Restructuring outside of insolvency proceedings for imminent illiquid companies in Germany from 1 January 2021

Europe

This article has been updated on 18 December 2020.

Federal Ministry of Justice and Consumer Protection submits draft bill on preventive restructuring

On 18 September 2020, the Federal Ministry of Justice and Consumer Protection submitted a 247-page draft bill for an Act on the Continued Development of Restructuring and Insolvency Law (Sanierungsrechtsfortentwicklungsgesetz – SanInsFoG). This draft bill contains numerous provisions that cover the preventive restructuring framework and are intended to further develop and supplement the existing restructuring and insolvency law on the basis of the results of the evaluation of the Act for Further Facilitation of the Reorganisation of Enterprises (Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen – ESUG). A summary of the results of the evaluation is available here.

This draft legislation was mandated by the EU Directive on the "preventive restructuring framework", which was passed in March 2019 (see our Blog Article). The Directive requires member states to establish a preventive restructuring framework (i.e. a "pre-insolvency restructuring procedure"). Such a framework is intended to enable companies to agree with and implement restructuring measures outside of insolvency proceedings under protective conditions and in a uniform manner with the parties involved. It is not mandatory to reach a consensus among those affected or to give individual parties the possibility to block the measure.

Already on 14 October 2020, and thus less than a month after the publication of the draft bill, the government draft of the SanInsFoG was published The Bundestag passed the law on 17 December 2020 in the version of the resolution recommendation of the Federal Legal Committee. There were thus only three months between the first submission of the law and its adoption.

Stabilisation and restructuring framework for companies

The preventive restructuring framework is named  "Stabilisation and Restructuring Framework" (Stabilisierungs- und Restrukturierungsrahmen ) and is regulated in the Act on the Stabilisation and Restructuring Framework for Businesses (Unternehmensstabilisierungs- und -restrukturierungsgesetz – StaRUG). The Stabilisation and Restructuring Framework offers a statutory framework, independent of insolvency proceedings, for the restructuring of companies from the time when imminent illiquidity occurs. The Stabilisation and Restructuring Framework is not designed as an integrated procedure. Instead, it is a framework of procedural tools which the debtor may utilise – without proceedings being formally opened and independent from one another – in the course of a restructuring measure that the debtor is pursuing.

The core element is the restructuring plan (sections 5ff. StaRUG). The declaratory part contains the restructuring concept, which is to be realised on the basis of the plan and will affect the legal consequences provided for in the constitutive part.

The plan is agreed with by those affected by it, meaning those holding what are known as restructuring claims. For this purpose, those affected by the plan are divided into groups. For the restructuring plan to be adopted, section 25 (1) StaRUG prescribes that in each group the group members approving the plan must hold at least 75% of the voting rights in that group. The voting right depends on the amount of the restructuring claims, see section 24 (1) StaRUG. However, the consent of individual groups can be replaced (sections 26-28 StaRUG) and the Stabilisation and Restructuring Framework can also be implemented against the will of individual creditors. Furthermore, excluded from this are claims by employees arising from or in connection with the employment relationship, including the rights arising from company pension commitments.

Out-of-court proceedings and the restructuring court

In principle, drafting and agreeing with the restructuring plan does not require court involvement. Only the instruments of the Stabilisation and Restructuring Framework require a notification of the restructuring measure to the restructuring court and its involvement (section 29 StaRUG) in the following way:

  • a judicial plan approval procedure (i.e. judicial plan agreement);

  • judicial confirmation of a restructuring plan (i.e. plan confirmation);

  • preliminary judicial examination of questions significant for the confirmation of the restructuring plan (i.e. preliminary examination);

  • judicial imposition of rules to restrict measures to individually enforce rights (i.e. stabilisation).

As a fifth measure the draft bill contained the judicial termination of bilateral agreements, which have not yet been completely performed by both sides (i.e. termination of agreements). This option was deleted after the Federal Law Committee's consultation.

Appointment of a restructuring officer

Appointing a restructuring officer (Restrukturierungsbeauftragter) will only be necessary in exceptional cases, or upon the application from the debtor or at least 25% of the restructuring creditors of a restructuring group who are prepared to bear the costs (section 77 StaRUG). However, appointing a restructuring officer is necessary in the following situations: if the rights of consumers of small or medium-sized businesses or micro establishments are affected, a stabilisation order is obtained or termination of an agreement is applied for or if it is foreseeable that the restructuring goal can only be achieved against the will of restructuring creditors or parties entitled to separation claims, whose consent needs to be substituted (see section 74 StaRUG).

Comprehensive protection from claw-back actions

The possibilities of avoidance actions are restricted in the context of the Stabilisation and Restructuring Framework (section 89 StaRUG). However, measures implementing the Stabilisation and Restructuring Framework will only enjoy comprehensive protection from avoidance actions if the restructuring plan has been confirmed in a final and binding manner by a court of law (section 90 (1) StaRUG).

New jurisdiction: the restructuring court

The StaRUG introduces a new jurisdiction for the instruments of the Stabilisation and Restructuring Framework: the restructuring court. The restructuring court is regularly the local court (Amtsgericht) in whose district a higher regional court (Oberlandesgericht) has its seat. As a result, proceedings are more concentrated than in insolvency proceedings. At present in insolvency cases, the rule is that the jurisdiction belongs to the local court in whose district a regional court (Landgericht) has its seat.

Restructuring moderation prior to the Stabilisation and Restructuring Framework

Independently of the Stabilisation and Restructuring Framework, section 94 StaRUG offers the debtor the possibility to make use of a restructuring moderator (Sanierungsmoderator) appointed by the court in the case of economic or financial difficulties. The role of the restructuring moderator is to assist in the development of a restructuring solution as an independent expert in restructuring matters.

The restructuring moderator is initially appointed for a period of three months. The appointment can be extended by a further three months period upon request of the restructuring moderator and with the consent of the debtor and the creditors involved in the negotiations.

The restructuring moderator will be removed from office before this time if he or the debtor requests this or if the restructuring moderator informs the court that the debtor is materially insolvent. If the debtor makes use of the instruments of the Stabilisation and Restructuring Framework, the restructuring moderator will remain in office until expiry of the appointment period of if he is removed from office or a restructuring officer is appointed.

Tightening of liability for business managers

Section 1 StaRUG establishes a duty for business managers to recognise crises early on and to implement crisis-management measures, applicable in the case of corporate entities with limited liability regardless of legal form.

From the time of notification of the restructuring project to the restructuring court, the management must, according to section 32 (1) StaRUG, conduct the restructuring case with the "diligence of a prudent and conscientious restructuring manager" and refrain from measures that jeopardise the restructuring objective. In doing so, it must also protect the interests of the creditors as a whole. In contrast to the government draft, the duty to protect the interests of creditors does not generally apply from the onset of imminent insolvency, but only from the pendency of the restructuring case. Claims for damages in the event of a breach of duty can only be made by the company itself, not by creditors.

In return, however, the management is also to be relieved: Payments made in the ordinary course of business, in particular those payments that serve to maintain business operations, now do not attract liability despite the existence of over-indebtedness (section 15b InsO). The new section 15b InsO shifts the liability provisions for payments made by the management after the onset of insolvency (e.g. section 64 GmbHG, 92 (2) AktG, 130a HGB) to the Insolvency Code across all legal forms.

Relationship between Stabilisation and Restructuring Framework and material insolvency

If illiquidity or over-indebtedness occurs after a restructuring case has been reported to the restructuring court, this occurrence must be reported to the restructuring court. The notification then replaces the duty to file for insolvencyn. The restructuring court has the option of setting aside the restructuring case after this notification.

Amendments to the applicable insolvency law

The SanInsFoG also contains further amendments, which concern the German Insolvency Act directly:

If at least two of the criteria set out in section 22a (1) InsO (i.e. at least a EUR 6 million balance sheet total, at least EUR 12 million turnover, and at least 50 employees) are satisfied, in accordance with section 10a InsO (draft bill) the debtor must be granted a right to a preliminary meeting with the competent insolvency court. This meeting will help to clarify decisive procedural questions before filing an application for insolvency.

Furthermore, the prerequisites for self-administration are clearly specified and have also been increased (sections 270ff. InsO, draft bill). The legislator is hoping that this will tie the proceedings more closely to the interests of the creditors with the intention of further strengthening self-administration through well-prepared debtors.

In order to more clearly distinguish imminent illiquidity and over-indebtedness in the future, different forecast periods are determined by the SanInsFoG. The forecast period for imminent illiquidity is now 24 months [section 18 (2) InsO (draft bill)] and the forecast period for over-indebtedness is 12 months [section 19 (2) sentence 1 InsO (draft bill)].

Further partial suspension of the obligation to file for insolvency In response to the COVID 19 pandemic, the legislator decided to temporarily suspend the obligation to file for insolvency until 30 September 2020 for illiquid and over-indebted companies. The prerequisite was that the insolvency maturity was based on the COVID 19 pandemic and that there were prospects of eliminating an existing illiquidity.
The legislator now prolonged the suspension of the obligation to file for insolvency until 31 January 2021 for insolvent and over-indebted companies, if

  • the insolvency maturity is due to the COVID 19 pandemic and
  • the company has filed an application for state aid in the period from 1 November to 31 December 2020, or
  • if for legal or factual reasons it is not possible to submit an application within the period, if the company is eligible to apply.

However, the obligation to file for insolvency applies as of 1 January despite having applied for state aid if companies are obviously not entitled to the aid or the aid is not sufficient to eliminate insolvency maturity.

By further suspending the obligation to file for insolvency, the legislator is reacting to the difficulties in paying out the state aids. It is still unclear how long the payment of aid will take and whether the suspension of the obligation to file for insolvency by one month will be sufficient. This short suspension period therefore hardly provides legal certainty, only a small respite.

Further relief for COVID-19-impaired companies

The legislator is reacting to the far-reaching end of the suspension of the obligation to file for insolvency with new measures to support COVID-19-affected companies.

A shortened forecast period applies to COVID-19-impaired companies. It is sufficient for these companies to be financed through the next four months - instead of the otherwise decisive twelve months.

Companies that file for insolvency will benefit from relief from 1 January 2021 until 31 December 2021 if their insolvency maturity is due to the COVID 19 pandemic: On the one hand, they can slip under the protective umbrella even if they are insolvent. On the other hand, the lower requirements for filing for self-administration proceedings continue to apply to them beyond 31 December 2020.

Is preventive restructuring promising?

From the perspective of legal practice, we welcome that the Stabilisation and Restructuring Framework offers companies in crisis a realistic way of taking restructuring measures outside of insolvency proceedings, and also outside of the stigma of insolvency proceedings. This possibility is all the more valuable since court orders will only be published on request of the debtor.

The Federal Legal Committee has improved the government draft in several important areas. Thus, at the very last minute, the immense requirements for managing directors were noticeably eased and liability risks were limited to a level that is manageable from today's point of view. However, with the deletion of the possibility to terminate contracts, the sharp sword became much blunter. This instrument would often have been a guarantee of success, especially for the COVID-19-hit retail trade.

Certainly, the practical application of this new, 102-paragraph law will reveal a need for improvement in some places. The legislator should remain vigilant and react quickly. It is to be hoped that all those affected by the new law, especially the restructuring courts, will quickly come to terms with their new tasks and possibilities and help the preventive restructuring option in Germany to succeed.

For more information on the draft for the preventative restructuring framework, contact your regular CMS advisor or local CMS expert: Dr. Alexandra Schluck-Amend