Case law has consistently set out the terms on which the refinancing or financial restructuring of a distressed company can take place in order to avoid lender liability and prevent the clawback of payments made under the finance agreements. The Federal Court of Justice has now outlined certain guidelines and rules of conduct which creditors should observe in the context of financial restructurings.
The Dusseldorf Higher Regional Court recently dealt with a challenge to security under a new loan provided by a bank for the purpose of repaying outstanding claims. The court found no direct proof of either the debtor's intention to disadvantage its creditors or the bank's awareness thereof. The court had to ascertain whether the insolvency administrator's burden of proof was reduced due to the fact that the security assignment constituted an unusual transaction.
The Federal Court of Justice recently clarified the conditions applicable to an 'unusual' transaction that may later qualify it as an 'ordinary course' transaction. The judgment is particularly important in the construction industry, where this type of arrangement – allowing a subcontractor to step in where the main contractor is in distress – is useful, as subcontractors can effectively protect themselves against a general contractor's crises or insolvency.
The federal government recently introduced a reform act which aims to improve legal certainty in connection with the existing avoidance rules under the Insolvency Code. The government has indicated that the act is intended to be a "selective readjustment" of avoidance rules. Measures proposed in the act appear unlikely to resolve all the issues that arise under avoidance provisions, but they are a step in the right direction.
The Federal Court of Justice recently dealt with a clawback claim brought by an insolvency administrator against a shareholder of a debtor in insolvency proceedings. The court found that the transfer of the shareholder position before payment of the last instalment was irrelevant and that the insolvency administrator's ensuing clawback rights would persist as long as insolvency proceedings were opened within one year after the shareholding had been disposed of.
Insolvency law provides for a clawback right in respect of transactions negatively affecting the insolvency estate and made within certain hardening periods before filing for insolvency. The Munich Higher Regional Court recently decided on whether the formal requirements of the Institute of Public Auditors S 6 Standards must be met in order to accept a restructuring plan as the basis of a serious restructuring attempt.
The Federal Court of Justice recently stated that the lease of assets by shareholders to their subsidiaries no longer falls under the principle of equitable subordination. The court stated that shareholders are no longer considered subordinated creditors in this respect. Thus, rental payments made in the year preceding the opening of insolvency proceedings cannot be clawed back on the basis of the rules applying to the repayment of a shareholder loan.
A recent Federal Court of Justice ruling sets out the requirements for subordination agreements designed to avoid insolvency. The court used the opportunity to clarify a number of basic and previously disputed questions concerning the nature and requirements of such agreements, which are a typical restructuring tool for stabilising a company in a crisis.
There is some uncertainty in self-administration proceedings as to the scope and content of a 'substantial impairment of interests', which will lead the court to refuse an application for self-administration and, where alleged by creditors, will trigger severe consequences for the restructuring process. A recent Cologne District Court decision has further clarified the definition of a 'substantial impairment of interests'.
In a decision which is expected to bring major changes to the regime of directors' liability, the Federal Court of Justice recently changed its previous jurisprudence on payments made after the occurrence of mandatory insolvency reasons. The court clarified that directors must reimburse payments after the occurrence of illiquidity or overindebtedness only if those payments were not compensated.
German insolvency law offers insolvency plans as a means to restructure a company in insolvency proceedings. An insolvency plan can include solutions that are almost as flexible as an out-of-court restructuring agreement. Recent amendments to insolvency law have extended the array of restructuring options and consequently insolvency plans are gaining in popularity.
The Federal Court of Justice recently ruled that the presumption of an intentionally disadvantageous transaction based on awareness of impending illiquidity can be rebutted if the debtor has made a congruent payment against a fair and immediate consideration which was essential for the continuation of the business and beneficial to the creditors.
The Federal Court of Justice has held that knowledge of impending illiquidity leads to a strong presumption of the debtor's intention to disadvantage its creditors; even liabilities which will become due in future must be taken into account when considering whether illiquidity may occur under certain circumstances. Such circumstances have a major impact on restructuring efforts and the risk of clawbacks.
A recent decision concerning the APCOA Group is the latest case to illustrate the willingness of English courts to accept jurisdiction over non-UK companies. The case demonstrates the need to develop the government draft bill on group insolvencies into law in Germany. It clearly shows the need for German insolvency law to provide for pre-insolvency restructuring proceedings and insolvency laws for group companies.
Following a referral from the Federal Court of Justice, the European Court of Justice recently ruled on whether the EU Insolvency Regulation is applicable where insolvency proceedings have been opened in a member state, but the place of residence or registered office of the defendant is not in a member state.
Suhrkamp has made legal history by initiating insolvency protection proceedings. It is at the centre of a power struggle between its two rival shareholders, which are attempting to wrest control over its business operations. The proposed insolvency plan provides for transformation from a limited commercial partnership into a German stock corporation. The dispute is unlikely to be resolved in the foreseeable future.
Contractual trust agreements are often used by German companies to set up a pension scheme in a tax-efficient manner to protect pension claims in the event of an employer's insolvency. A recent court decision shows that for a contractual trust agreement to be upheld, it is essential to properly implement all elements of the twofold trust into the underlying trust agreement.
The Federal Ministry of Justice recently published a discussion paper on the Act for the Facilitation of the Management of Corporate Group Insolvencies. The paper proposes the introduction of rules to enhance the coordination of multiple insolvency proceedings in domestic group settings.
The Duisburg Regional Court recently ruled that an insolvency court can empower the insolvency debtor to incur certain predetermined preferential claims. The decision will help to shape prevailing opinion after several local insolvency courts arrived at divergent rulings. For now, debtors should seek constructive dialogue with the competent local insolvency court before filing the petition for the opening of insolvency proceedings.
The Federal Supreme Court recently underlined the importance of commercial considerations in the context of insolvency avoidance rules regarding the repayment of shareholder loans. The court explicitly outlined that a commercial approach is required in order to prevent any potential strategies to structure around the German principles of equitable subordination.
The Federal Supreme Court recently ruled that a termination clause was invalid pursuant to Section 119 of the Insolvency Code, as it was based on an insolvency-related termination event which limited the insolvency administrator's right to choose whether to perform the supply contract in accordance with the code. The court's judgment is likely to cause suppliers to monitor the financial situation of their customers more carefully.
When a company is in financial distress, the shareholders and management must decide to what extent they will subordinate their own interests to the company's interest in survival. It is vital for them to know whether they can rely on advice given by company advisers. A recent Federal Supreme Court judgment provides insight to advisers and stakeholders on how best to protect their interests in a distressed situation.
Subordination agreements between a debtor and its shareholders are a frequently used restructuring tool for German companies. A Federal Finance Court decision has highlighted that the decisive factor in the treatment of debt is the wording of the relevant subordination provision and, in particular, the circumstances under which the debtor must repay the subordinated claim.
The German Federal Court of Justice has refused to recognise an English scheme of arrangement in relation to the German branch of an insurance company, finding that such recognition would be contrary to EU Regulation 44/2001. The judgment was based on specific insurance-related provisions of the Judgment Regulation, suggesting that outside the scope of these specific provisions, schemes will be recognised in Germany.
The Federal Court of Justice has clarified that a former shareholder will be subordinated to its claim under a loan only for a one-year period. The ruling has been widely accepted by German legal scholars and practitioners. However, some legal authors have criticised the ruling, since they think that it could create questionable incentives for delays in filings for insolvency in order to overcome the one-year period of subordination.
The Reform Act on insolvency law, which aims to facilitate the restructuring of companies within insolvency proceedings, recently entered into force. The main scope of the act is to strengthen the creditors' influence throughout preliminary insolvency proceedings, particularly by involving the creditors at an early stage in the selection of the insolvency administrator.
Parliament recently adopted various changes to the insolvency law, which aim to facilitate the restructuring of operating companies. The revisions are intended to improve the prospects of a successful restructuring; involve the debtor and creditors in the selection of the preliminary insolvency administrator; and improve the reliability and predictability of insolvency proceedings.
According to the Federal Court of Justice, as soon as a trustee chooses to violate its obligations under the contractual trust agreement and decides to use the trust assets at its own discretion instead of administering them for the trustor in accordance with the trust arrangements, the assets can no longer be considered to belong to the trustor, which must therefore lose its rights to segregate them in case of insolvency.
Following a ruling by the Federal Court of Justice, when faced with a contestable transaction an insolvency administrator now has a second option to satisfy the creditors. Instead of pursuing claims for restitution before a national court, it may choose to sell them in order to increase the value of the insolvency estate immediately.
Managing directors of a crisis-shaken company are obliged to file for the opening of insolvency proceedings within three weeks of an insolvency event arising. Managing directors are personally liable for any payments which they make out of the company's assets during that three-week period. However, a recent court ruling held that payments made by managing directors with a view to an intended restructuring are permissible.
The federal government recently published the first draft of a new act to facilitate the restructuring and the reorganisation of enterprises. The purpose of the draft act is to improve the prospects of a successful restructuring process, to involve the debtor and the creditors in the selection process of the (preliminary) insolvency administrator and to improve the reliability and predictability of insolvency proceedings.
The Ministry of Justice has issued a consultation paper on insolvency law reform. While many insolvency lawyers and academics have acclaimed the proposals, a significant number of insolvency administrators and judges have voiced their opposition to the paper. It remains to be seen when and how the various elements of the paper will be manifested in a draft bill.
Irrespective of certain weaknesses that German restructuring and insolvency law may have, creditors whose claims are secured by land charges can nevertheless choose between several feasible possibilities for realising encumbered real estate. German law tends to be somewhat reluctant to allow creditors to grasp direct control of real estate. As such, the Federal Ministry of Justice's recent proposals should be welcomed.