Rapidly Increasing Count of Businesses in Financial Distress
In July 2020, the number of corporate insolvencies in Germany decreased, despite the economic hardship caused by the COVID-19 pandemic. According to local courts, there were 1,369 corporate insolvencies, a 16.7% decrease compared to July 2019 [1].
The Federal Statistical Office (Destatis) announced this information on Thursday. Among the industries hit hardest by insolvencies were the construction, hospitality, and trade sectors, with 204, 154, and 228 insolvency applications, respectively [2]. In the freelance, scientific, and technical services sector, 182 insolvency applications were reported [3].
The decrease in insolvencies was primarily due to temporary government support measures and legal changes that postponed insolvency filings. These included government financial aid and subsidies aimed at stabilizing businesses and providing liquidity to companies affected by the crisis [4].
Additionally, the suspension or easing of insolvency filing obligations legally delayed companies from having to declare insolvency during the peak pandemic months [4]. Various emergency protections designed to prevent a surge in bankruptcies allowed companies to temporarily avoid insolvency declarations despite economic difficulties [4].
This resulted in an artificially reduced number of insolvency filings during mid-2020, even though the actual economic stress on businesses was high [1][3]. These protective measures have been well-documented as a key reason why insolvency numbers did not immediately spike at the beginning of the pandemic, with trends only showing increases once these supports were rolled back or expired later on [1].
In July 2020, 4,024 consumer insolvency applications were reported, and the number of opened regular insolvency proceedings decreased by 34.5 percent in July and August 2020, compared to the previous year [5]. Furthermore, 5,645 other debtors filed for insolvency, which was 28.4 percent less than in the previous year [6].
The obligation for companies to file for insolvency was suspended on March 1, 2020 [7]. While these protective measures have helped to delay insolvency proceedings, they do not reflect the true economic stress on businesses due to the corona crisis.
Sources: [1] Destatis, 2020. [2] Destatis, 2020. [3] Destatis, 2020. [4] Destatis, 2020. [5] Destatis, 2020. [6] Destatis, 2020. [7] Destatis, 2020.
The decrease in corporate insolvencies in July 2020 was not merely a reflection of the economic health of businesses, as it was influenced by government support measures and legal changes that temporarily postponed insolvency filings in the Other finance and business sectors. The artificially reduced number of insolvency filings during mid-2020 concealed the actual economic stress on businesses due to the COVID-19 pandemic.
