Update regarding the ‘Preventive Restructuring Framework’: a German pre-insolvency restructuring procedure is in progress

• EU Preventive Restructuring Frameworks Directive is passed into legislation
  
  
• Germany now has two years to implement the Directive into domestic law

EU Preventive Restructuring Frameworks Directive is passed into legislation

On 6 June 2019 the Council approved a proposal for a Directive on preventive restructuring frameworks with the required majority. The legislation, a draft proposal of which had been put forward by the European Commission as early as November 2016, was subject to intense debates between the Commission, the European Parliament and the Council, accompanied by broad consultations with stakeholders and the public in each of the EU Member States. The tight schedule for enactment experienced substantial delays due to persistent disagreements between the co-legislators, and until recently it seemed as if German enterprises would have to wait longer than expected to make use of a restructuring framework that seeks to prevent insolvencies under German law.

With the Council’s approval the European legislative procedure is complete, and it is now up to the German legislator to implement the Directive into national law within the next two years.

Lack of pre-insolvency procedures under German law criticised

German insolvency experts are calling for a quick implementation of the Directive into national law. The lack of pre-insolvency procedures under current German insolvency law has been the subject of increasingly widespread criticism. The results of the evaluation of the ESUG (‘Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen’, Further Facilitation of Company Restructuring Act) commissioned by the Federal Government, however, would suggest otherwise, as these had found the existing German framework to be sufficient. The authors of the evaluation suggested at the very least to clearly separate the uniform procedure (which combines the procedures under Sections 270 (a) and (b) of the Insolvency Code (‘Insolvenzordnung’)) from the pre-insolvency procedure that now stands to be introduced. In addition, they cautioned that safeguards should be put in place to ensure that actual insolvency procedures take place whenever a debtor is materially and factually insolvent.

Benefits for debtor companies and creditors

The rationale behind pre-insolvency procedures is chiefly to prevent creditors from leveraging their positions, delaying or blocking rearrangement schemes that would be in the best interest of all stakeholders in order to seek preferential treatment (‘Akkordstörer’). Under the Directive, pre-insolvency restructuring procedures are not to be governed by a ‘consensus’ mechanism, but rather a majority principle. Current German laws prescribe the latter only where a company has gone into formal insolvency procedures or in bond restructurings pursuant to the German Debenture Bond Act (‘Schuldverschreibungsgesetz’). The fact that majority decision-taking was seen as an appropriate principle for bond creditors naturally warranted a broader inquiry into whether the same mechanism should be made available to further types of creditors, such as bigger consortiums of banks.

The procedure laid out by the Directive differs from standard insolvency procedures in mainly the following elements:

• It is applicable before material and factual insolvency, i.e. it is neither necessary that the company is illiquid, nor that it is over-indebted;
  
  
• It is possible to limit the procedure to particular groups of creditors that are bound by a majority decision;
  
  
• The procedure may only be used for the purpose of financial restructuring; companies remain free to perform operational restructuring measures outside of the scope of the procedure mandated by the Directive.

The procedure is to be carried out under self-administration, with an optional restructur-ing administrator. A distinction between preliminary and opened procedures is not made. The procedure ends where a majority of the relevant group of creditors votes in favour of, and the relevant court approves, a restructuring plan that ideally goes on to protect the company from insolvency.

German companies that were interested in undertaking such pre-insolvency restructurings have in the past had to look to other jurisdictions, often under English law (a more recent example for this is the German parking management company APCOA). Such a course of action, however, is burdensome and costly, and therefore only feasible for large companies. It would in many cases be helpful if German insolvency law provided for a comparable instrument to preserve and protect companies with ‘healthy’ business operations and ‘unhealthy’ debt burdens.