Out-Of-Court Restructuring Alternatives in The European Union, Germany and The United States
Restructurings are ideally carried out early, quietly and quickly. Efficient tools for out-of-court restructurings play a decisive role in value preserving restructurings.
The Coronavirus (COVID-19) pandemic has had a huge impact on the global economy and most businesses. Thousands of companies currently have urgent restructuring needs and every jurisdiction has responded differently. The following is a brief overview of some of the key tools available in the European Union, Germany, and the United States. More details and guidance can be found in our full special report, Out-of-Court Restructuring Alternatives in the European Union, Germany and the United States.
On 26 June 2019, the European Union issued new EU Directive 2019/1023 on preventive restructuring frameworks, discharge of debt and disqualifications, and measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt (the Directive).
A primary objective of the Directive is to ensure that viable enterprises and entrepreneurs with a “likelihood of insolvency” have access to effective national preventive restructuring frameworks that will enable them to continue operating.
EU Member States must implement the Directive by 17 July 2021. In light of the COVID-19 pandemic, many Member States, including Germany, intend to implement the Directive much earlier.
The German Federal Government has published a draft of the Restructuring and Insolvency Law Further Development Act (the draft law). The draft law is very ambitious in two respects: it aims to implement the Directive in its broadest sense, and Germany expects to make it effective as of 1 January 2021.
The draft law intends that the restructuring court should be involved only to make use of the available restructuring instruments, i.e.,
Preliminary examination of the plan and voting rights
Judicial approval of the plan
Termination of executory contracts
Stabilisation measures (stay of individual enforcements)
Confirmation of the plan if not all affected parties have granted their consent
EU Member States must implement the Directive by 17 July 2021.
In contrast to insolvency plans, restructuring plans do not need to cover all creditors; they may be limited to appropriately selected groups of creditors. Within each group, creditors holding at least 75 per cent of the total amount must approve the restructuring plan. Under certain conditions, the consent of a dissenting group will be deemed to be granted.
The draft law provides a limited stay of actions upon application by the debtor and allows the debtor to terminate executory contracts, subject to certain requirements. It also modifies manager duties for a company facing “imminent illiquidity,” which is also the eligibility threshold for a company wishing to avail itself of the new preventive restructuring framework or voluntary insolvency proceedings.
There are several viable options for restructuring or liquidating a business outside a traditional chapter 7 or 11 bankruptcy filing. Specifically, insolvent companies may consider an assignment for the benefit of creditors (an ABC), or dissolution under state law.
ASSIGNMENT FOR THE BENEFIT OF CREDITORS
ABCs provide an alternative to filing a federal bankruptcy case and involve the assignment of an insolvent company’s assets to a third-party assignee that is selected by the company and charged with liquidating the company’s assets to satisfy creditors’ claims.
Insolvent companies may consider an assignment for the benefit of creditors or dissolution.
ABCs differ from state to state but the fundamentals remain the same. First, the company must obtain approval of the ABC, which often requires board or shareholder approval. Second, the company assigns all of its right, title, and interest in the company’s assets to the assignee, which then steps into the role of a fiduciary to the company’s constituents.
State Law Dissolution
Dissolution involves proper approval of the ABC, filing a certificate of dissolution with the state in which the company was formed, paying certain outstanding taxes, and winding-up the company’s affairs. In certain states, insolvent companies have two methods by which they may wind-up. These methods are commonly referred to as the “safe harbor method” and the “non-safe harbor method.”
Safe Harbor Method
This method generally requires public notices in newspapers and, in some states such as Delaware, a petition to the appropriate court to determine the amount and form of security that will be reserved for certain future or contingent claims. This method shields shareholders, officers and directors from liability, particularly because a court determines the reasonable reserve for unliquidated, contingent, or unmatured claims.
Non-Safe Harbor Method
Under this method, a company may simply dissolve, adopt a plan of distribution, pay the claims of any of its known creditors, and set aside what it thinks are appropriate reserves for unliquidated, contingent, or unmatured claims. In Delaware, this applies to claims that are likely to arise or become known within 10 years after the date of dissolution.