German restructuring and insolvency law update

The Covid-19 pandemic had a strong impact on the practice of restructuring and insolvency law in Germany in 2020. The issue of preventive restructuring frameworks and how the corresponding requirements under EU law (Directive (EU) 2019/1023 of 20 June 2019 (see our report in German)) are to be transposed into German law was delayed, as was the evaluation of the Act on Further Facilitation of the Restructuring of Companies (Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen – ESUG) of 7 December 2011. This had been concluded but not yet addressed in the form of a corresponding legislative amendment.

To progress both of these projects despite the unique situation caused by the Covid-19 pandemic that makes additional adjustments to restructuring and insolvency law necessary, the German Federal Ministry of Justice and Consumer Protection (BMJV) published a draft act to update restructuring and insolvency law on 19 September 2020 (see our report in German). On 9 November 2020, the German Federal Government published its own draft bill based on the BMJV’s version (draft bill in German). On 17 December 2020, the Federal Government’s draft bill was adopted by the German Parliament (Bundestag) in a version amended by its Committee on Legal Affairs  which became the German Act on Updating Restructuring and Insolvency Law (“Restructuring Update Act” – Gesetz zur Fortentwicklung des Sanierungs- und Insolvenzrechts – SanInsFoG) (adopted bill in German). The Restructuring Update Act was published in the German Federal Gazette on 29 December 2020 (BGBl. 2020, Part I, p. 3256). The core of the Restructuring Update Act is the German Act on the Stabilisation and Restructuring Framework for Companies (“Framework Act” – Gesetz über den Stabilisierungs- und Restrukturierungsrahmen für Unternehmen – StaRUG).

Most of the provisions of the Restructuring Update Act entered into effect on 1 January 2021. The most notable exceptions are the provisions regarding public restructuring matters (section 84 onwards Framework Act) which do not come into effect until 17 July 2022. The entry into effect of most of the provisions of the Restructuring Update Act including the Framework Act on 1 January 2021 is intended to ensure that companies affected by the Covid-19 pandemic that are over-indebted, but not technically insolvent, profit from the new option of restructuring outside of insolvency proceedings. The temporary moratorium on over-indebted companies’ obligation to file for insolvency, which was extended beyond 30 September 2020 (see our report in German), ended on 31 December 2020. The concerned companies are therefore, in principle, once again subject to the obligation to file for insolvency. After the amendment of the German COVID-19 Insolvency Suspension Act (COVID-19-Insolvenzaussetzungsgesetz – “COVID Insolvency Act”) published on 19 February 2021, an exception applies until 30 April 2021 under certain circumstances to over-indebted and insolvent companies that had applied for financial aid from the Covid-19 state aid programme between 1 November 2020 and 28 February 2021 or for those for which it was impossible to apply during that time period.

I. The restructuring framework

The Framework Act lays the foundation for restructuring against opposition from minority stakeholders and aims to avoid insolvency proceedings. To date, German law has recognised the possibility of intervening in the rights of creditors independently of insolvency plan proceedings via a majority resolution only in connection with bonds falling within the scope of the German Bonds Act (Schuldverschreibungsgesetz) of 31 July 2009. The restructuring framework is a long-awaited new instrument for restructurers because it closes the gap between out-of-court restructuring, which requires unanimity, and restructuring via majority decision in insolvency plan proceedings, which entails the costs and classic disadvantages of insolvency proceedings. The new framework allows companies in economic difficulties to restructure based on a plan adopted by a majority of creditors independent of insolvency proceedings, thereby preventing insolvency proceedings before they become necessary. The restructuring framework is available to legal entities and entrepreneurial individuals (section 30(1) Framework Act).

The key points of the restructuring framework are:

• Partial court involvement: The company can autonomously draft a restructuring plan, handle negotiations with its creditors and initiate a vote on the plan. It is only necessary to involve a court if the company wishes to use one of the legal procedural aids or intervene in creditors’ rights despite opposition from a minority of stakeholders. This is the current process when a plan is accepted by a majority (but not unanimous vote). Court decisions are only announced to the creditors affected by the plan and/or the court decision, unless the company opts for public plan proceedings. Only public plan proceedings benefit from the simplified recognition of their effect in other EU Member States pursuant to the EU Insolvency Regulation.
  
  
• Companies in an early stage of financial distress: A company has access to the restructuring framework and the procedural aids if it is not yet unable to pay its debts when due, but faces imminent insolvency (section 18 German Insolvency Code). The Restructuring Update Act (section 18(2) German Insolvency Code (new version)) specifies that the period for the going concern prognosis is “in the regular case” 24 months. It also makes a sharper distinction between imminent insolvency and over-indebtedness (pursuant to section 19 German Insolvency Code) by setting a prognosis period of twelve months for over-indebtedness (in section 19(2) sentence 1 German Insolvency Code (new version)). A temporary shortened prognosis period of four months is applicable until the end of 2021 for companies which became over-indebted because of the Covid-19 pandemic (section4 COVID Insolvency Act). The maximum time period for filing for insolvency in the event of over-indebtedness has been extended from three to six weeks (section 15a(1) sentence 2 German Insolvency Code (new version)).
  
  
• Option to include all creditors and shareholders: The restructuring framework is not restricted to financial creditors but can apply to all kinds of claims and security interests. The only exceptions are employees’ claims (including company pension schemes); claims arising from intentionally committed tort; and governmental penalty claims. The debtor must set the scope of the restructuring framework based on objective criteria. The plan can also intervene in the rights of shareholders in the debtor (e.g. debt-to-equity swap or transfer of equity and membership rights). In return for appropriate compensation, the plan can also intervene in intragroup third-party security provided by an affiliate (section 15 German Stock Corporation Act) of the debtor, e.g. a parent, subsidiary or sister company.
  
  
• Majority requirements: Those affected by the plan will vote on it in classes. In each class, a qualified majority of 75% (by claim amount) must vote for the plan. Even if a class does not fulfil this majority requirement, the consent can be deemed granted if certain prerequisites are fulfilled. The Framework Act is based on the principle of an absolute priority rule, i.e. neither a subordinated creditor affected by the plan, nor the debtor nor a shareholder of the debtor is permitted to receive any assets. It is possible to deviate from this absolute priority rule if the party benefiting from the exception fully compensates the debtor for its advantage. The rule is also set aside in favour of the debtor or its shareholders in two additional scenarios: First, if the contribution of the debtor or its shareholder is indispensable for the continuation of the debtor’s business as a going concern due to circumstances linked to the identity of the debtor or shareholder, and the debtor or shareholder has entered into a commitment to cooperate for five years or for a shorter time period set for the implementation of the plan. Second, if the intervention in the rights of creditors is insignificant (for example, because claims in the plan are not reduced but rather deferred for a period of up to 18 months). An individual creditor is not allowed to be put in a better position than creditors with the same priority unless this is objectively justified by the circumstances and the type of economic difficulties to be overcome.
  
  
• Contractual conditions: The plan may provide for a reduction or deferral of creditor claims. It can also allow contractual provisions to be modified so that conditions and covenants under long-term agreements can be changed in a way that the debtor will be able to adhere to them once the restructuring is completed. However, this only applies to long-term agreements, if and to the extent that the claims under the agreement are already established and the other party has performed. An obligation to continue to provide services in the future at more favourable conditions cannot be justified in the plan. Originally, it was intended to allow the court to terminate contracts upon request, but – due to intense criticism – this did not become law.
  
  
• Moratorium: One flanking measure that can be used to stabilise the company is a court-ordered stay of execution and enforcement (“stabilisation order”) lasting up to three months, or four months for those affected by the plan, and up to eight months if the plan is accepted. The order can apply to some or all creditors, except for creditors generally excluded from the plan.
  
  
• New financing facilities: New financing granted after the restructuring matter is legally pending are privileged under liability and avoidance law, to the extent that the knowledge of the pending restructuring matter or the use of the restructuring framework in itself does not establish liability or intent. This applies to new financing provided for in the plan as well as to interim and bridge financing. For new financing in a legally binding plan, the privilege under avoidance law extends even further; all measures taken to implement the plan are subject to avoidance in subsequent insolvency proceedings. At a practical level, it is primarily the provision of collateral that is exempt from avoidance, but not the subsequent repayment of loans. Shareholder loans and equally treated claims (as well as collateral provided) are excluded from the privilege from the outset. The Framework Act does not exercise the option of creating a priority position for new financing as opposed to all other creditors in any subsequent insolvency proceedings. It is possible, however, to include a provision in the restructuring plan that grants priority to new financing over existing creditors.
  
  
• Restructuring practitioner: In many cases, it is at the court’s discretion to appoint a restructuring practitioner, for example if a comprehensive stay of enforcement and execution is put into effect. Appointing a restructuring practitioner is only compulsory if it is expected that one or more of the classes will not approve with the necessary majority, so that the prerequisites for a majority decision transcending classes are decisive. An exception to the exception applies if only companies in the financial sector are affected by the plan.
  
  
• Creditors’ advisory committee: If the restructuring plan requires the modification of the claims of all creditors (with the exception of the creditors generally excluded from the plan) and if the restructuring matter shows similar characteristics to collective proceedings, the court may appoint a creditors’ advisory committee. This committee supports and monitors the company’s management and can, under certain conditions, propose the restructuring practitioner, and the restructuring court may not to diverge from this proposal. Creditors that are not affected by the plan (e.g. employees) can also be represented in the creditors’ advisory committee and thereby influence the restructuring matter.
  
  
• Public restructuring matters: When the Framework Act (from section 84) enters into effect on 17 July 2022, it will be possible for a debtor to conduct public restructuring matters, with the result that the individual steps in the proceedings will be made public. If the debtor does not expressly choose publicity, only the parties to the restructuring matter will be permitted to attend hearings and to be kept informed. Choosing to go public means that the restructuring matter and the instruments made available under the Framework Act are recognised more easily in other EU Member States under EU Insolvency Regulation. The extent to which recognition is also possible for non-public restructuring matters will be examined on a case-by-case basis.

Several items discussed – sometimes heatedly – during the legislative process for the Framework Act were not included in the law adopted by the German legislator. For example:

• Management board’s personal liability in the event of imminent illiquidity: The provisions according to which from the onset of imminent illiquidity the management must no longer protect the interests of the shareholders, but rather the interests of the creditors as a whole – and assumes personal liability in the event of a violation of said duty – were deleted from the Framework Act.
  
  
• Option to end contracts: The competence of the court to terminate mutual contracts that are yet to be performed in full by either party (in particular related to long-term debt) upon the debtor’s request was also deleted.

Further details on the Framework Act:

1. The restructuring framework and the role of courts

The initiative for a restructuring plan must come from the debtor (section 17(1) Framework Act). This means that the company is responsible for drawing up the plan based on the detailed requirements of the law (see sections 5 to 15 Framework Act and annex to Framework Act). As a rule, the company will also conduct the negotiations with its creditors and put the plan to a vote itself. A restructuring based on the plan offered by the company comes into effect only if (i) all of those affected by the plan vote in favour of it or (ii) the necessary majorities approve the plan, and it is then confirmed by a court (see section 18 Framework Act).

In general, it is only necessary to involve the competent restructuring court if the proposed restructuring interferes with the rights of a party affected by the plan (for example, if the plan is adopted to the disadvantage of an outvoted minority) or a third party (such as in the case of a stay of execution and enforcement) or if a restructuring practitioner or mediator is appointed.

2. Instruments in the restructuring framework

The following instruments can be used as procedural aids for sustainable recovery from imminent illiquidity (section 29(1) and (2) Framework Act):

• conducting a court-led proceeding to vote on a restructuring plan;
  
  
• preliminary court examination of issues that are significant for confirmation of the restructuring plan;
  
  
• court orders for stays of execution and realisation (stabilisation); and
  
  
• court plan confirmation of a restructuring plan.

The prerequisite for using one of these instruments is that the company has notified the competent restructuring court of its proposed restructuring, enclosing the necessary documentation, which includes in particular a draft restructuring plan or at least a restructuring concept (section 31(1) and 31(2) Framework Act). With this notification the matter is legally pending. For the company, this means that it receives access to the instruments of the restructuring framework if its respective additional requirements are fulfilled. This access remains available as long as the restructuring matter is legally pending, which can be up to a maximum of six months or, with a second notification, up to twelve months in total (section 31(4) Framework Act).

3. Relationship to the insolvency filing reasons

The court confirmation of a plan that was not adopted by all affected parties (section 60(1) no. 1 Framework Act) and the court order for stays of execution and enforcement (section 51(1) no. 3 Framework Act) are both only available if the company is imminently illiquid. Pursuant to the explanatory memorandum for the Framework Act the legislator assumes that, even at this early stage, complete satisfaction of the creditors’ claims is endangered, and this therefore constitutes an objective justification for an intervention in the creditors’ rights.

Imminent illiquidity (drohende Zahlungsfähigkeit) means that the debtor will likely not be able to pay its debts when due. How long the prognosis period for imminent illiquidity should be has always been debated. The prognosis period to determine whether imminent illiquidity exists also overlapped with the positive prognosis of continuation as a going concern for determining over-indebtedness (Überschuldung) pursuant to section 19 German Insolvency Code. The Restructuring Update Act provides clarity on these issues by stipulating a period of 24 months for the evaluation of imminent illiquidity (section 18(2) second sentence German Insolvency Code, new version). At the same time, the Restructuring Update Act distinguishes more sharply between imminent illiquidity and over-indebtedness. It will still be necessary to take imminent illiquidity into account within the prognosis of continuation as a going concern as a part of the test for over-indebtedness. The prognosis period for over-indebtedness is now limited to twelve months (section 19(2) first sentence German Insolvency Code, new version). A temporarily shortened prognosis period of four months applies until the end of 2021 for companies whose over-indebtedness has been caused by the Covid-19 pandemic (section 4 COVID Insolvency Act, new version). Finally, the time limit for filing for insolvency in the event of over-indebtedness is extended from three to six weeks in order to provide enough time to prepare a restructuring proposal under the new Framework Act.

The instruments of the restructuring framework are generally not available to illiquid or over-indebted companies within the meaning of sections 17 and 19 of the German Insolvency Code. However, insolvency within this meaning that occurs after one of the instruments has already been used does not necessarily result in the failure of the proposed restructuring; the court may refrain from terminating the restructuring matter in the interest of all creditors. This particularly applies if the insolvency has been caused by termination or other maturity of a claim that according to the notified restructuring concept is to be subject to the plan, provided that it is predominantly likely that the restructuring goal will be achieved (section 33(2) no. 1 Framework Act). As long as the restructuring matter is legally pending, the obligation to file for insolvency under section 15a German Insolvency Code (new version) is also suspended. The company must immediately notify the restructuring court if it becomes illiquid or over-indebted (sections 32(3) and 42 Framework Act) in order to enable the court to rule on premature termination of the restructuring matter.

4. Material and personal scope of the restructuring plan

The selection of the creditors affected by the restructuring plan (affected parties) is at the discretion of the company and must be made according to objective criteria. The scope of applicability is not restricted, e.g. to financing creditors. In principle, all substantiated claims against the company, as well as preferential rights to the company’s assets, can be reorganised in the restructuring plan (section 2 Framework Act). In contrast to insolvency plan proceedings, which as a rule only permit reductions and stays of claims (see section 224 German Insolvency Code), an option to change individual provisions of contracts, such as financial covenants, is available for multilateral legal relationships between the company and several creditors (e.g. syndicated loan agreements). This also applies in the event that the company has entered into contracts on the same conditions with several creditors (e.g. promissory note loans) and for inter-creditor agreements. The only claims that are precluded are employee claims, including company pension schemes, as well as claims arising from intentionally committed tort and penalties (section 4 Framework Act).

As in insolvency plan proceedings, the full extent of shareholder and membership rights in the company can be addressed within the restructuring framework. All measures permissible under corporate law can be included in the restructuring plan (sections 2(3) and 7(4) Framework Act). This expressly encompasses the option of converting claims into shareholder or membership rights (debt-to-equity swap), but not against the will of the affected creditor.

There has been widespread criticism that insolvency plans enable a reduction in the claims against the insolvent debtor but cannot alter the collateral provided by other group companies to secure these claims. The Restructuring Update Act addresses this criticism and allows not only insolvency plans (section 223a German Insolvency Code, new version) but also restructuring plans (section 2(4) Framework Act) to include third-party collateral provided by an affiliate (section 15 German Stock Corporation Act) of the debtor, e.g. a parent, subsidiary or sister company, but only in return for appropriate compensation for the affected creditors.

5. Voting on the restructuring plan

Restructuring plan proceedings closely resemble insolvency plan proceedings. The affected parties must be divided into classes to vote on the restructuring plan. Formation of classes must take into account the members’ various legal positions and commercial interests (e.g. secured creditors, non-subordinated unsecured creditors, subordinated creditors; see section 9 Framework Act). Holders of shareholder or membership rights form a separate class.

The vote on the plan can be in writing or in a meeting of the affected parties and, at the company’s request, in court proceedings (section 23 Framework Act). The plan is adopted if a qualified majority of 75% of the voting rights (by claim amount) in each class votes for the plan (section 25(1) Framework Act). A class that fails to meet the majority requirement is deemed to have granted its consent if (i) the members of that class are likely not to be placed at a disadvantage by the restructuring plan as compared to their situation without such plan; (ii) the members of that class will receive a reasonable share in the commercial value to be distributed to the affected parties under the plan; and (iii) the majority of the voting classes consent to the plan with the required majorities (“cross-class majority decision”; section 26(1) Framework Act). If there are only two classes, the approval of one class suffices if this class does not consist solely of shareholders or subordinated creditors.

The EU directive also permits confirmation of the plan against the vote of a class if it is ensured “that dissenting voting classes of affected creditors are treated at least as favourably as any other class of the same rank and more favourably than any junior class”; (“relative priority rule”, Article 11(1)(c) of Directive (EU) 2019/1023). In contrast, the Framework Act is based on the absolute priority rule modelled after the rules of the insolvency plan. Confirmation of a plan against the vote of a dissenting voting class is in principle not possible as soon as any asset is attributed to a junior class (section 27(1) Framework Act). An exception to this principle of absolute priority can apply if the party benefiting from the exception provides the company with full compensation for its advantage (section 27(1) no. 2 Framework Act). In contrast to insolvency plan law, there are two additional scenarios in which the Framework Act diverges from the absolute priority rule in favour of the debtor or a person holding equity in the debtor (section 28(2) Framework Act): First, if the contribution of the debtor or one of its shareholders is essential for the realisation of the plan value due to special circumstances linked to the identity of the debtor or shareholder, and the debtor or shareholder has entered into a commitment to cooperate for five years, or for a shorter time period set for the implementation of the plan, and to transfer its economic share if its cooperation ends prematurely for reasons for which the debtor or shareholder is responsible. Second, if an intervention with the rights of creditors is insignificant (for example, because claims in the plan are not reduced but rather deferred for a period of up to 18 months).

In addition, individual creditors may not be placed in a better position than creditors with the same priority unless this is objectively justified by the circumstances and by the type of economic difficulties to be overcome (section 28 Framework Act). Such unequal treatment is not deemed justified especially if more than half of the voting rights – i.e. more than half of the restructuring claims and thus the main burden of the restructuring contributions – falls to the overruled creditors with the same priority (section 28(1) sentence 2 Framework Act). The report on the draft Framework Act reveals that in the event of fewer than half of the voting rights, the unequal treatment is not automatically justified and depends on the circumstances of the individual case.

6. Effects of the plan

If the plan is not accepted by all of the affected parties, its effects commence when the court’s confirmation is announced (sections 65(1) and 67(1) Framework Act). Compared with insolvency plan proceedings, there is no need to wait until the confirmation enters into legal effect. Each affected party is entitled to avail itself of the legal remedy of immediate appeal, but the appeal only has suspensive effect if a special court order is issued (section 66 Framework Act).

7. Stabilisation via stays of execution and enforcement

To ensure stability until the restructuring plan is confirmed and increase its chances of success, the company can apply to the restructuring court for a temporary stay of execution and enforcement (“stabilisation order”, section 49 Framework Act onwards). The application needs to be accompanied in particular by a financing plan that convinces that the financing for the next six months is ensured (section 50(2) no. 2 Framework Act). The requirements for the stay are increased if the company has allowed arrears to accrue in regard to employees, social security institutions, tax authorities or suppliers, or has not complied with its accounting obligations in the previous three years. The stay is not restricted to creditors affected by the plan but can apply towards selected/all creditors with the exception of claims that as a rule cannot be modified by the restructuring plan (employees, company pension schemes, claims arising from intentionally committed tort and penalties).

The maximum term of the stay is three months (section 53(1) Framework Act). It can be extended by one month if the company has made a plan offer and it is to be expected that the plan will be accepted within one month. During the extension period, the order only applies to affected parties (section 53(2) Framework Act). An additional extension until the plan confirmation enters into legal effect, but for up to a total of eight months, is possible if the plan has already been accepted and the company has filed for court confirmation of the plan (section 53(3) Framework Act).

8. Restriction of rights to terminate and withhold performance

The effect of a stabilisation order is that if, at the time of the stabilisation order, the debtor owes something to a creditor under a contract, the creditor may not, solely on account of the arrears, refuse to perform a duty owed to it during the order period or assert rights to terminate or modify the contract (section 55(1) Framework Act). In addition, a creditor cannot assert a right to terminate or modify the contract by citing the arrears. An exception applies if the company is not dependant on the creditor’s performance to continue as a going concern (section 55(2) Framework Act).

A creditor that is obliged to provide advance performance remains entitled to demand security or only to perform concurrently. A lender that has not yet disbursed the loan may still exercise the termination right under section 490 Civil Code (section 55(3) Framework Act). Even after a stabilisation measure is ordered, creditors still have the option of protecting themselves from a further increase in their commercial risk.

9. Avoidance and liability law privileges

To protect, in particular, new financing, interim financing and transactions in conjunction with the implementation of the restructuring, the Framework Act clarifies that any knowledge of the pending restructuring matter or that instruments of the restructuring framework have been used will not adversely affect the participants with regards to avoidance or liability law (section 89(1) Framework Act).

New financing provided in a restructuring plan that has entered into legal effect is not subject to claw-back rights within subsequent insolvency proceedings, with the exception of shareholder loans and equally treated claims as well as collateral granted for them (section 90(1) Framework Act). This privilege especially applies to newly created collateral but not to subsequent loan repayments. An exception from the privilege applies if the confirmation of the plan is based on incorrect or incomplete information provided by the debtor. Whether a promising restructuring proposal in itself is sufficient to preclude risks, especially deriving from section 826 Civil Code, thus making a restructuring expert opinion unnecessary, will be evaluated on a case-by-case basis. The Framework Act does not enact the option of giving new financing priority over other creditors in any possible subsequent insolvency proceedings (see Article 17(4) Directive (EU) 2019/1023).

10. The role of the restructuring practitioner

A company can make use of the instruments of the restructuring framework without the appointment of a restructuring practitioner. However, under certain circumstances, the Framework Act requires the appointment of a restructuring practitioner by the court, i.e. if it can be foreseen that adoption of the plan will not come with the necessary majorities in all classes (section 73(2) Framework Act) or unless only companies in the financial sector are affected.

A restructuring practitioner is also appointed ex officio if the company applies for a stabilisation order against all creditors (with the exception of those excluded from plan law); if the rights of consumers or SMEs are affected; or the restructuring plan provides for monitoring of performance (section 73(1) Framework Act). In such cases, the court can use its discretion on a case-by-case basis to refrain from appointing a restructuring practitioner. It can also choose to appoint a restructuring practitioner as an expert, particularly to evaluate the prerequisites for approval of the plan and the adequacy of compensation for intragroup third-party security providers (section 73(3) Framework Act). The debtor has the right to propose a restructuring practitioner (section 74(2) Framework Act). Depending on the reason for the appointment, the restructuring practitioner will be assigned different auditing and monitoring duties, including assuming the function of a paying agent for the company’s incoming and outgoing payments (section 76 Framework Act).

If there is no mandatory reason to appoint a restructuring practitioner, the court will only appoint one at the request of the company (section 77 Framework Act). The facultative restructuring practitioner supports the company in drafting and negotiating the restructuring concept and plan (section 79 Framework Act). The request can be aimed at assigning additional duties and powers to the restructuring practitioner.

11. Creditors’ advisory committee

If the restructuring plan provides for the modification of the claims of all creditors (with the exception of claims that cannot be modified such as employee claims; section 4 Framework Act) and if the restructuring matter has characteristics similar to collective proceedings, the court can appoint a creditors’ advisory committee. Characteristics of collective proceedings will be assumed if a large number of creditors with heterogeneous interests are affected. This does not apply if there are only a few creditors with comparable interests. Under certain circumstances, the creditors’ advisory committee can propose the restructuring practitioner, and the restructuring court can only deviate from this proposal if the proposed person is clearly unsuitable. The creditors’ advisory committee supports and monitors the debtor’s management. Creditors that are not affected by the plan (e.g. employees) can also be represented in the creditors’ advisory committee and thus influence the restructuring matter, even though their claims cannot be included in the restructuring plan.

12. Public restructuring matters

The Framework Act (Section 84 onwards) will enable a debtor to request that the restructuring matter is made public when these provisions come into effect from 17 July 2022. The delayed implementation allows sufficient time to establish the technical prerequisites for public notices. Notices in the context of the proceedings include court dates, court decisions and the appointment or dismissal of a restructuring practitioner. The consequence of publicity allows that the restructuring matter and the instruments of the Framework Act used will be recognised more easily in other EU Member States under the EU Insolvency Regulation.

If the debtor does not request public disclosure of the restructuring matter (which will not be possible until 17 July 2022), only the parties to the restructuring matter will be permitted to attend hearings and be kept informed. The extent to which recognition is possible for non-publicised restructuring matters will be examined on a case-by-case basis.

II. The consequences arising from the evaluation of the ESUG

The Restructuring Update Act implements both a preventive restructuring framework and the results of the evaluation of the ESUG. Access to debtor-in-possession proceedings is recalibrated, and both debtor-in-possession proceedings and insolvency plan law have been adjusted. The Restructuring Update Act aims to create incentives for timely and responsible preparation and initiation of restructurings. The trust inherent in letting the debtor continue to manage the business despite the financial crisis is only justified if the debtor-in-possession proceedings have been prepared in a conscientious and timely manner and before any pressure to act associated with acute insolvency. In addition, various previously unaddressed individual issues are provided for, i.a. the debtor’s may to establish obligations on behalf of the insolvency estate (section 270c(4) German Insolvency Code, new version) and the liability of managing directors during (preliminary) debtor-in-possession proceedings (section 276a(2) and (3) Insolvency Code, new version).

III. Adjustments due to the Covid-19 pandemic

Most of the provisions of the Restructuring Update Act entered into effect on 1 January 2021. This allows solutions for companies that are over-indebted due to the Covid-19 pandemic but, as of the end of 2020, can no longer profit from the suspension of the obligation to file for insolvency pursuant to the COVID Insolvency Act of 25 September 2020. The solution now includes permission to use the preventive restructuring framework as a new instrument and to provide companies that have suffered from the effects of the Covid-19 pandemic with easier access to debtor-in-possession and protective shield proceedings without the newly introduced restrictions (sections 5 and 6 COVID Insolvency Act, new version).

In addition the period for predicting continuation as a going concern despite over-indebtedness was shortened to four months (instead of the generally introduced twelve months) until 31 December 2021 for companies whose over-indebtedness was caused by the Covid-19 pandemic (section 4 COVID Insolvency Act, new version) in order to reflect the currently increased uncertainty entailed in future economic developments.

Finally, the restructuring update act provided that the obligation to file for insolvency was suspended for the whole of January 2021. Due to the slow disbursement of financial aid in the context of state aid programmes, the Framework Act and the recent update of the COVID Insolvency Act (in force retroactively from 1 February 2021) provide that the obligation to file for insolvency is suspended until 30 April 2021 for companies that applied for financial aid via state aid programmes due to the Covid-19 pandemic between 1 November 2020 and 28 February 2020 (or that were unable to apply for legal or practical reasons) (section 1(3) COVID Insolvency Act, new version). Excluded are cases in which it is obvious that there is no prospect that the aid will be granted or in which the disbursement will not change the fact that the insolvency exists. This provision applies to both insolvency reasons, i.e. illiquidity and over-indebtedness.