On October 14, 2020, the federal government passed a draft for a “law on the further development of restructuring and insolvency law”. Its core provides for the introduction of a pre-insolvency reorganization procedure in the implementation of an EU directive. This is intended to close a gap in German restructuring law. In view of its profound changes, the design is tantamount to a revolution.
In contrast to some foreign legal systems, German law has so far not recognized any general restructuring procedure outside of formal insolvency proceedings. Up until now, restructuring projects have relied on voluntary contributions from each relevant creditor. As a result, individual creditors can block a restructuring project.
Companies in difficulty therefore often only have to go to the bankruptcy court or “escape” to restructuring proceedings under foreign legal systems for an operational or financial restructuring – each often associated with considerable costs and other disadvantages. The bill aims to remedy this with a paradigm shift.
A high degree of design freedom and flexibility
The declared aim of the draft is to provide debtors with a flexible, legally secure and efficient framework for promising restructuring projects. The debtors should be largely free as to when they initiate the procedure and which groups of creditors (financial creditors, bondholders, suppliers, customers, etc.) they include. Involving the shareholders is also possible.
The main requirement for access is the impending insolvency. This crisis stage should be sufficient to justify cuts in creditors ‘and shareholders’ rights even against their will if necessary. No judicial access control is provided for when proceedings are initiated: it is sufficient to report the debtor to the competent court with a restructuring concept.
As a rule, however, there will be subsequent judicial reviews if the debtor wishes to make use of specific restructuring instruments. A restructuring advisor with u. a. Supervising and checking tasks are not automatically ordered, but only mandatory in certain situations.
Control mechanisms and minimum standards
As an antipole to the extensive procedural autonomy of the debtor, procedural control mechanisms and content-related minimum standards are provided in the interests of creditor protection. According to the Anglo-Saxon model, the management should primarily be committed to the interests of the creditors during a restructuring process and be directly liable to them in the event of breaches of duty.
Claims from employment relationships are excluded from the scope of the new procedure, so they must continue to be fully serviced. A reorganization procedure is usually canceled by the court in the event of insolvency or over-indebtedness or if the prospect of success of the reorganization project no longer exists.
A new toolbox for renovations
The common goal of the new restructuring instruments is the sustainable elimination of the impending insolvency. The debtor should be able to use the tools individually or cumulatively. The central instrument is a restructuring plan to be adopted by those affected by the plan. In this way, demands and rights can be redesigned in terms of content, in particular reduced. If the groups of creditors agree with a qualified majority of at least 75 percent of the amounts due, the restructuring project can, after judicial confirmation, have a binding effect even for creditors who refuse to accept.
Further restructuring instruments are u. a. the granting of enforcement protection during the restructuring negotiations and the possibility of terminating certain ongoing contracts. The redevelopment process should not be public. Undesired disruptions to business operations can thus be avoided.
A first conclusion
The planned introduction of pre-insolvency restructuring proceedings is undoubtedly a great achievement. The draft appears suitable to achieve its ambitious goals and to bring about a significant further development of the German renovation culture. In view of its size and complexity, it is not surprising that some details have been discussed and improved upon. In some cases, fundamental criticism is also asserted, for example from central banking associations.
Although the technical discussions are still in full swing, far-reaching changes in the legislative process are not to be expected, as the law is to come into force on January 1, 2021. Obviously, the political goal is to provide the new legal instruments immediately after the expiry of the obligation to file for insolvency, which is still partially suspended until the end of the year, in order to be able to cope with the wave of corporate crises that will then be feared.
Daniel White and Markus Reps are lawyers and restructuring experts in the Frankfurt office of the international law firm Hengeler Mueller.