COVID-19 and measures for distressed businesses

Examples from continental legal systems

The COVID-19 pandemic has posed serious difficulties for a huge number of businesses. To address this extraordinary challenge, countries around the world have introduced various stabilisation and economic support measures.

The State of Emergency Measures Act (SEMA) provided partial solutions for Bulgaria, foreseeing the suspension of a number of deadlines, options for settling relations between employers and workers, extended deadlines for the fulfillment of public obligations and others. However, the Act does not contain explicit provisions regarding stabilisation and insolvency proceedings. As a result, the rules in force provided for by the Bulgarian Commerce Act (CA) apply to these proceedings in accordance with SEMA. An example for this is Article 626 of the CA, in accordance with which any debtor, who becomes insolvent or over-indebted, should apply for initiation of insolvency proceedings within 30 days. The 30-day period starts to run from the date when the company is found to be insolvent, or respectively, over-indebted. Taking into account Article 4, paragraph 1, item 1 of the SEMA, if the same 30-day period expires during the state of emergency, it will be extended with one month as of the end of the state of emergency. Aside from the relevant compliance with and application of the SEMA, the Bulgarian government has not adopted explicit legislative reforms for financially distressed companies in order to prevent the initiation of insolvency proceedings.

How did some of the leading continental legal systems respond to the challenge? Historically, modern Bulgarian civil law takes after the Roman legal system through the Civil Codes of Italy and France. The Bulgarian Commerce Act has borrowed and combined principles and legal institutes from the German legal system. In this context, we will address some explicit legislative changes in Italy, France and Germany, adopted in light of the pandemic to support financially distressed companies. The purpose of these changes is to avoid the initiation of insolvency proceedings and to enable the stabilisation and recovery of companies affected by the pandemic.


In Italy, temporary legislation has been adopted, which could be amended depending on the development and duration of the pandemic, given its dynamic and unpredictable nature. Some of the measures are as follows:      

○ The implementation of the Italian Corporate Crisis and Insolvency Code has been postponed. This Code was developed before the pandemic and in accordance with Directive (EU) 2019/1023 of the European Parliament and of the Council, in order to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt. Prior to the pandemic, this Code was scheduled to enter in force in August 2020, but following the state of emergency, the Italian authorities postponed it until no later than 1 September 2021. This includes the applicability of early warning tools provided in the Code, which aim to allow for earlier and more timely measures to prevent the company from falling into financial difficulty.      

○ The filing of any insolvency requests is not possible until 30 June 2020;   

○ Any debt-restructuring agreements and rehabilitation proceedings plans, pending at the time of the emergency, are postponed for a given period of time. Amendments to the restructuring or rehabilitation plan, as well as the filing of a new plan, are permitted under certain conditions if the plan is not approved by the debtor's creditors.

○ Companies, represented by their managing authorities, are not obliged to immediately initiate pre-insolvency or insolvency proceedings, in order to avoid personal and criminal liabilities. Instead, they could adopt a more flexible approach to reaching out-of-court settlements. In particular, companies and their managers could:

a) determine which procedure may be considered the most appropriate one for recovery from the crisis;

b) postpone the decision to initiate any of the above proceedings until the end of the pandemic situation

In view of these measures, it can be assumed that Italian insolvency courts are unlikely to encounter practical problems related to the increase in the number of cases as a result of the pandemic and the associated difficulties and constraints for companies.


The French government has adopted Ordinance №2020-341 of 27.03.2020, which provides provisional amendments to the insolvency law, aimed at promoting access to pre-insolvency proceedings and extending statutory time limits for insolvency proceedings. Such amendments are:   

○  Amendment regarding the insolvency test. The insolvency test in France is a cash flow test for a company's capability to pay its current liabilities out of its current assets, taking into account available credit lines and moratoriums. If a company is not insolvent, it may request the opening of one of the preventive procedures provided for in French law.

If a company is insolvent for less than 45 days, it may either request the opening of a procedure, similar to the Bulgarian stabilisation proceeding, or file for a reorganisation or liquidation procedure. If the company is insolvent for more than 45 days, this can no longer be applied and it is imperative that insolvency proceedings be opened. Ordinance № 2020-341 / 27.03.2020 provides for the insolvency test, which should have been performed during the pandemic, to be carried out three months after the end of the pandemic emergency.

For example, a company which is solvent as of 12 March 2020, but became insolvent during the pandemic, will not be considered legally insolvent and will not be requested to file for a reorganisation or liquidation procedure for up to three months after the end of the state of emergency or until 24.08.2020. On the other hand, a company which is solvent as of 12 March 2020 and would not be insolvent after this date under normal conditions, retains the possibility to file for a reorganisation or a liquidation procedure, if necessary.   

○  Extension of time limits in pre-insolvency proceedings. The „conciliation procedure", which is similar to the “stabilisation proceedings” under the Bulgarian Commerce Act, is usually open for a maximum of five months. If no agreement is reached with the debtor's creditors during this period, it is possible for such a procedure to be reopened after a waiting period of three months. According to Ordinance №2020-341 / 27 March 2020, the time limit for the conciliation procedure is automatically extended until 24 August 2020, regardless of the time limit, which has expired before the adoption of the ordinance. The Ordinance also removes the three-month waiting period between two conciliation procedures

Stabilisation proceedings in Part Five of the CA are similar to the French "conciliation procedure”. Article 796, paragraph 1, item 2 of the CA states that the stabilisation proceedings are terminated when a stabilisation plan is not endorsed by the court within four months after the initiation of the proceedings. Furthermore, Article 762, paragraph 3, item 2 of the CA, stipulates that stabilisation proceedings may not be initiated for a debtor, for which such proceedings have been initiated over the past three years prior to the filing of the stabilisation application. In conclusion, under Bulgarian law, a debtor's stabilisation proceedings may be opened for a maximum of four months before the adoption of a stabilisation plan, and subsequently such a procedure for the same company can be reopened three years later. Taking into account Article 4, paragraph 1, item 1 of the SEMA, if the four-month time limit for approval by the court of a stabilisation plan expires during the state of emergency, this time limit is extended by one month from the repeal of the state of emergency.   

○  Extension of time limits in insolvency proceedings. According to the Ordinance, some exhaustively listed deadlines in insolvency proceedings are automatically extended until 24 June 2020. In addition, the insolvency practitioners may request before the president of the court the extension of all statutory time limits imposed with Part VI of the Commercial Code until 24 August 2020.   

○  Extension of time limits for restructuring plans. The Ordinance provides for an automatic extension of the time limits for restructuring plans until 24 June 2020, with the possibility of a further extension until 24 August 2020. After 24 August 2020, and for a time limit of six months - until 24 February 2021, the court may be requested to extend the plan for a time limit of one year.   

○ All time limits for communication between courts and insolvency authorities are extended with up to one month after the cessation of the state of health emergency. The time limits provided for referral to court by the troubled debtor have been extended in the same way.

On 23 March 2020, French insolvency practitioners launched a free phone number available to the managing directors of companies affected by the COVID-19-related economic crisis. Companies can ask questions related to government policy responses and legislative measures.


At the core of the legislative reforms, which specifically concern debtors in financial distress, is the Act to temporarily suspend the duty to file and to limit the directors’ and managers’ liability in case of an insolvency caused by the COVID-19 pandemic - ‘CoVInsAG’.

According to the German Insolvency Act (Insolvenzordnung), the directors or liquidators (or, under rare circumstances, members of a supervisory board or shareholders) are obliged to file for insolvency proceedings in case of lack of liquidity or overindebtedness without undue delay, at the latest within three weeks from becoming aware of this circumstance. A negligent or intentional breach of this duty exposes them to civil and criminal liability. Considering that the COVID-19 crisis  is likely to provoke a wave of insolvency claims filed by companies which are otherwise stable and viable or likely to recover, the State's support through fiscal incentive measures includes explicit changes in order to preserve companies.   

○  §1 of CoVInsAG suspends the duty of managers or liquidators of companies to file for insolvency proceedings until 30 September 2020. This time limit may be extended by executive order until 31 March 2021. However, this suspension does not apply if:

a. the preconditions for filing for insolvency proceedings have not been caused by the COVID-19 crisis; or

b. there is no prospect of recovery of the objective condition, which has already occurred and which leads to insolvency.

Neither of these two exceptions applies if the debtor was not already illiquid on 31 December 2019. Despite the suspension of this obligation, it remains as an option at the discretion of the debtor. The aim of this legislative amendment is to give the debtors breathing space and time to apply for loans, guarantees, grants, as well as to enter into negotiations with creditors and other stakeholders – such as investors.   

○ The measure is supplemented by the irrefutable presumption that payments related to ordinary activities - and in particular those for maintaining or restarting the business - are considered compatible with the due care of a prudent businessperson. The need to accept that presumption is imposed by the fact that, under German law, and in particular (but not limited to) the Limited Liability Companies Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung), the managers of a limited liability company (GmbH) must indemnify the company (respectively the insolvency estate) for payments that are incompatible with the due care of a prudent businessperson. The adopted presumption intends to ensure the peace of mind and security of the managers for the undertaking and implementation of bold management actions aimed at maintaining the debtor's business and doing so while keeping it in solvent condition.   

○ Unlike the Italian and French legal systems, the German legal system does not have legal institutes that are preliminary and preventive to insolvency proceedings. The COVID-19 crisis does not change that. According to German authorities, the measures set out in the previous two points are sufficient to ensure adequate prevention of bankruptcies, caused by the pandemic.   

○ According to §3 of CoVInsAG, petitions by creditors to open insolvency proceedings against their debtor, filed between 28 March 2020 and 28 June 2020 (a date that may be extended), can lead to opening of insolvency proceedings only if, as of 1 March 2020, the debtor was already in a position which implies the opening of insolvency proceedings. This amendment was made to ensure the effectiveness of the aforementioned measures, allowing time for debtors in distress to take advantage of incentive measures in order to avoid insolvency proceedings initiated by their creditor. It should be noted that in Germany, insolvency proceedings are initiated mainly at the request of the debtor himself, as Germany has one of the strictest requirements for 'early filing', and initiating proceedings at the request of a creditor is rather the exception.

The purpose of these measures is to enable companies, which have economic difficulties or have become insolvent due to the pandemic, to continue their activities.

In conclusion, taking into account the dynamics of the situation, the leading continental legal systems have adopted explicit legislative measures, aimed at addressing the economic and financial impact of the pandemic on companies. The measures are mainly aimed at extending the time limits for companies to reach an agreement with their creditors, as well as at extending the time limits, within which to request that insolvency proceedings be opened against them. Usually, non-compliance with these deadlines is subject to liabilities.   

Italy has postponed the entry into force of a newly developed Italian Corporate Crisis and Insolvency Code, as the latter aims to introduce strict rules to limit the time needed to rescue financially distressed companies and to conduct insolvency proceedings, as well as increased sanctions in case of non-fulfillment of the obligations in this direction.    

In France, access to preventive proceedings is encouraged and all deadlines in this area are extended at the legislative level, with possibilities for their further extension.    

In Germany, the imperative nature of the obligation for companies to initiate insolvency proceedings against themselves, if the preconditions are met, is suspended. The latter remained only as an option at the discretion of the debtor. In contrast,    

Bulgaria did not pay special attention to these problems, relying on their regulation with the general rules for suspension and extension of the deadlines provided by the SEMA. The upcoming months will show whether this is enough to support businesses affected by the pandemic and to prevent the opening of insolvency proceedings for companies, which could have been rescued.

Source: INSOL International and the World Bank Group Global Guide about measures adopted to support distressed businesses through the COVID-19 crisis

Related Content: Global Guide: Measures adopted to support distressed businesses through the COVID-19 crisis, Insolvency and Creditors’ Rights, Restructuring and Enforcement of Securities

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