the corona crisis will also have an impact on existing financing arrangements. Transparency creates trust and with that the basis for good cooperation during and after the crisis.


If you have any questions in this context, you are welcome to reach out to your usual kallan contact persons in our Banking and Finance team or contact us at


The situation resulting from the effects of coronavirus is changing rapidly. The above information reflects the situation on 3 April 2020 which may have changed since then.