New Study: the German Law on Further Facilitating the Restructuring of Companies (ESUG) is being implemented in practice but proceedings are becoming more complicated and creditors more critical

New Study: the German Law on Further Facilitating the Restructuring of Companies (ESUG) is being implemented in practice but proceedings are becoming more complicated and creditors more critical

• The number of company insolvencies increases slightly in Germany, at the same time only a few applications for self-administration have been made.
• Self-administrations as a protection are more frequently and more rapidly completely successfully.
• 90 % of those surveyed find that the expectations from the ESUG are satisfied.
• Stricter documentation obligations and inadequate legal certainty increase the complexity of the application.
• Most important requirements for self-administration: experienced independent management and administrator – Chief Restructuring Officer becomes more significant.
• Creditors are becoming increasingly critical and more frequently reject applications for self-administration.
• Protective proceedings are well received.

On 1 March 2012, the German Law on Further Facilitating the Restructuring of Companies (ESUG) came into force in order to improve the environment for the restructuring of companies threatened with insolvency. Creditors interests where particularly to be strengthened, self-administration (protective proceedings) supported and plan proceedings made easier. In the current ESUG study of Roland Berger Strategy Consultants and the commercial law firm NOERR, 2,100 decision-makers including creditors, insolvency administrators, lawyers, judges, investors and managers were surveyed on their practical experience in implementing the new insolvency law. The conclusion is that almost two years after the coming into effect of the ESUG, while the amendments continue to be controversially discussed, approximately 90 % of those surveyed see their expectations fulfilled.

The number of company insolvencies in Germany increased slightly in 2013. The share of applications for self-administration continues to be low although the tendency is towards a slight increase. So far, above all creditors (46 %) and insolvency administrators/administrators (32 %) have applied the new provisions of the ESUG. Most experience has so far been gathered in provisional self-administration (86 %), the protective proceedings and the provisional creditor committee (80 % in each case). 63 % of those surveyed have also meanwhile gathered experience with debt-equity swaps.

Creditors increasingly critical of self-administration

Although almost 90 % of those surveyed have already applied the ESUG provisions, creditors, judges and investors still feel that they are ill-informed about some of the new provisions. Above all, creditors are often critical of the insolvency law and frequently refuse consent to self-administration. In 2013, 44 % of the applications for self-administration where rejected, in the year before it was only 32 %.

“This is primarily due to the lack of preparation of a consistent restructuring concept” explained Roland Berger Partner Oliver Reuscher. “Most companies simply do not succeed in presenting a complete restructuring concept with the application for self-administration. And that makes the creditors insecure”.

In order not to endanger the opening of the proceedings further, the continuation of the business and support of stakeholders such as customers, suppliers and employees must be secured. For over 90 % of those surveyed, the independence of the administrator and the management as well as experience in restructuring are crucial for successful self-administration. In addition, more than 70 % believe that a responsible Chief Restructuring Officer is necessary in the company in order to achieve successful restructuring.

“Improved environment alone is not sufficient” said Dr. Thomas Hoffmann, Co-Head of the Restructuring & Insolvency Practice Group at NOERR. “When a company is in such a critical phase, the responsibilities must be clearly specified. Only thereby is professional direction of the individual processes and permanent communication with the administrator and all stakeholders possible”.

Good acceptance for protective proceedings

There is a clear trend in favour of protective proceedings. In 2013, approximately one third of the self-administrations applied for were at same time protective proceedings. Self-administrations which began as protective administrations were, according to the participants in this study, more frequently and more rapidly successfully completed (41 %), unlike provisional self-administrations (23 %).

However, more than half of those surveyed complained of the complexity in the application for self-administration – above all by the high degree of legal uncertainty (51 %) and comprehensive documentation obligations (43 %). Nevertheless, the experts believe that the new insolvency law can achieve its objectives mainly by easier self-administration (74 %) and a stronger regard for the interests of creditors (59 %). Those surveyed particularly value the introduction of a provisional creditor committee and its influence on the selection of an administrator (44 %).

However, amendment of insolvency law is still required in. The tax treatment of debt-equity swaps in which the claims of the creditors are converted into shares in the company should here be in focus. “While there are positive echoes from the initial experience with the ESUG, the classical success factors of restructuring such as the early and confident involvement of the creditors nevertheless continue to apply” summarised Roland Berger Partner Rainer Bitzenberger. “The restructuring under the ESUG rules will in future usually only succeed if positive examples strengthen the acceptance among creditors”.