New financing facilities and the German Act on the Stabilisation and Restructuring Framework (StaRUG)
Since 1 January 2021, a new pre-insolvency restructuring tool is available in Germany: a restructuring plan under the German Act on the Stabilisation and Restructuring Framework for Companies (Gesetz über den Stabilisierungs- und Restrukturierungsrahmen für Unternehmen – StaRUG, hereinafter “the Framework Act”) (see our report). The restructuring plan can also contain provisions concerning the commitment to grant new financing facilities (section 12 of the Framework Act). Including those provisions on new financing facilities in the plan entails privileged status for the financing party under section 90 of the Framework Act as regards potential insolvency claw-back risks. This provision falls short of what is permitted as privileged treatment for new financing facilities according to Directive (EU) 2019/1023 regarding restructuring and insolvency, and in particular regarding preventive restructuring frameworks. For example, in consequent insolvency proceedings, the new German law does not assign priority to claims arising from new financing facilities. Nor can priority be established by including a provision to that effect in a restructuring plan, as is possible in the monitoring phase of an insolvency plan (section 264 German Insolvency Code). Thus, it is essential for financiers who are willing to grant new financing facilities to know how far-reaching their protection under the Framework Act is and whether they need to supplement their protection with measures corresponding to those often seen in a restructuring process outside the scope of the Framework Act.
Extensive protection from claw-back risks
Upon final legal confirmation of the restructuring plan, provisions included in the plan and legal actions taken to implement the plan are basically protected from insolvency claw-back in subsequent insolvency proceedings and are not subject to creditor avoidance according to the German Avoidance of Transactions Act (Anfechtungsgesetz) outside the context of insolvency (section 90(1) Framework Act). However, this privileged treatment is subject to a number of restrictions. For example, shareholders’ loans are not privileged, and collateral security provided to secure shareholder loans can be subject to claw-back rights. From a financier’s point of view the following aspects are of particular significance:
- The term “new financing facilities” will probably only be permitted to include loans that are granted for the first time, but not extensions or deferrals. In any case, the wording of the law no longer equates deferrals with new financing facilities as opposed to the wording of its draft. It is likewise in dispute whether novations constitute new financing facilities. Nor is there final clarity if and to which extent extensions, deferrals, novations, etc. (and in particular granting of collateral security for the claims restructured thereby) can nevertheless benefit from the protection against claw-back granted in section 90(1) of the Framework Act if and because they constitute provisions included in the plan or legal actions to implement the plan.
- Subsequent repayment of the new financing facilities is not covered by the privilege – at least based on the law’s explanatory memorandum. This greatly restricts the protection against claw-back that then is based primarily on the unvoidability of (i) the collateralisation and (ii) the repayment made to redeem collateral that remains unaffected by the insolvency of the company.
- Thus, especially collateral provided for in the plan (by means of personal or impersonal collateral security) to secure new financing facilities is basically not subject to claw-back. In any case, this includes collateral provided by the company to be restructured itself. It is questionable whether this also applies to third-party collateral provided within a group of companies in the event of their future insolvency.
- The privileged treatment under claw-back rules is not applicable
- if the plan was confirmed based on incorrect or incomplete information provided by the debtor and this was known to the creditor (section 90(1) Framework Act);
- as soon as a sustainable restructuring was achieved (section 90(1) Framework Act). While there has been no clarification as to when this status is deemed to have been achieved; based on section 33(2) third sentence of the Framework Act (that governs the permissibility of recurring proceedings under the Framework Act), it is possible that it should be presumed that a crisis has been overcome after three years;
- if all or substantially all of the debtor’s assets have been transferred unless the creditors not affected by the plan can obtain satisfaction from the adequate consideration for the transfer in priority to those creditors affected by the plan (section 90(2) Framework Act).
No comprehensive protection from liability risks
The provisions that protect financiers from the risks of liability for contributing to delayed filing for insolvency found in the Framework Act are not comprehensive, in contrast to those of the German Act on Temporarily Suspending Insolvency due to COVID-19 (COVID-19-Insolvenzaussetzungsgesetz – COVInsAG). It is true that a contribution to delayed filing for insolvency cannot be based solely on the knowledge of the pending nature or use of instruments of the Framework Act (section 89(1) Framework Act). However, this does not preclude an accusation of unethical actions based on other circumstances of the individual case. Thus, it can be advisable under certain circumstances for financiers to protect themselves by means of a confirmation that the company can be restructured.
Additional requirements regarding the restructuring plan
If the restructuring plan provides for a new financing facility, additional requirements must be taken into consideration in drawing up and confirming the plan. For example, the declaratory part of the plan must explain and state why the new financing facility is “necessary” to finance the restructuring on the basis of the plan. Section 63(2) of the Framework Act then expands the scope of the restructuring court’s review. If the plan provides for a new financing facility, the restructuring court must also examine the plausibility of the restructuring concept upon which the plan is based before confirming it. The plan must be rejected, amongst others, if circumstances are known that indicate that the concept is not based on the facts or does not have any prospect of success. For this examination, the restructuring court can appoint a restructuring officer as an expert pursuant to section 73(3) no. 1 of the Framework Act. This can result in a delay in confirming the plan and also leads to greater legal uncertainty regarding the court’s decision on confirming the plan.
A distinction is to be made between new financing facilities included in the plan and interim financing facilities. Interim financing facilities are those that are already granted during the on-going Framework Act proceedings for the time until the plan is confirmed and implemented. The wording and explanatory memorandum of the Framework Act indicate that interim financing facilities do not constitute permissible content of the restructuring plan. Final clarification has not yet been given as to whether this statement applies in this generality. Even if interim financing facilities are not considered new financing facilities, at least they are covered by the (limited) protection from claw-back and liability according to section 89 of the Framework Act if the restructuring case is already pending. For interim financings, it will be necessary to verify on a case-by-case basis whether additional protection (such as structuring as bridge financing) is advisable to safeguard the financier.
The Framework Act has definitely created incentives for financiers to commit to new financing facilities as part of a restructuring plan. This is true at least for new financing commitments that are dependent on the confirmation of the plan and are secured by the company to be restructured. At least in favour of collateral security far-reaching protection from claw-back risks applies. Beyond this basic statement, much remains to be clarified. Thus, until higher-court case law is handed down, financiers will probably need to determine on a case-by-case basis as to whether, notwithstanding the provisions of the Framework Act, the typical restructuring protection measures are to be taken in favour of the financiers before they commit to new or interim financing facilities. Even in connection with proceedings based on the Framework Act, it remains the case that bridge and/or restructuring financing facilities on the basis of a commissioned or available restructuring expert opinion drawn up according to the requirements of the German Federal Court of Justice is worthy of consideration and in any case represents the safest way.