The Germans are not coming

by Frank Tschentscher

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12 Mar 2012

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IF YOU were to ask a company its ideal destination for a restructuring, until recently it certainly would not have been Germany. Not that the German legal system was a bad option, but it suffered from certain weaknesses that proved unpopular when companies had a choice of which restructuring regime to use.

German insolvency law has historically been perceived as hampered by uncertainty for the stakeholders, mainly because the process was predominantly court driven. It also lacked an official out-of-court restructuring process and tends to focus on formal insolvency proceedings.

But no more! In a stroke of absolute genius, that all changed on 1 March when a new insolvency legislation came into force. The German Company Restructuring Facilitation Act (‘Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen' or ‘ESUG') aims to bring Germany much more in-line with UK and US insolvency regulations.

Perhaps ‘stroke of genius' is not quite accurate, it implies the decision to reform the law was quick. It was not. In fact, the reform has been discussed and considered for many years. But, out of those long years of debate has come a modern and very flexible tool, which puts Germany's insolvency and restructuring regime on a level playing field with those of the UK and US.

This should particularly help overseas creditors feel more comfortable, as the new proceedings are much closer to what they are accustomed to in their own countries.
The main impact of the ESUG includes:

• Creditors, rather than the courts, will now be in the driving seat and able to exercise influence over the choice of the insolvency administrator via a preliminary creditors' committee, thereby exercising significant control over insolvency proceedings

• In an insolvency procedure under German insolvency law, it will now be possible to convert debt to equity even without the consent of legacy shareholders, who will be crammed-down in the voting process, subject to fairness and valuation considerations. In a restructuring process, this will enable creditors to influence company decisions and - upon a successful sale after the restructuring - participate in any surplus value

• Self-administration has also been enhanced. This has always been a feature of the German Insolvency Code but the process has been improved with a view to making it available to debtors more easily.

• The amended insolvency code also allows what is called umbrella proceedings, a reorganisation procedure under insolvency legislation. Here, management will appoint a restructuring expert whom the court will task with the preparation and presentation of a reorganisation plan within a period of three months. The ‘protective umbrella' procedure is available to a debtor who is at risk of becoming insolvent but is still able to pay his current liabilities (imminent insolvency) and whose company re-organisation seems feasible.

The planned changes should be viewed positively. Hopefully, the stakeholders will embrace the new law and engage - and if that leads to more work for German law firms, I shall not complain!

Frank Tschentscher is a dual qualified German attorney and English solicitor. He is a partner and of Schultze & Braun

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