Introduction of a Preventive Restructuring Framework
The core element of SRF is the submission of a restructuring plan (the "plan") by the company and its acceptance by affected creditors.
- The plan allows far-reaching arrangements to be made affecting not only the debts and contracts of the distressed company but also its shareholder structure. The decision as to which creditors will be affected by the plan and whether the plan should affect shareholders remains with the company.
- The plan can be used to restructure the debts owing to affected creditors (for example by imposing a haircut or a deferral), intervene in the rights of shareholders, alter creditors' claims under security provided by other entities within the group and/or implement a new financing.
- Claims of employees must not be changed under the plan.
- The creditors affected by the plan must be divided into groups according to appropriate characteristics and treated equally within their groups. If the plan intervenes in the rights of shareholders, the shareholders must form a separate group.
- In order to become effective the plan must be accepted by each creditor group by a majority within that group of at least 75 % by value, whereby the voting right depends on the amount of the claim held by each creditor. Dissenting creditor groups can be crammed down under certain conditions.
- It is possible to implement the plan without the involvement of the court. The new restructuring law thus gives the debtor a comparatively discreet opportunity for restructuring both its debts and its capital on a confidential basis. A successful restructuring, though, requires a structured and precisely planned preparation.
- Involving the restructuring court may, however, be advantageous. The plan will only bind dissenting creditors if it is approved by the court. In addition, the court may under certain conditions terminate mutual contracts and order certain stabilization measures (e.g. cessation of enforcement measures), neither of which can be done under a plan without court involvement.
If the court is involved, the following limitations of liability will also apply:
- Relaxation of the general prohibition on payments pursuant to section 15b of the Insolvency Code (previously section 64 of the Limited Liability Company Code) if the company has notified the court of its subsequently occurred illiquidity and/or over-indebtedness.
- Provisions of a legally binding plan and legal actions taken in the implementation of the plan are generally not contestable in a subsequent insolvency.
In certain cases, a restructuring officer must be appointed, to whom the court can transfer various rights of control. Alternatively, it is also possible to enter into a consensual settlement with different creditors with the support of a restructuring moderator.
Amendment of the Insolvency Code and obligations of managing directors
In parallel, significant changes to the Insolvency Code are to come into force as of 1 January 2021. In particular, the system of insolvency grounds is modified:
- A forecast period of 24 months will generally be taken into account when assessing imminent illiquidity.
- In contrast to that, when assessing whether a company is over-indebted, the required going concern prognosis will have to cover the next 12 months, only.
- In case of illiquidity, the application for the opening of insolvency proceedings must be filed at the latest 3 weeks after its occurrence, in case of over-indebtedness after 6 weeks.
In addition, access to the normal self-administration proceedings and the so-called protective shield procedure will be more difficult in the future. According to the current draft legislation the debtor must in particular submit significantly more documents to the insolvency court in connection with the insolvency application (e.g. a financing plan for the next 6 months, a concept showing how the company's insolvency shall be overcome and a calculation of the additional or reduced costs in case of self-administration proceedings).
The scope of directors' duties was also reorganized:
- Section 15b of the Insolvency Code provides for a relaxation of the general interdiction of payments (previously contained in section 64 of the Limited Liability Company Code) and permits payments made in the ordinary course of business, in particular if they are necessary to maintain business operations.
- At the same time directors' duties have been tightened in the event of imminent illiquidity. Going forward, once the company is on the verge of becoming illiquid (drohend zahlungsunfähig) the management must protect the interests of the creditors but must still in parallel consider the interests of the shareholders. In case of a breach of duty the management may be personally liable to the company. Correspondingly, the supervisory body will be responsible for monitoring the management and may also become liable in case of a breach of duty.
Adoption of regulations in connection with the Covid-19 pandemic
The following special regulations will apply in 2021 to companies that are in financial difficulties due to the ongoing Covid-19 pandemic:
- When assessing whether a company is over-indebted the forecast period for the going concern prognosis is reduced to 4 months.
- The debtor can apply for the so-called protective shield procedure even if the company is illiquid already.
Authored by Dr. Christian Herweg, Dr. Heiko Tschauner, and Dr. Maximilian Baier