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Legal Advice

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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