Pre-insolvency restructuring scheme finally under way in Germany


Restructuring and insolvency legislations of EU member states significantly differ from one another. In order for Germany to be able to compete particularly with the UK Scheme of Arrangement and as a reaction to the EU recommendation for a new approach to company insolvencies, VID e.V., a renowned association of German insolvency administrators, has developed key points for a pre-insolvency restructuring scheme in Germany.

Difficulties under the current German Insolvency Proceedings

German insolvency law has traditionally given insolvency practitioners a powerful set of tools to restructure business operations of insolvent companies, i.e. focusing rather on the asset side of the balance sheet. For decades insolvency administrators have used these tools to reorganize businesses and sell them afterwards. But even after substantial changes adopted in 2012, the restructuring of liabilities using insolvency proceedings has remained difficult, even though the situation has been improving, as a survey compiled by McKinsey and Noerr indicates (the "Resolving Insolvency" survey conducted by the World Bank even ranked Germany no. 3 worldwide).

Proposal of a pre-insolvency restructuring scheme

The scheme proposed by VID aims exclusively at the financial restructuring. This includes various measures such as the injection of new capital by equity or debt capital, hybrid financing or the full or part remission of claims. (The proposal is so far only available in German.)

The access to the procedure is limited to debtors who are in an economically challenging situation that endangers their existence. They must not be insolvent or over-indebted (these terms are defined under §§ 17 and 19 of the German Insolvency Code) for another six months. Additionally, the procedure is only open to debtors whose bookkeeping and accounting obligations are met and who do not have payment arrears towards fiscal authorities or social insurance agencies.

The restructuring scheme is introduced by the debtor’s request with the competent court. If all requirements are met, the court has to accept the request and to appoint a supervisor. The supervisor reports to the creditors and the court regarding any misuse of the restructuring scheme or an impending insolvency. Neither the request nor the court approval are published. Within two weeks after the court approval the debtor presents the restructuring scheme to the relevant creditors and the court. It lists the creditors taking part in the restructuring scheme and outlines the changes of their claims and interests, if any.

The court then reviews whether the restructuring scheme ensures the company’s going concern. If the court deems the scheme feasible, it announces a date of approval. Prior to the court approval, a voting hearing for all affected creditors, the debtor, and the supervisor takes place. If the restructuring scheme provides for different creditor classes, each class votes separately. The scheme is approved with a majority of 75% of all claims within each class, if applicable.

The approved scheme is subject to § 254 German Insolvency Code, which means that its effects are binding for all involved parties. Upon the request by the debtor, the court may in addition decide that the involved creditors must not invoke their right of termination resulting from the scheme or the financial deterioration of the debtor and must not realize their collateral. On the other hand, the restructuring scheme must not interfere with the debtor’s shareholders’ rights and dissenting creditors must not be disadvantaged in comparison to their position in case of a liquidation of the debtor. Thus, there has to be a “best interest test” regarding the intended results of the scheme.

It is universally acknowledged that the restructuring scheme should be a quick procedure. Hence, the two-months-deadline for providing the restructuring scheme to court after the application. At the moment, there is still uncertainty as to the responsible court. The VID proposal leaves open whether the chamber for commercial matters (a panel of the district court which is superior to insolvency courts) or the insolvency courts should be put in charge of the restructuring scheme.