European Perspective All Change in GermanyA New Era in German - PDF document

European Perspective All Change in Germany—A New Era in German Insolvency Law January/February 2012 Olaf Benning Michael Rutstein Football is not the only arena where England and Germany have clashed in recent times. Insolvency and restructurings have been another battleground, and one in which England has had the upper hand. This has been evidenced by German debtors (usually individuals, but sometimes companies) migrating their centres of main interest (“COMIs”) to Britain and also by German companies proposing English schemes of arrangement. The relative lack of German competitiveness compared to England’s, at least in some important areas of corporate insolvencies, as well as the perceived need to make Germany a more creditor-friendly country, has prompted a German rethink of its insolvency laws. This has resulted in the enactment by the German Parliament of a new Insolvency Act on 26 October 2011 (the “Act”). The Act ( das Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen , broadly translated as “the law for the further facilitation of the rehabilitation of companies”) will significantly strengthen the rights of creditors and, to some extent, the rights of debtors in insolvency proceedings. The new law has been adopted by the German Parliament and will come into force early in 2012. Described herein are some of the main features of the Act. Insolvency Officeholder May Be Proposed by Creditors The Act introduces the right of creditors to request that the court appoint a specified individual as the insolvency officeholder. This is a fundamental change in German insolvency law. Although 1

creditors in the past have occasionally put forward an individual to the court to act as the officeholder, certain insolvency courts have automatically disqualified the nominee on the basis of the view that anyone proposed by an interested party in the proceedings cannot be considered independent and therefore is not competent to hold office. Even where the insolvency courts in a particular region have not held this view, some judges in those courts have. In these instances, the court has appointed the officeholder under a rota (ladder) system, which does not always take into account the circumstances of the case ( e.g. , a need for the officeholder to have cross-border expertise). That said, some German insolvency courts and judges have been more receptive to these sorts of requests. The Act provides that a nominated individual does not lack the required independence if he or she has been proposed by the debtor or by a creditor, or has advised the debtor prior to the insolvency filing in a general capacity on the possible course of action in an insolvency proceeding or its consequences. The court must appoint the individual put forward by a unanimous resolution of the preliminary creditors’ committee (the function and composition of which are described below), unless the nominated individual is not suitable to act as insolvency officeholder, taking into account any requirements set out in the committee’s resolution. If the court intends to appoint as insolvency officeholder an individual other than the one proposed in the committee’s resolution, the court must state its reasons in the order it makes for the opening of proceedings. This will make it difficult for the court to ignore the creditors’ choice when making the appointment. 2

The fact that creditors can influence the appointment of the officeholder will make it easier to effect prepackaged asset sales in German insolvencies. Such asset sales can be implemented under German insolvency law only after the court opens insolvency proceedings, which is usually two or three months after the initial application is made to the court, and if the creditors’ committee has approved the sale. However, if proper preparations have been made for the prepackaged sale and the sale clearly benefits all creditors, an earlier opening of insolvency proceedings is possible. Preliminary Creditors’ Committee Established at an Early Stage As a general rule, in larger insolvencies, the court is required under the Act to establish a preliminary creditors’ committee ( vorläufiger Gläubigerausschuss ) at an early stage of the proceedings. The composition of the committee, including the number of members, will be decided on a case-by-case basis by the court, but the committee will typically consist of an odd number of creditor representatives. In a large case, representatives can be expected to come from bank creditors, major suppliers, the local tax office, the employment office, and the Pensions Protection Fund ( Pensions-Sicherungs-Verein ). The committee will have an important function similar to that performed by creditors’ committees in U.S. chapter 11 cases. For example, it can make decisions on the strategy the officeholder should pursue, such as whether a sale of assets should take place or whether the business should be continued. The insolvency officeholder will usually comply with resolutions of the committee, as he risks personal liability if he does not. 3

An important early function of the creditors’ committee is to nominate to the court the person it wants to serve as the preliminary insolvency officeholder ( vorläufiger Insolvenzverwalter ). The nominee can be expected to be appointed by the court (as discussed above) both as preliminary officeholder and, once the court formally opens the proceedings several weeks later, as officeholder. The court must establish a committee if the debtor satisfies two out of three thresholds: (i) a balance-sheet total ( Bilanzsumme , equivalent to a company’s total assets) of at least €4.84 million; (ii) revenues of at least €9.68 million in the 12 months immediately before the filing for insolvency; and (iii) an annual average of at least 50 employees. These thresholds were subject to some heated debate in legal and political circles and, as a consequence, were increased at a late stage of the legislative process. The thresholds now are identical with the criteria defining “small corporations” under section 267, paragraph 1, of the German Commercial Code. The thresholds were increased to address the concern that the volume of cases in which the court must establish a committee would soar to an unreasonable number. However, a preliminary committee is not required if: (i) the establishment of such a committee would be inappropriate, giving regard to the value of the insolvency estate; (ii) a delay caused by the establishment of a committee would have an adverse effect on the debtor’s net assets; or (iii) the debtor has already ceased its business operations. In these situations, the court is not obliged to establish a preliminary committee but nevertheless has the discretion to do so if the court considers it appropriate ( e.g. , to preserve value or increase creditors’ participation in the insolvency proceedings). This exception from the general rule is sensible—in the situations 4

where it applies, the chances of achieving a higher recovery for general unsecured creditors will increase, since the estate will incur lower costs and, at least in an ideal world, the insolvency officeholder will be able to act more quickly because he will not be obliged to consult with a committee. Obtaining Order for Self-Administration Will Become More Common One of the aims of the Act is to make it more likely that the court will order the debtor to be placed into self-administration ( Eigenverwaltung ) following an application to the court for the opening of insolvency proceedings. Self-administration is a “debtor in possession” procedure. This means that management remains in charge of the debtor’s business, rather than a court- appointed insolvency officeholder, once the court formally opens the proceedings. The concept is similar to the debtor in possession in chapter 11 cases under the U.S. Bankruptcy Code. The purpose of this change is to encourage the management of companies in financial difficulties to file for insolvency earlier than is currently the case ( i.e. , before the situation becomes critical). Management can now expect that the court will make an order for self-administration, as opposed to making any other appointment, and so will remain in charge while the debtor attempts to restructure during the insolvency proceedings. The self-administration concept strengthened by the new law is a positive development for the debtor and, if the business or personal relationship with the shareholders is good, for the debtor’s shareholders as well. Where the court makes an order for self-administration, the debtor will act under the supervision of the court and of a preliminary insolvency trustee ( vorläufiger Sachwalter ) appointed by the court. Provided that certain requirements are met, the court will grant the debtor a period of up to 5