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.
© ThinkstockIn 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.
