The government has adopted a series of measures to counteract the economic consequences of the pandemic and to support those affected. Billion-euro aid packages include measures such as state loans, state guarantees and non-refundable subsidies. In addition to these measures, most of which directly support the liquidity of a business, the government has suspended the duty to file for insolvency on several occasions. Taken together, these measures provide financial support for companies and give them time to adapt to the new challenges and to develop ways of dealing with the situation. However, many businesses will suffer greatly from the effects of the crisis and will run into financial problems, so that sooner or later insolvency may well become an issue. In order to avoid losing its business through insolvency proceedings by way of a sale and liquidation by an insolvency administrator, affected businesses will have to give serious consideration to a comprehensive restructuring in the short rather than the long term.
Germany’s new restructuring regime (Gesetz über den Stabilisierungs- und Restrukturierungsrahmen für Unternehmen, StaRUG) came into force on 1 January 2021. This is the German implementation of the European Directive on Restructuring and Insolvency (2019/1023) which required Member States to introduce into national law by 17 July 2021 a process allowing a company to go through a comprehensive restructuring outside formal insolvency proceedings. A financially distressed company now has a specific opportunity for restructuring itself without having to go through insolvency proceedings.
In a nutshell, the main advantages of a restructuring for the ailing company under the new restructuring plan proceedings are as follows:
- It leads to the rescue, reorganization and continuation of the company
- Claims may be deferred or waived (in whole or in part)
- The company is not liquidated or its business sold by an insolvency administrator
- Any arrangement can be made under the plan that is permitted under corporate law
- It allows for facilitated debt-to-equity swaps
- It allows the retention of management resources and business relationships necessary for business operations
- Existing contracts continue during the process
- It allows for the maintenance of concessions and licenses required for business operations
- The company and its management remain in the "driver's seat"
- The restructuring framework includes accompanying measures for stabilization, e.g. enforcement and liquidation freezes, suspension of insolvency petitions filed by creditors and restriction of contractual partners’ rights to refuse performance, terminate contracts and amend contracts
- The process carries certain tax advantages
- There are many parallels to the successful English “Scheme of Arrangement”
- And last but not least the process allows the swift implementation of the restructuring
The restructuring plan (the plan) can include provisions relating to material assets, liabilities and shares of the distressed company. In particular, it can include a waiver of claims in order to reduce the debt load and payment deferrals to protect liquidity as well as all types of measures permissible under corporate law. Going even further than what is allowed under corporate law, a debt-equity-swap is also possible against the will of the existing shareholder. The plan can also shape the rights of the holders of receivables secured by intra-group third-party collateral. The content of the plan is left largely up to the parties to agree within a framework of legal requirements. The plan proceedings thus serve to ensure that the process is carried out by mutual agreement between the debtor and the creditors.
The plan has to be approved by the creditors. This happens in the case of interventions without the consent of all affected parties through a special creditors’ meeting (Erörterungs- und Abstimmungstermin), in which the creditors are divided into different groups. In principle, the consent of each group of creditors is required for the plan to become legally effective. The approval of a creditor group requires a majority of 75 percent of the voting rights in that group. This means that dissenting minority creditors within a group can be outvoted if a corresponding majority of the remaining creditors is present. In addition, the refused consent of entire groups of creditors or shareholders can be overridden by the court by way of so-called “cross-class cram downs”. All this gives the ailing company considerable leeway.
Contrary to the original proposal from the legislator, current (long-term) contracts (e.g. long-term leases) cannot be terminated by a restructuring plan outside of insolvency proceedings if such contracts are no longer required after the successful restructuring. Termination is only possible through insolvency plans in the context of insolvency plan proceedings, which are often combined with a protective shield (Schutzschirm) or other forms of self-administration (Eigenverwaltung). As the restructuring plan largely follows the insolvency plan, the latter also offers similar restructuring options to those described above. Most recently Adler Modemärkte AG filed for such insolvency plan proceedings. Another recent prominent example is the protective shield for Galeria Karstadt Kaufhof GmbH. The process is based on US Chapter 11, and is a very helpful tool for business restructuring. The Hogan Lovells Business Restructuring & Insolvency Team has broad experience with this particular rescue process and has negotiated and implemented many successful reorganizations under insolvency plan proceedings.
Overall, the restructuring plan and the insolvency plan serve to ensure the continuation of business operations. Both proceedings can be initiated if there is a realistic chance from an economic perspective that the business can in fact be restructured and continue as a going concern. At a time when businesses may be facing severe, but ultimately temporary, issues, both plan proceedings which enable the business to emerge as a viable trading entity are a valuable element of the German restructuring toolkit.
Authored by Christian Herweg, LL.M. (Cambridge) and Jan Fürbaß
