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Nexia Ebner Stolz

EU initiative on out-of-court restructuring proceedings: New opportunities for German companies?

In 2017, the EU Commission presented a proposed directive for a so-called "preventive restructuring framework". One of the aims is to create a uniform legal framework for restructuring companies outside of insolvency proceedings.

If a distres­sed com­pany fails to agree with its cre­di­tors on restruc­tu­ring mea­su­res, insol­vency is often the only option. In a reform of insol­vency law in 2011, the Ger­man legis­la­ture streng­t­he­ned the pos­si­bi­li­ties for restruc­tu­ring through insol­vency pro­cee­dings (insol­vency plan pro­cee­dings, pro­tec­tive shield pro­cee­dings, self-admi­ni­s­t­ra­tion, etc.). Howe­ver, insol­vency pro­cee­dings involve exten­sive inter­ven­ti­ons for all par­ties invol­ved. Even the types of pro­cee­dings in which the mana­ge­ment remains aut­ho­ri­zed to dis­pose of assets (pro­tec­tive shield pro­cee­dings, self-admi­ni­s­t­ra­tion) are asso­cia­ted with con­s­i­de­ra­ble liti­ga­tion risks. In addi­tion, the "ble­mish of insol­vency" can remain - even if not to the same extent as in the past.

EU initiative on out-of-court restructuring proceedings: New opportunities for German companies?© Thinkstock

In 2017, the EU Com­mis­sion pre­sen­ted a pro­po­sed direc­tive for a so-cal­led "pre­ven­tive restruc­tu­ring frame­work" (COM (2016) 723). One of the aims is to create a uni­form legal frame­work for restruc­tu­ring com­pa­nies out­side of insol­vency pro­cee­dings.

In essence, the "pre­ven­tive restruc­tu­ring frame­work" is inten­ded to make it pos­si­ble to reor­ga­nize a com­pany through finan­cial restruc­tu­ring. The focus is on restruc­tu­ring the finan­cing struc­ture, e.g. by means of debt equity swaps, wai­vers of all or some receivab­les, modi­fi­ca­ti­ons to invest­ments, debt restruc­tu­ring or new col­la­te­ral arran­ge­ments. The mea­su­res requi­red for restruc­tu­ring are to be recor­ded in a restruc­tu­ring plan and put to the cre­di­tors for their appro­val.

Debt wai­vers, debt equity swaps and other instru­ments are com­mon practice in cor­po­rate restruc­tu­ring. Howe­ver, out­side insol­vency pro­cee­dings, these instru­ments require the con­sent of all cre­di­tors con­cer­ned. For one thing, the necessary legal chan­ges can only be brought about by con­tract. Second, the finan­ciers regu­larly require una­ni­mity (chan­ges are sub­ject to con­sor­tium appro­val). Mee­ting these requi­re­ments is often the big­gest chal­lenge in out-of-court restruc­tu­ring. It someti­mes requi­res very com­plex nego­tia­ti­ons, in which indi­vi­dual cre­di­tors often use their posi­tion to achieve spe­cial advan­ta­ges. This may be the case in parti­cu­lar if spe­cia­li­zed inve­s­tors have bought into the len­der posi­tion by acqui­ring distres­sed debt - usually at a sig­ni­fi­cant dis­co­unt - and get "paid" for their appro­val of the restruc­tu­ring con­cept. This kind of practice could be coun­te­red with a "pre­ven­tive restruc­tu­ring frame­work".

At the end of the pro­cee­dings there is a restruc­tu­ring plan appro­ved by the cre­di­tors by majo­rity vote and con­fir­med by the court. This plan con­ta­ins the legal rules that are dee­med necessary for the inten­ded restruc­tu­ring. Details are yet to be laid down in the direc­tive or in natio­nal legis­la­tion. The deci­sive fac­tor is that the restruc­tu­ring plan adop­ted with the votes of a (qua­li­fied) majo­rity is also bin­ding on non-appro­ving cre­di­tors. Their legal posi­ti­ons (claims, secu­ri­ties, etc.) are also chan­ged in the man­ner defi­ned in the plan. As pro­tec­tion against abuse, a kind of "sett­le­ment acco­unt" is to be requi­red, accor­ding to which dis­sen­ting cre­di­tors may not be placed in a worse posi­tion than in the event of liqui­da­tion or sale of the com­pany as a whole.

The "pre­ven­tive restruc­tu­ring frame­work" should dif­fer from regu­lar insol­vency pro­cee­dings in the fol­lo­wing points:

  • The pro­cee­dings begin before the insol­vency. It is not necessary for the com­pany to be insol­vent or overin­deb­ted. After all, insol­vency should be avo­i­ded.
  • The pro­ce­dure should be limi­ted to indi­vi­dual groups of cre­di­tors (e.g. finan­cial cre­di­tors).
  • In addi­tion, the pro­ce­dure is always car­ried out in "self-admi­ni­s­t­ra­tion". Mana­ge­ment is not han­ded over to an insol­vency admi­ni­s­t­ra­tor.

The intro­duc­tion of a "pre­ven­tive restruc­tu­ring frame­work" is to be wel­co­med. It remains to be seen what pro­vi­sion will ulti­ma­tely be con­tai­ned in the direc­tive, which will then have to be trans­po­sed into natio­nal law. Howe­ver, accor­ding to the basic idea, the plan­ned pro­ce­dure offers a use­ful restruc­tu­ring instru­ment. Of course, it is not a panacea eit­her. A com­pany cri­sis can­not be resol­ved by its­elf. Howe­ver, the plan­ned pro­ce­dure can help to bundle and chan­nel the various restruc­tu­ring mea­su­res.

The final direc­tive is expec­ted to be adop­ted at the end of 2018. The direc­tive must then be trans­po­sed into Ger­man law.


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