Germany Implements New Insolvency Laws and Restructuring Tools
After its publication in the German Federal Gazette (Bundesanzeiger) on 29 December 2020, the Law for the Further Development of the Restructuring and Insolvency Laws (SanInsFoG) came into force in Germany on 1 January 2021. The major part of this new law, the Law on the Stabilisation and Restructuring Framework for Enterprises (StaRUG), introduces a new framework for restructurings outside of formal insolvency proceedings, implementing EU Directive 2019/1023 of 20 June 2019 on preventive restructuring frameworks.
In addition to the new tools, the core one of which is the restructuring plan other important changes to the German insolvency and restructuring laws were made which we discuss below.
New Tools in the Insolvency Toolkit
StaRUG offers debtors which have their centre of main interests in Germany multiple tools to allow restructurings to take place outside of formal insolvency proceedings, provided that the relevant debtor is not yet obliged to file for insolvency at the time it starts the restructuring proceedings.
The core element of this new tool set is the restructuring plan, which is prepared by the debtor and submitted to its creditors for approval. The restructuring plan enables monetary claims as well as collateral rights (including those provided by affiliated companies to the debtor) to be compromised or restructured under the restructuring plan, and it will also be possible to not only defer payments or (partially) waive such claims or collateral, but also to amend the terms of certain underlying agreements (e.g. financial covenants, termination rights etc.). The restructuring plan can also provide for a debt-for equity swap.
Certain exemptions apply, in particular, it is not possible to restructure executory contracts unless the debtor already has fulfilled the respective obligation, and claims of employees (including pension related claims) may not be subject to a restructuring plan.
While the general structure of the restructuring plan procedure follows the insolvency plan procedure available in a formal insolvency, the debtor is free to decide which creditors to include in the restructuring plan and can decide only to involve certain creditors and other stakeholders (e.g. shareholders) who shall make contributions to the restructuring. These stakeholders will be allocated to certain groups, depending on the type of stakeholder (e.g. shareholder, secured creditor, unsecured creditor, subordinated creditor) and the contributions requested from them as part of the restructuring.
If a majority of 75% of the members in each group (calculated by amount of claims) approves the proposed restructuring plan, the plan is adopted and will also bind the objecting stakeholders. If the required majority has not been reached in one group, it can still be approved in certain circumstances (cross-class cram down).
The court can be involved in the coordination and review of the restructuring plan, which may be helpful to ensure compliance with the legal requirements and to obtain formal confirmation of the restructuring plan by the restructuring court (which is required to make the restructuring plan binding on dissenting stakeholders).
In order to facilitate the process of preparing the restructuring plan, the debtor may request that the restructuring court imposes a moratorium on creditors for a period of up to three months, which can be extended in certain circumstances up to a total eight months period. Furthermore, third party creditors are barred from filing for insolvency of the debtor during the time of the restructuring procedure.
In certain cases, the restructuring court will appoint a restructuring officer who will monitor the restructuring proceedings, mediate, between the parties, if necessary, and report to the restructuring court.
Other changes to German restructuring laws
In addition to the introduction of StaRUG, SanInsFoG makes a few further important changes to the German restructuring and insolvency laws:
During January 2021, a limited suspension of the obligation to file for insolvency applies in certain situations where the debtor has applied for COVID-19 government support, or is eligible for such support but was prevented from an application for legal or practical reasons, unless such support will not overcome the insolvency.
The requirements for entering into self-administration proceedings (Eigenverwaltung) have become stricter. Applications for self-administration proceedings now require that the debtor provides (i) a finance plan for the next six months, (ii) a specific concept how the self-administration shall be conducted and what goals shall be reached with what measures, (iii) a description about the status of negotiations with its creditors, shareholders and other stakeholders in respect of the restructuring concept, (iv) a description of measures taken by the debtor to ensure compliance with insolvency law obligations, and (v) a description of the expected increased costs (or cost benefits) compared to regular insolvency proceedings. The court only allow self-administration if the concept for the self-administration is complete and plausible, and if no circumstances are known from which it follows that the concept for self-administration is based on incorrect facts.
In the case of insolvency due to over-indebtedness (Überschuldung), the maximum timeline available for the management to file for insolvency is extended from three months to six months; the purpose of this change is to allow the debtor to properly prepare an insolvency filing, and in particular an application for self-administration proceedings.
The requirements for a positive going-concern prognosis, which are important to evaluate over-indebtedness or imminent illiquidity (drohende Zahlungsunfähigkeit), have been clarified: the relevant time period when reviewing imminent illiquidity shall generally be 24 months, whereas the respective time period shall generally be 12 months when assessing over-indebtedness. During 2021, in COVID-19 related insolvency cases the relevant time period to assess over-indebtedness shall be four months only.
SanInsFoG was adopted by German parliament in a very quick legislative process, the purpose of which was to have the new restructuring tools provided by StaRUG available on 1 January 2021, when the temporary suspension of insolvency filing obligations in COVID-19-repated insolvency cases expired in most cases. It remains to be seen whether the new restructuring proceedings will meet the high expectations of the market and become a widely used tool for financial restructurings outside insolvency proceedings in Germany.