What do financial believers mean

Guest PostWhy bankruptcy law could face a revolution

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 restructuring 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 does not yet have 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, bond creditors, suppliers, customers, etc.) they include. The involvement of 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 inter alia Monitoring 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 interest 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. As a rule, restructuring proceedings are canceled by the court if insolvency or over-indebtedness occurs, or if the prospect of success of the restructuring 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, i.e. in particular shortened. 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.

Other restructuring instruments include: 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 a pre-insolvency reorganization procedure 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 a number of details have been discussed and improved on. 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 due 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 WhiteandMarkus Repsare lawyers and restructuring experts in the Frankfurt office of the international law firm Hengeler Mueller.