The government has adopted a series of measures to counteract the economic consequences of the pandemic and to support those affected [An overview of government measures responding to COVID-19]. The billion-euro aid package includes measures such as state loans and state guarantees. Additionally, businesses can benefit from the possibility of tax deferrals. Besides these measures, most of which directly support the liquidity of a business, the government has suspended the duty to file for insolvency until at least 30 September 2020 if the insolvency is due to the COVID-19 crisis [Aussetzung der Insolvenzantragspflicht & weitere Regelungen / New regulations to mitigate consequences of the COVID-19 pandemic in Germany]. 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 could 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.
In June 2019 the European Union adopted a restructuring Directive, which introduces a pre-insolvency reorganisation process. The Directive still needs to be implemented by the German legislator but hopefully that will happen very soon.
A real option for a financially stressed business is a reorganization under plan proceedings, often combined with a protective shield (Schutzschirm) or other forms of self-administration (Eigenverwaltung). Most recently Galeria Karstadt Kaufhof filed for such plan proceedings. The process is based on US Chapter 11 and its concept of ‘debtor-in-possession’, 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 plan proceedings.
In a nutshell the main advantages of a restructuring under plan proceedings are as follows:
- It leads to the rescue, reorganization and continuation of the company
- It does not involve a liquidation or fire-sale of the business
- Claims may be deferred or waived (in whole or in part)
- It achieves maximum satisfaction of creditor claims
- It is similar to the successful US "Chapter 11" model
- Any arrangement can be made under the plan that is permitted under corporate law
- In addition 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 provides for special termination rights for existing contracts (e.g. long-term lease agreements)
- It allows for the maintenance of concessions and licenses required for business operations
- The company and its management remain in the "driver's seat" through self-administration
- The debtor can propose a trustee
- The process carries certain tax advantages
- And last but not least the process allows the swift implementation of the restructuring
The ultimate plan can include provisions relating to all of the 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 deferrals to protect liquidity as well as all types of measures permissible under corporate law, such as a debt-equity swap. Under a debt-equity swap creditors acquire, with their consent, an equity participation in the debtor. Moreover, under plan proceedings certain (long-term) agreements can be terminated to the extent that they will not be needed following the successful restructuring. 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 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 be approved. However, dissenting creditors can be overruled under the cram down rule (Obstruktionsverbot) provided that, broadly speaking, the plan is in the best interest of the creditors as a whole. In addition to the creditors, the debtor must also agree to the plan. Finally, the plan has to be confirmed by the court so that it can become legally effective.
Overall, plan proceedings are made for preserving the business of the debtor as a going concern and can be initiated if there is a realistic chance from an economic perspective that the business can in fact be restructured. At a time when businesses may be facing severe, but ultimately temporary, issues, plan proceedings which enable the business to emerge as a viable trading entity are a valuable element of the German restructuring tool-kit.
Authored by Dr. Christian Herweg, LL.M. (Cambridge) and Dr. Jan Fürbaß