Government draft of a law on the further development of restructuring and insolvency law (Restructuring and Insolvency Law Further Development Act – SanInsFoG)
On 14 October 2020, the German Federal Government presented the government draft of an Act on the Further Development of Restructuring and Insolvency law (Sanierungs- und Insolvenzrechtsfortentwicklungsgesetz (German abbreviation SanInsFoG-E, herein: “draft Insolvency Reform Act”)), which takes up a previous draft bill of the Federal Ministry of Justice and Consumer Protection from 18 September 2020. At the heart of the draft Insolvency Reform Act is the creation of a pre-insolvency restructuring framework through the Corporate Stabilisation and Restructuring Act (German abbreviation StaRUG-E, herein “draft Business Stabilisation and Restructuring Act”), which is intended to implement the EU-wide requirements of EU Directive 2019/1023 of the European Parliament and Council of 20 June 2019. In addition, the draft Insolvency Reform Act provides for amendments to the Insolvency Code intended to harmonise the draft Business Stabilization and Restructuring Act with the restructuring instruments of the Insolvency Code, and to incorporate findings from the assessment of the Act to Further Facilitate the Restructuring of Companies (German abbreviation ESUG, hereinafter “2011 Restructuring Act”), which came into force at the end of 2011.
Further provisions of the draft Insolvency Reform Act take into account the significant economic consequences of the COVID-19 pandemic. The relief provided by the Act to Temporarily Suspend the Obligation to File for Insolvency and to Limit Directors’ Liability in the Case of Insolvency Caused by the COVID-19 Pandemic (German abbreviation CovInsAG, hereinafter “Covid Insolvency Act”) for companies threatened with insolvency as a result of the COVID-19 pandemic (see our Legal Update of 3 April 2020), which was initially scheduled to expire at the end of September, has now been partially extended until the end of 2020; in particular, the obligation to file for insolvency under the conditions provided for in the Covid Insolvency Act is still suspended until December 31, 2020 for cases of over-indebtedness (but not illiquidity!). According to the Federal Government, the Insolvency Reform Act is to come into force on 1 January 2021, thus ensuring a seamless transition between the Covid Insolvency Act and the new rules of the Insolvency Reform Act in order to be able to meet the widespread necessity of reorganisations and restructurings which have been and will be caused by the COVID-19 pandemic more effectively than with the restructuring instruments available to date. To this end, the law provides for temporary reduction of the entry requirements for self-administration under insolvency law, and the definition of over-indebtedness will be altered during a transitional period.
As the Federal Government intends for the law to come into force at the turn of the year, we would like to present the main innovations suggested by the government draft of the Insolvency Reform Act below.
A. Changed reasons for filing for insolvency
Companies that are not yet illiquid (Section 17 Insolvency Code) or over-indebted (Section 19 Insolvency Code) shall be given access to a pre-insolvency restructuring procedure as soon as they are threatened with illiquidity. This is provided in the form of the Business Stabilisation and Restructuring Act.
In order to distinguish these pre-insolvency proceedings more clearly from insolvency itself (a rule known as the "distance requirement"), the forecast periods required for the liquidity forecast for over-indebtedness (Section 19 Insolvency Code) and imminent insolvency (Section 18 Insolvency Code), which were previously largely identical for both circumstances, will now be differentiated.
The draft Business Stabilization and Restructuring Act stipulates that in future, "a forecast period of 24 months is, as a rule, to be used as a basis for determining imminent illiquidity", while a forecast period of only 12 months is to apply to the continuation forecast in the context of over-indebtedness.
Note for practitioners: The limitation "as a general rule" shows that different standards may apply in individual cases depending on the particular individual circumstances. Even in cases where a liquidity bottleneck becomes apparent outside the 24-month period, managers (both in the future and up until now) would therefore have to deal with the question of imminent illiquidity.
Under insolvency law, over-indebtedness shall continue to oblige the managers of limited liability companies (in particular GmbH, GmbH & Co. KG, and AG) to file for insolvency, just as in the event of (actual) illiquidity. However, the draft Insolvency Reform Act provides for an extension of the maximum insolvency application period from three to six weeks in the event of over-indebtedness. This is intended to enable managers to avert over-indebtedness.
Note for practitioners: Despite an extension of the application deadline in the event of over-indebtedness, managers should note that the deadline is still only available if the applicant can expect to resolve the over-indebtedness within the six-week period. If it is already clear before expiry of the deadline that the over-indebtedness cannot be eliminated in time, the insolvency petition must be filed immediately. If the elimination of over-indebtedness has not yet been successful and a restructuring plan has not been prepared or appears unlikely to succeed, then as of 1 January 2021, the circumstances of each individual case will have to be examined to determine whether and to what extent the six-week application period can still be used.
In order to take account of the special circumstances of the COVID-19 pandemic, the definition of over-indebtedness will apply only in a weakened form for a transitional period between 1 January 2021 and 31 December 2021 for companies particularly affected by the pandemic. For companies that are able to show a reduction in sales from ordinary business activities in 2020 of at least 40 % compared to the previous year due to the COVID-19 pandemic, the period for the continuation forecast will be reduced from twelve to four months. This applies if the companies were not insolvent as of 31 December 2019, and achieved positive results from ordinary business activities in the last financial year completed before 1 January 2020 (Section 4, draft Covid Insolvency Act).
B. Changes to managerial duties in the event of imminent illiquidity
The draft Business Stabilisation and Restructuring Act now expressly obliges managers to set up an early warning system for crises and to react accordingly to recognisable business threats (Section 1). Moreover, Section 2 of the draft Business Stabilisation and Restructuring Act, in particular, provides for an essential innovation for managers: Under this provision, when imminent illiquidity is apparent, the managers of limited liability companies must orient the management of the company primarily to the interests of creditors and only secondarily to those of shareholders and other stakeholders (“other affected parties”). This is known as the shift of fiduciary duties. Since the concept of imminent illiquidity can cover various stages of a crisis, the draft bill assumes a "breathing" system in which the duties of managers to react become more acute as the crisis deepens. However, Section 2 (1) sentence 2 of the draft Business Stabilisation and Restructuring Act clarifies that managers have discretionary authority, analogous to the business judgment rule to the extent that they can assume they are acting in the interest of creditors based on an appropriate information basis.
Note for practitioners: The requirements for managers in a company crisis will be significantly increased by this provision. The explicit obligation of the managers to fulfil their duties in the interests of creditors confronts them with the challenge of examining, assessing, and initiating restructuring measures, including those under the Business Stabilisation and Restructuring Act and the Insolvency Code (e.g. filing an insolvency application under self-administration), if necessary against the wishes of shareholders, even before the occurrence of an obligation to file for insolvency (due to illiquidity or over-indebtedness). This had already been demanded in the past by some commentators (see Hölzle, ZIP 2013, 1846). As soon as the company is threatened with illiquidity, managers will no longer be able to meet their obligations under the draft Business Stabilisation and Restructuring Act by acting consistently with the instructions of the shareholders; shareholder demands which conflict with the interests of creditors will be considered irrelevant. Managers will therefore have to review their options and plans in the context of a corporate crisis even more closely in future.
Note for practitioners: Since managing directors will in future find themselves more closely involved in the conflict between the interests of creditors and shareholders than before, it appears all the more important that they document precisely how and for what reasons they make use of their discretionary powers in crisis situations. This is the only way to minimise the risk of “hindsight bias” due to retroactive evaluations if managerial decisions are later reviewed in court in a subsequent liability suit.
In the event of a breach of this obligation, the managing director shall be liable to pay damages to the company (Section 3 (1) draft Business Stabilisation and Restructuring Act). For (culpable) breaches of duty after the restructuring court has been notified of the restructuring plan, managers are even liable directly to creditors (Section 45 draft Business Stabilisation and Restructuring Act).
Note for practitioners: It remains to be seen whether activist distressed debt investors will use the possibility of direct liability for managers as a means of exerting pressure to improve their negotiating position in restructuring negotiations.
The government draft also ensures the debtor's ability to act in a crisis by obliging the bodies responsible for appointing the managing directors (in particular shareholders or the supervisory board) to appoint new managing directors if the company is rendered leaderless after the onset of imminent illiquidity, i.e. if all managing directors entitled to represent the company leave the management or the executive board (e.g. by resigning from office) (Section 2 (3) draft Business Stabilisation and Restructuring Act). A violation of this obligation may trigger liability for damages on the part of the responsible board members (Section 3 (3) draft Business Stabilization and Restructuring Act).
C. Key elements of the restructuring framework
I. Restructuring plan
The core of the draft Business Stabilisation and Restructuring Act is the provision of a restructuring plan based on the insolvency plan procedure, which can also be enforced in a binding manner against the resistance of dissenting minorities. The restructuring plan allows for a flexible structuring of a debtor’s legal relationships threatened with illiquidity in the form of a 'modular system' from which the debtor can select those instruments which it requires in its specific restructuring situation. Accordingly, it is not a collective procedure. Rather, the plan can be limited to include only certain selected creditor groups chosen based on "appropriate criteria". (Section 10 draft Business Stabilisation and Restructuring Act). The draft Business Stabilisation and Restructuring Act is thus intended to close the gap between restructuring possibilities within insolvency proceedings and non-insolvency consensual restructuring solutions, and to eliminate the obstruction potential of individual "holdout creditors". However, the draft law excludes claims by employees, claims arising from intentional torts, and fines from inclusion in a restructuring plan.
In principle, the primacy of freedom of contract applies to the design of the restructuring plan and accompanying measures, just like with an insolvency plan. The parties accordingly enjoy general contractual freedom to structure their legal relationships, whereby the draft law expressly emphasises that the following legal relationships can be subject to the restructuring process:
- liabilities of the debtor (e.g. by (partial) waiver of claims),
- collateral provided by the debtor, and third-party collateral (in return for appropriate compensation) provided by subsidiaries of the debtor (e.g. through release of collateral),
- "individual terms" of contracts in multilateral legal relationships between the debtor and a number of creditors. This refers in particular to syndicated loan agreements (e.g. by extending maturity or amending covenants or termination rights in a syndicated loan agreement), and, under certain circumstances, to bond terms and conditions (whereby, in the case of the latter, case-by-case review is necessary of whether inclusion in a restructuring plan brings advantages over a (possibly parallel) restructuring of the bond under the existing provisions of the German Bond Act),
- terms governing relations between creditors within these multilateral agreements or in intercreditor agreements concluded in connection therewith, in which the debtor itself – as in the case of inter-creditor agreements – need not be involved at all (e.g. by amending necessary approval thresholds in syndicated loan agreements or adjusting inter-creditor agreements),
- any share and membership rights in the debtor (e.g. through debt-to-equity swaps).
It should be noted that, following the model of Section 225a Insolvency Code, participation in the debtor itself, i.e. the rights of the shareholders, can also be included in the plan. This was criticised in discussions as an obstacle to initiation of proceedings, since the shareholder would then run the risk of losing its shares during restructuring. However, the provision follows the model of broad contractual freedom.
Note for practitioners: So far, the government draft of the draft Business Stabilisation and Restructuring Act only provides for the inclusion of third-party collateral by subsidiaries ("upstream collateral"), but not third-party collateral provided by shareholders ("downstream collateral") or sister companies ("cross-stream collateral") of the debtor, but which may typically also be part of group financing. Further, the value of the third-party collateral must be settled accordingly. The regulation is therefore – and in our view rightly – to be understood above all as a measure to avoid potential disruptions and knock-on insolvencies by ensuring that the liquidation of third-party collateral within the framework of the restructuring happens in a coordinated manner based on the model as set out in Section 166 of the Insolvency Code. It also creates the possibility of structuring new financing (see under C. V.) in a flexible manner by making released third-party collateral available to new financing creditors.
As expected, the draft does not contain any provisions on the tax consequences of restructuring, which is why § 3a of the Income Tax Code remains applicable.
Note for practitioners: This means the restructuring process will generally also have to be accompanied by obtaining binding assessments from tax authorities. Obtaining such assessments in complex restructurings will usually take considerably longer than the time limits provided for in the draft law for the implementation of a restructuring plan procedure. Accordingly, timely and comprehensive preparation of the restructuring process is essential. The necessary time period, also taking into account the tax authorities’ expected processing time, determines the duties to act and the standard of liability according to Section 2 Business Stabilisation and Restructuring Act and Section 18 Insolvency Code, and must be taken into account when selecting the "right" restructuring instrument (consensual restructuring, restructuring plan, or self-administration?).
For the purpose of voting on the plan, the parties to be included in the plan are divided into groups with the same legal status (as a general rule (1.) secured creditors, (2.) unsecured creditors, (3.) creditors whose claims would be subordinate in insolvency proceedings; and (4.) shareholders). Relevant parties within the same group must, in principle, be treated equally in the restructuring plan. The principle of equal treatment interacts here with the assessment of the appropriateness of the selection of the participants to be involved in the plan, which, according to the principle, may not be arbitrary and must be justified by the specific plan.
Acceptance of the restructuring plan requires acceptance in principle by each group with at least 75 % of the voting rights; the voting rights are determined for secured creditors by the value of their collateral, for unsecured creditors by the amount of their claim, and for shareholders by their nominal share in the debtor's share capital or partnership interest. Disagreeing groups of creditors may, however, be outvoted (so-called "Cross-Class Cram-Down") if (i) the affected parties are not worse off under the plan than they would be without it, (ii) they are given an appropriate share in the economic value of the restructuring and (iii) the majority of the groups have agreed to the plan (in the case of only two groups, it should even be sufficient if only one group agrees) (Section 28 draft Business Stabilisation and Restructuring Act).
Note for practitioners: By means of clever plan architecture, cram-down decisions will be possible even against majorities in the restructuring plan procedure if only two groups are (or may be) formed, since then the agreement of one group is sufficient to outvote the creditors in the rejecting group.
II. Are the proceedings public?
The draft Business Stabilisation and Restructuring Act is intended to enable out-of-court restructurings, which, in principle, means that only parties involved in the proceedings will be made aware of them. For this reason, as in the case of a freehand restructuring, there are no formal requirements for starting restructuring negotiations and preparing the restructuring plan. Accordingly, the proceedings will also not be publicly disclosed.
However, if the debtor wishes to have a court review the plan in advance, carry out the voting procedure, or confirm the plan in court – which, for example, is mandatory in the case of cross-group majority decisions (the so-called cross-class cram-down) – it must file the restructuring plan with the competent restructuring court. The same shall apply if stabilisation orders (suspension of individual enforcments of claims by way of enforcement and realisation of collateral), termination of contracts, or other encroachments on contractual rights are to be requested from the court or approved (see under C. III.). However, even in this case, disclosure is made only to the parties to the proceedings, i.e. the creditors involved in the proceedings.
Notifying the competent restructuring court of the restructuring project has the advantage that obligations to file for insolvency are suspended while the restructuring matter is pending (Section 44 (1) draft Business Stabilisation and Restructuring Act). However, the debtor must notify the court of any illiquidity or over-indebtedness occurring during the proceedings, and failure to do so is punishable at criminal law. The court will set aside the restructuring matter if the restructuring plan has not already been implemented to such an extent that the opening of insolvency proceedings would obviously not be in the interest of the creditors, or if actual insolvency results from the termination or maturity of a claim after notification of the restructuring matter to the court, and the success of the restructuring plan is more likely than not.
III. Further measures to safeguard the restructuring plan
The pre-insolvency restructuring procedure is a modular system. The debtor can reach into different drawers and take out the instruments needed in any specific case.
Accordingly, upon application by the debtor to secure the restructuring project, the court may issue stabilisation orders for a period of up to three months which prohibit creditors from enforcing their claims by way of enforcement and the realisation of collateral (Section 56 draft Business Stabilisation and Restructuring Act).
Note for practitioners: With regard to the possibility of ordering a halt to realisation (Sections 56 (1) no. 2, 61 draft Business Stabilisation and Restructuring Act) with regard to items encumbered with security interests, the draft bill makes comprehensive reference to Section 21 (2) no. 5 Insolvency Code. The relevant case law on the inapplicability of the realisation stop to current assets (BGH dated 24.01.2019 - IX ZR 110/17) specifies that in preliminary insolvency proceedings, the preliminary insolvency administrator must ensure that the collateral basis (storage security transfers, other collateral on inventories, lessor's liens) is not reduced by further access to the collateral. Section 61 (2) draft Business Stabilisation and Restructuring Act follows this logic. Accordingly, if a realisation ban is issued in the restructuring process, the debtor is obliged to separate or pay out the proceeds from the collection of claims assigned by way of security or from the sale or processing of movable property in which security interests exist, unless otherwise agreed with the secured parties. This means that the management or the restructuring officer will, where possible, be required to enter into "non-genuine (estate) credit agreements" with the secured parties in order not to have to separate collateral proceeds.
During the moratorium, the right of creditors of the debtor to file for insolvency is also suspended (§ 65 draft Business Stabilisation and Restructuring Act). The duration of the order may, in certain circumstances, be extended for a further month when a plan offer is made and, after the application for court confirmation has been made, for up to eight months after the initial order. The restructuring project can therefore be accompanied by a moratorium vis-à-vis all participating creditors.
Note for practitioners: In practice, it will therefore be necessary to carefully consider whether extending the proceedings to supplier creditors, in particular, is appropriate and conducive to restructuring. This is the case because their inclusion will usually result in the cancellation, or at least freezing, of lines by trade credit insurers, which would significantly increase the liquidity needs of the debtor company due to the significant reduction of payment target terms or even a switch to advance payment. A resulting working capital requirement would then have to be made available again by financiers, because countervailing liquidity advantages, such as the insolvency funding effect in insolvency proceedings, for example, are not offset by this.
Section 51 draft Business Stabilisation and Restructuring Act provides that within the framework of a restructuring plan project, certain mutual contracts of the debtor which have not yet been fully performed by both parties to the contract may also be terminated; for this purpose, a decision of the restructuring court is required if the opposing party is not prepared to amend or terminate the contract by consensus as required for the restructuring project. All contracts can be terminated in this manner where an insolvency administrator in on-going insolvency proceedings would have a choice of performance in accordance with section 103 Insolvency Act or a special right of termination in accordance with section 109 Insolvency Code.
Section 46 draft Business Stabilisation and Restructuring Act also contains a provision similar to Section 119 Insolvency Code, according to which contractual clauses which link the termination of a contract to the pendency of a restructuring plan or the use of the draft Business Stabilisation and Restructuring Act are invalid.
IV. Inclusion of a restructuring officer
Restructuring proceedings pursuant to the draft Business Stabilisation and Restructuring Act are designed as proceedings in which the debtor retains its autonomy. In principle, the debtor therefore controls the restructuring plan proceedings itself, and retains control over its company.
However, as soon as the level of fully consensual settlement is abandoned, i.e. a majority decision against minorities is to be enforced or a moratorium ordered, the draft Business Stabilisation and Restructuring Act provides for the restructuring court to involve a restructuring officer as an independent supervisory and mediating body. In particular, the restructuring court must appoint a restructuring officer (apart from exceptional cases) if (i) consumers, micro, small, or medium-sized enterprises are involved, (ii) stabilisation orders are issued, or (iii) it is foreseeable that the plan can only be implemented against the resistance of individual plan participants (Section 80 draft Business Stabilisation and Restructuring Act). The scope of the powers of oversight and participation conferred on the restructuring officer is at the discretion of the court. In particular, the court may also entrust the restructuring officer with certain oversight tasks as an expert (e.g. on whether illiquidity is imminent, or whether compensation for the release of intra-group third-party collateral is adequate).
Note for practitioners: We expect the fully autonomous execution of proceedings to remain mere theory. While purely consensual restructurings are already possible today, the advantage of the procedure lies precisely in the fact that it allows moratoriums to be ordered and minorities overruled. The use of these measures will, however, necessarily lead to the appointment of a restructuring officer, who will be given extensive (oversight and auditing) tasks and powers, because the restructuring courts will not have the resources to be able to examine the project in detail within the time frame provided for by law.
Note for practitioners: According to the draft Business Stabilisation and Restructuring Act, the restructuring officer is to be remunerated on the basis of appropriate hourly rates, the amount of which is to be determined by the restructuring court taking into account the complexity of the restructuring situation and the qualifications of the officer. The remuneration should ordinarily be up to EUR 350 per hour for the restructuring officer him or herself and up to EUR 200 per hour for qualified employees. In view of the extensive tasks of the restructuring officer (e.g. auditing claims and collateral, verifying the termination of contracts) and his or her liability towards affected parties as provided for in Section 82 (4) draft Business Stabilisation and Restructuring Act, these hourly rates fall well short of normal market compensation, at least with respect to major restructuring projects. It can therefore be assumed that in larger and more complex restructuring cases, the practice will be to use the different remuneration provided for in the Act (Section 90 draft Business Stabilisation and Restructuring Act) for special cases (which permit higher hourly rates or compensation calculated on the basis of the value of the claims included in the restructuring plan or the company assets).
Irrespective of the conditions under which a restructuring officer is mandatory, an "optional restructuring officer" (Section 84 draft Business Stabilisation and Restructuring Act) may also be appointed at the request of the debtor or of creditors who hold more than 25 % of the voting rights in a group to assist the debtor and creditors in drawing up and negotiating the restructuring plan.
V. Securing new financing
The restructuring plan may also contain provisions on new financing commitments and their collateralisation (in the form of personal and/or asset security) (Section 14 draft Business Stabilisation and Restructuring Act). Aside from some exceptional cases, the provisions of a restructuring plan and the legal acts taken to execute it are not subject to a subsequent insolvency law claw-back claim under Sections 129 et seq. Insolvency Act until the occurrence of a "sustainable restructuring" (§ 97 (1) draft Business Stabilisation and Restructuring Act). This privilege provides financiers with greater legal certainty, particularly with regard to possible claw-back actions regarding the collateralisation of new financing. However, such preferential treatment will not apply to subordinated shareholder loans and their collateralisation. Furthermore, the exclusion of claw-back claims is only intended to protect (external) financiers from a failure of the planned restructuring concept which unexpectedly leads to insolvency. If, on the other hand, the debtor's insolvency occurs at a later point in time, independently of the restructuring project, and thus only after the occurrence of a "sustainable restructuring", the protection against claw-back claims no longer applies. This restriction corresponds to Section 39 (4) sentence 2 Insolvency Code, which regulates an exception to subordination under insolvency law for shareholder loans made to effect a restructuring.
Further legal risks in connection with restructuring financings outside of restructuring plans are to be minimised by ensuring that legal acts undertaken in the knowledge of a restructuring plan project are not regarded as an improper contribution to culpable delay in filing for insolvency (Section 96 (1) draft Business Stabilisation and Restructuring Act).
Note for practitioners: The privileged status of new financing schemes with regard to the exclusion of claw-back claims is mainly limited to the collateralisation of those schemes. According to the explanatory memorandum to the government draft, however, Section 97 (1) draft Business Stabilisation and Restructuring Act is not intended to cover loan repayments, as these are no longer included in "implementation" of the restructuring plan.
VI. Restructuring moderation
Independently of restructuring plan proceedings, the draft Business Stabilisation and Restructuring Act provides for the possibility, at the debtor’s request, of a court appointment of a restructuring moderator for a period of up to three months. The moderator mediates between the debtor and its creditors in an economic crisis and assists in drawing up a (consensual) restructuring concept. The restructuring moderation can result in the preparation of a restructuring settlement which, if confirmed by a court, is subject to the same privileges against claw-back claims as the measures of a restructuring plan (see above under V.).
However, unlike the restructuring plan, a settlement does not allow enforcement against the will of obstructive creditors. The restructuring moderation tool is intended in particular for micro and small enterprises, which can quickly be financially overwhelmed by the costs of professional external restructuring consultation.
D. Amendments to self-administration and insolvency plan proceedings
Finally, the draft Insolvency Reform Act provides for changes to insolvency law self-administration and insolvency plan proceedings.
In particular, the entry barriers for recourse to self-administration shall be raised, which serves the interest of creditors. In future, the debtor must accompany its request for self-administration with a self-administration plan which must contain, in particular: (i) a financial plan for a period of six months, (ii) a specific restructuring concept, (iii) a description of the status of negotiations on restructuring with creditors, (iv) a description of the arrangements to ensure that all the debtor's obligations under insolvency law are met, and (v) a description of the expected additional or reduced costs of self-administration compared with customary insolvency proceedings. Before initiating self-administration proceedings, the insolvency court must review the self-administration plan for completeness and conclusiveness.
Note for practitioners: According to the draft, the order of a moratorium under the Business Stabilisation and Restructuring Act should, in future, generally rule out the admissibility of self-administration proceedings for a period of three years. This means that if the restructuring plan fails, self-administration is, in principle, no longer possible. Only externally-managed insolvency proceedings are permitted. This makes it all the more important for the parties involved to carefully consider which restructuring instrument (a restructuring plan with targeted interventions, for example in the financing structure, or self-administration with comprehensive restructuring) best meets the economic challenges faced by the respective company.
For insolvency plan proceedings, in particular, the Act creates the opportunity (in accordance with the provisions in the draft Business Stabilisation and Restructuring Act governing restructuring plans) to include in the plan intra-group third-party collateral which were provided by subsidiaries for liabilities of the debtor.
The government draft of the Insolvency Reform Act is not limited to implementing the minimum requirements under EU law, but rather chooses a "big solution" with the introduction of an independent restructuring framework, although this takes the form of an optional modular system. The high degree of flexibilisation opens up wide avenues for structuring insolvency and related proceedings, should the Act be passed in its current form.
In principle, the Federal Government's proposal is welcome, as the draft Insolvency Reform Act adds sensible provisions to German restructuring and reorganisation law. In particular, the planned restructuring framework should provide a solution for cases where restructuring (in particular balance-sheet restructuring) risks failure owing to resistance from individual holdout creditors. The law may be particularly relevant for companies with high financing liabilities (perhaps also as a result of taking out KfW loans made available in connection with the COVID-19 pandemic) and rent or tax liabilities which have been deferred under COVID-19 support measures. Only practical experience can show how broad the scope of the new laws or the advantages they confer will be (in addition to a well-prepared self-administration procedure). The Insolvency Reform Act provides more nuanced solutions for German reorganisation and restructuring law, so that it should be possible to prevent the kind of “escape” into foreign legal systems (e.g. into English law, with its Scheme of Arrangement), which were seen in the past.
Dr. Kirsten Schümann-Kleber, LL.M., Prof. Dr. habil. Gerrit Hölzle and Dr. Manuel Holzmann