On 30 September 2015, the EU-Commission issued an action plan for the “realization of a capital markets union”. Therein, the Commission announces the presentation of a “legislative initiative” for the last quarter of 2016 which shall include the EU-wide implementation of “early restructuring procedures”. This initiative might present an ice-breaker for the German debate over a “pre-insolvency restructuring procedure” which has been stalled since 2011 after the ESUG.
Although some glossy evaluations of the latest reform of the German Insolvency Act in 2012 (“ESUG” = “Gesetz zur weiteren Erleichterung von Unternehmenssanierungen”) paint a rosy picture of its successes (e.g. Roland Berger (here), Boston Consulting Group (here), McKinsey/Noerr (here) or hww (here)), others casts doubts about the outcome to date (e.g. the well-renown German Professor Eidenmüller called the reform a complete failure (“kompletter Fehlschlag”; here, cf. page 16). And, so to say, just-in-time, the EU-Commission is pressing for a “pre-insolvency restructuring mechanism”. So, will the EU serve as an icebreaker for out-of-court restructurings in Germany?
Before going into the details of the EU-reform project, let’s take a closer look into the actual and current figures in order to gain a more differentiated view on the merits of the recent German reforms:
- According to figures published by Schultze & Braun (cf. here), the percentage of insolvency procedures commenced with an insolvency plan (that does not say anything about whether the plan has been accepted by the creditors later on!), rose from 0.67% in 1999 to 1.96% in 2013. Hardly a success-story.
- Also, the procedures executed by the management (Debtor-in-possesion, DIP, “Eigenverwaltung”), only make for 2.7% of all procedures (but around a third for the 50 biggest insolvencies, cf. BCG-study, p. 14). However, even BCG has to admit that 40% of the procedures beginning as a DIP end up in a regular (thus insolvency administrator-led) procedure! Given that the establishment of DIP into the German “rescue culture” was a goal set to be achieved with ESUG I would again hardly call this a success.
- Furthermore, the payments to creditors before the introduction of the InsO amounted to around 4 to 5% in (then) Deutschmark (the famous Kuhn/Uhlenbruck, 10th edition, 1986, Vorbem., No. 3a, states an average return to the creditors of 3.5% for the beginning of the 80’s!). The average return to creditors nowadays is estimated to be around 3 – 5% (cf. BCG-paper, p. 12; there are no comprehensive and all-comprising researches since the “new” Insolvency Statistics Act seemingly did not produce any results yet) In a particular survey for 2009 the IfM stated the return to be about 3.6% (cf. IfM-materials, no. 186, here, p. 14). Given these figures, neither the InsO nor the ESUG really improved the outcome of the creditors in ordinary insolvency procedures. Again, hardly a success.
- However, one has to admit that these average returns are topped when it comes to a turnaround through an insolvency plan procedure: then the return to the creditors is stated to be around 11% – in the average! (cf. BCG-paper, p. 12). The BCG-figures are corroborated by figures of the IfM (IfM-materials no. 195, here, cf. p. 91), where the average return to creditors in the case of insolvency-plan procedures is said to be at 14.4%. So, here we are getting nearer a success story.
- Finally, according to the same study (IfM-materials, no. 195, p. IX, cf. also page 33), it is assessed that in around 11% of the insolvency cases involving companies with more than six employees a turnaround of the company is achieved through the “übertragende Sanierung” (rescue through the transfer of assets or distressed M&A)! Overall, the “rescue-quota” (i.e., the share of rescued companies among all insolvencies) is assessed to be around 10% of all insolvencies. This looks like a sucess – however, the “übertragende Sanierung” has been around and available since the seventies – thus well before the introduction of the new German Insolvency Act in 1994/1999!
To sum these observations up: Since the inception of the InsO, the share of companies rescued through and in insolvency meanders around 10% overall – the biggest part being achieved through distressed M&A, which was around well before the reform! The payout to the creditors has not risen in over 20 years – when looking to the average of all procedures. The payout in case of insolvency plan procedures is considerably higher, though, but these concern only 2% of all procedures. Also, the number of procedures executed under the aegis of the company’s management are rather insignificant.
Hence, it as to be admitted, that in REALLY big cases InsO and ESUG were and are a success. In such cases, as we have seen, DIP, insolvency plan-procedures and higher payouts to creditors are rather the norm, especially compared to mid-size procedures.
Also, one has also to state the obvious: the number of insolvencies has considerably declined since the overall high in 2003 (nearly 40,000 companies went into insolvency then). For 2015, the number is estimated to be just over 23,000, hence, 2/5th less. And the cases which are currently coming in are – to my experience – of a lower “quality”, especially regarding remaining cash, management, etc. Hence, the real litmus test will be when the insolvencies go up again….
Or, when there is another procedure available – for example a procedure to REALLY restructure a company out-of-court. To this aim, the EU-Commission issued an action plan for the “realization of a capital markets union” on 30 September 2015 (here). Within the plan (p. 25), the Commission first states a certain disappointment with the state of the implementation regarding certain measures to prevent insolvency as previously recommended in another paper in 2014 (here) with reference to an evaluation paper (here). Secondly, the Commission then announces the presentation of a “legislative initiative” for the last quarter of 2016 which shall include the EU-wide implementation of “early restructuring procedures”.
Since the draft will most probably be built on the recommendations of 2014, here are the main points in a nutshell:
- Commencement of the “early restructuring procedure” shall be possible as “soon as it is apparent that there is a likelihood of insolvency”
- the debtor should keep control over the day-to-day operation of its business
- the debtor should be able to request a temporary stay of individual enforcement actions for four up to twelve months but only upon confirmation by a court
- a mediator or supervisor to the procedure shall only be appointed on a case-by-case basis and only upon confirmation by a court
- a restructuring plan adopted by the majority prescribed by national law should be binding on all creditors provided that the plan is confirmed by a court
- new financing which is necessary for the implementation of a restructuring plan should not be declared void, voidable or unenforceable as an act detrimental to the general body of creditors.
The tasks of an already existing “Group of experts on restructuring and insolvency law (E03362)” in which Germany is re-presented with three members – a well-known academic (Prof. Dr. Paulus), a well-known banker (Dr. Karen Kuder) and – a partner of a well-known German insolvency administration firm (sic!) (Daniel F. Fritz) shall now also encompass the advice on the pre-insolvency restructuring mechanism.
Faced with the evaluation of the successes and shortcomings of the recent German reforms and the basic considerations of the EU-project, the question arises whether another new procedure will really kick-off the rescue culture in Germany? Or will it just serve as an additional starting point for insolvency procedures – just with another name-tag attached to it? Obviously, only time will tell, but I cannot deny a certain skepticism…