“Be careful with what you choose,
you may get it”
Colin Powell
The deadline for the legislator to implement the EU “Restructuring Directive” is 17 July 2021 (see for further background information to the Directive here (in German)). However, The Ministry of Justice will most probably not publish the (German) draft bill originally expected for the end of this year, which should also take into account the consequences of the ESUG evaluation (see here for more details (in German)), until the spring of next year. Meanwhile, however, various associations have been very active and have, in some cases, developed concrete proposals as to how they believe the implementation into German law should take place. A look outside the box shows that the Dutch, for example, are already much further along in implementing the directive – and are likely to set completely different priorities than the German position papers suggest.
In the following, the timetable for implementation, the key points of the various position papers and some key points of the planned implementation of the Directive in the Netherlands are outlined – perhaps also in order to once again stimulate discussions in Germany about a really “successful” implementation.
The timetable
According to statements made at the VID’s annual conference at the beginning of November 2019, the implementation of the directive and the implementation of the amendments to the InsO derived from the ESUG evaluation are planned within the framework of three legislative packages:
Package 1: Debt relief & private insolvency, draft until the end of 2019,
Package 2: Corporate insolvency law (implementation of results of ESUG evaluation and implementation of directive including, if necessary, revision of over-indebtedness concept), draft by spring 2020 and
Package 3: Professional code, institutional framework (Title IV of the Directive), draft until summer 2020.
One can only hope that the Grand Coalition will continue until 2021, otherwise this timetable will prove to be quite ambitious.
The positions
In the meantime, several associations have commented on their respective ideas on the implementation of the Directive with so-called “position papers”, including the German Institute of Auditors (IDW), the Association of German Insolvency Administrators (VID) and the Association of German Management Consultants (BDU). In the following, the corresponding positions of these associations will be briefly outlined against the background of the respective requirements of the Directive:
Already the premises under which the IDW places its position description are interesting:
“When transposing the Directive into national law, the German legislator […] should not be guided by the instruments and the way of thinking of the Insolvency Code, but should create a procedure that is as independent as possible from it – as far as legally possible – which takes effect much earlier than the insolvency procedure and supplements the existing restructuring instruments. In order to avoid the stigma of failure, it is necessary that the preventive restructuring framework runs as quietly as possible, i.e. under exclusion of the public; moreover, a regulation outside the insolvency code is necessary. This is the only way to upgrade Germany as a location for restructuring and make it more competitive.“
All position papers agree on the necessity of an independent regulation outside the Insolvency Code. Only Prof. Dr. Madaus (see links below) pursues the goal of integrating the restructuring procedure into the German Civil Code (BGB) and the Code of Civil Procedure (ZPO) in an approach that is certainly worthy of note.
a) Access to the procedure
According to Art. 4 of the Directive (Directive) in conjunction with recitals (EC) 24 and 28, access to the restructuring procedure must be granted in the event of “likelyhood of insolvency”, but it should also be opened “[…] before a debtor becomes insolvent under national law” and can be made possible in the event of “non-financial difficulties” (e.g. loss of a contract of decisive importance).
The Directive provides for a general dispensation from the obligation to apply as soon as the restructuring procedure has been initiated (permissible), cf. Art. 7 (1); EC 38. Such a far-reaching dispensation is, however, rejected by the IDW and VID. The position papers emphasise the necessary “distance requirement”, i.e. that an overlap with the German insolvency reasons of illiquidity and over-indebtedness must be avoided. In most cases, the retention of the reason for the application for insolvency under § 19 InsO is also advocated, however, one could read from an overall view of the IDW position paper that at least from the time the application is filed only the insolvency under § 17 InsO (illiqudity) should have an effect on the proceedings (i.e. a transition to a formal insolvency procedure would be necessary). On the other hand, the BDU is in favour of retaining the provision of § 19 InsO, but wishes to waive the resulting obligation to file an application.
The IDW proposes to base the national definition of “probable insolvency” on the statements of the Federal Court of Justice in the ruling on the liability of tax advisors due to a lack of warning of the client’s crisis from January 2017 (see more details on the ruling here (in German)). Accordingly, a “probable insolvency” would exist if “no profits were made in the past, no easy recourse to financial resources was possible and the balance sheet over-indebtedness threatens or has already occurred.”
The debtor’s application (Art. 4 (7) Directive) should be necessary for the (judicial) initiation of the proceedings, but the member states may also permit creditors’ and employees’ applications with the debtor’s consent (cf. Art. 4 (8) Directive). Insofar as the documents take a position on this at all, the initiation of proceedings in Germany should, however, only be possible by application of the debtor.
In addition, Art. 4 (3) Directive in conjunction with EC 26 places the introduction of a “viability test” as a potential further obstacle to access at the discretion of the member states. Most authors and position papers (as far as they deal with it) demand such an examination, whereby it should be based on the so-called “§ 270b certificate” according to the corresponding protective shield procedure contained in the InsO. According to the IDW, however, it shall be sufficient that “… the debtor proves that he is not insolvent, that he is fully financed for the duration of the proceedings, that a rough restructuring concept exists and that the simple majority of the creditors concerned support this.”
b) Self-administration / “Restructuring Officer”
In Art. 5 in conjunction with EC No. 30, the Directive advocates the principle of self-administration by the debtor, but now sees Art. Art. 5 (3) in conjunction with EC 31 provides for the possibility (extended compared to the previous versions) of appointing a “restructuring officer” for “supervision” or “partial assumption of control over the daily operations of the debtor” (!) if a
- “general” moratorium will be imposed,
- “cross-class cram-down” is planned or
- at the request of the debtor or a majority of creditors.
The corresponding position papers uniformly provide for the rule of self-administration with the more or less active “assistance” of a restructuring officer. However, it is doubtful whether the far-reaching proposal of the VID, according to which the restructuring officer shall even be authorised to sell the company, is still in conformity with the Directive.
c) Moratorium
The Directive gives member states the option of a moratorium (general or limited to certain claims) (Art. 6, 7; EC 32 et seq.) for an initial maximum period of four months (Art. 6 (6)), extendable to a maximum of 12 months (Art. 6 (8)). IDW and VID are in favour of a moratorium which should only bind the creditors affected by the planned restructuring measures; a comprehensive moratorium should be reserved for insolvency proceedings. In line with this, the Directive stipulates that the debtor can meet obligations “in the normal course of business” (EC 39).
d) Restructuring plan
The debtor is to be restructured in accordance with the guidelines on a “restructuring plan”. For this purpose, the “affected parties” are to be divided into classes according to Art. 9 (4), EC 44 (whereby exceptions are provided for SMEs). The plan is deemed to have been accepted if (in terms of the sum and headcount, if any) a majority of not more than 75% of the “parties concerned” have approved the plan.
If individual groups are rejected, the Directive provides for the possibility of “cross-class cram-downs”, cf. Art. 11, EC 53. In this case, however, an official confirmation is required, as is also the case with the determination of “new financing” or the loss of more than 25% of jobs in the restructuring plan (Art. 10, EC 48). This official confirmation must be granted if
- the classification of creditors was fair (Art. 10 (2) lit (b),
- there is no violation of “absolute priority rule” (e.g. for subordinated claims, EC 55, Art. 9 (3)),
- the restructuring plan fulfills the ‘best interest of creditors’ test’ (Art. 10 (2) lit (d) and
- the new financing is necessary and possible without “unreasonable prejudice” to the creditors’ interests (Art. 10 (2) lit (e).
On the other hand, the official confirmation of the plan must be rejected in accordance with the requirements of the Directive if “there is no reasonable prospect” that the restructuring plan will prevent the insolvency of the debtor or guarantee the viability of the company (cf. Art. 10 (3), EC 50). While the IDW, as expected, proposes the IDW S2 as the standard for the restructuring plan, the VID refers to the relevant case law of the Federal Supreme Court in this respect, in particular the judgment of May 2016 (see here for further details). VID and IDW want to fully exploit the framework of the directive on approval requirements with a 75% majority of the headcount and total amount of claims.
According to the IDW, the competent courts should at least be granted an explicit right of preliminary examination (i.e. before the plan is even forwarded to the “parties concerned”!). The IDW also wants to grant the court a right of review with regard to the debtor’s ability to restructure.
(e) Involvement of shareholders
According to the requirements of the Directive, shareholders should not be able to “prevent the acceptance of restructuring plans for no reason” (EC 57, Art. 12); they may, however, be partially exempted from the “absolute priority rule” under certain conditions (EC 56). In the case of SMEs, there should also be the possibility of contributing to the restructuring through contributions in kind, such as experience, a good reputation or business relations (EC 59). In principle, the associations take the view that the shareholders should only be included, for example by converting their claims into equity (so-called “debt-equity swap”), on a voluntary basis.
f) Restructuring financing
The Directive provides for an explicit exception of (bona fide) intermediate and new financing (“fresh money”) from avoidance in the case of possible subsequent insolvencies (“super senior loan”), cf. Art. 17 f, EC 66 ff. As expected, the VID in particular opposes this exception to restructuring financing and sees the danger of the establishment of “insolvency privileges” thought to be overcome by the InsO.
Implementation of the Directive in the Netherlands
Already the fact that the draft Bill has already entered the parliamentary process in July 2019 (!) makes for an interesting view accross the border to the Netherlands when it comes to implementing the Directive. The final decision on the Dutch Bill is expected for the beginning of 2020. For starters, the Dutch are therefore much faster than the Germans.
But they are also obviously approaching the directive with a different objective, because on the one hand the restructuring framework is rather pragmatically located in the Dutch insolvency law. It is explicitly stated that the COMI for the opening of a Dutch restructuring procedure should already exist in the case of “sufficient connection” with the Netherlands. On the other hand, the right of initiative should not only be limited to the debtor, but extended to the creditor and the works council of the debtor. In contrast to the German approach, the jurisdiction of the insolvency court should remain limited.
Overall, the draft law gives the impression that the proceedings are to take place with a rather tight schedule, for example the moratorium period is generally limited to two months. A distinction is also made between public and private proceedings in favour of possible secrecy of the latter. Self-administration should not lead to the debtor’s withdrawal of control over his company; only the optional appointment of an “observer” is envisaged. As a rule, a “plan expert” should be appointed to draw up the restructuring plan. “Naturally”, a debt-equity swap should be possible in the Dutch restructuring process. Last but not least, the restructuring plan should be accepted if a sum majority of 2/3 of the creditors and / or a capital majority of 2/3 of the shareholders is reached (Art. 378).
Critical appraisal
Already at this early stage – according to the Minstry of Justice following the recommendations of the position papers – a failure of the German restructuring framework is to be feared in the sense that the case numbers of the “preventive restructuring framework” in Germany will not exceed those of the protective shield procedure according to § 270 b InsO. This is partly due to “homemade” problems, such as the over-complexity of the planned implementation, which is likely to degrade the proceedings to “light insolvency proceedings” due to the constant involvement of the court. This is all the more the case as the German insolvency courts – which are not known for their debtor friendliness – are likely to be given jurisdiction over the restructuring proceedings. Thus, the proceedings are likely to face the same fate (albeit for other reasons) as the German “Vergleichsordnung, VglO” at the time.
In part, however, the already apparent lack of success of a German restructuring procedure may also be due to the pursuit of other – more creditor-oriented – approaches to implementation in other member states. The emerging Dutch law on the restructuring framework is a prime example of a creditor-friendly system that should also make it possible for debtors from other EU countries to use it. The Dutch system thus takes up the original idea of the Directive, which was intended to promote a settlement of the high numbers of NPL stocks in the southern member states of the EU without too much involvement of the courts. It is already foreseeable that this system will enjoy similar popularity among creditors and managing directors of debtors as the scheme of arrangement procedure under English law.
It remains to be seen how the German Ministry of Justice will proceed in view of this initial situation – i.e. what the draft Bill will look like.
(*this post is a summary of a lecture I had the honour to deliver on 15 November as part of the “Update Restrukturierung” organized by Müller & Rautmann insolvency administrators).
Position Papers (all in German):
IDW: „IDW Positionspapier “Präventiver Restrukturierungsrahmen”
VID: „Thesenpapier zur Umsetzung der Richtlinie über Restrukturierung und Insolvenz “
BDU: „Gesetzgebungsverfahren zum Präventiven Restrukturierungsrahmen – Anregungen zur Diskussion“
Die Deutsche Kreditwirtschaft: „Positionspapier zur Richtlinie (EU 2019/1023)…“
Gravenbrucher Kreis: „Gravenbrucher Thesen“ bereits vom 14.01.2017
Madaus, „Der deutsche Restrukturierungsrahmen – Anregung einer zivilrechtlichen Umsetzung“
Implementation Netherlands:
“Amendment to the Bankruptcy Act in view of the introduction of the possibility of getting court confirmation for an extrajudicial restructuring plan to prevent bankruptcy (Wet homologatie onderhands akkoord ter voorkoming van faillissement)”