German regulations obliging managing directors to monitor the liquidity of a company during crisis situations are typically strict and give rise to the risk of personal liability in cases of non-compliance. Legislation requires company management to file for insolvency proceedings without undue delay in the case of illiquidity or over-indebtedness. Continued trading where the company is considered to be materially insolvent can have serious consequences.
On February 9 2017 the Great Senate of the Federal Fiscal Court published a decision stating that the Restructuring Order was illegal. On June 27 2017 the legislature introduced new legislation which provides that the tax authorities may waive taxes or assess taxes at a lower level. However, the new legislation can be applied only where creditors have waived their claims after February 8 2017.
In order to maintain an insolvency estate and achieve the utmost satisfaction of all creditors, German legislation has ratified various liability claims against managing directors for payments made after their company has become illiquid or been deemed to be overindebted. However, according to recent case law, one thing that all of these claims have in common is that managing directors cannot be held liable for payments made that result in an equivalent compensation for the company.
According to the Federal Ministry of Finance's Restructuring Order, a tax deferral or exemption for restructuring profits is possible if the restructuring needs of the company are clear, a complete or partial waiver of the debts takes place, the creditor's intention to restructure is apparent and the tax deferral or exemption is linked to the restructuring and necessary for its successful implementation. However, the Great Senate of the Federal Fiscal Court recently held that the Restructuring Order is illegal.
The Law for the Facilitation and Management of the Insolvencies of Groups of Companies will enter into force in April 2018. The new law places no emphasis on a consolidation of the insolvency estates of certain group companies. Instead, it firmly sticks to the principle of 'one company, one insolvency proceeding'. Consequently, an insolvency of a group of companies will still lead to multiple individual insolvency proceedings.
Parliament recently concluded the reform of the insolvency clawback rules introduced by the federal government at the end of 2015. The reform is expected to come into force in the first half of 2017. Its declared objective is to create greater legal certainty and transparency regarding clawback practice for all kinds of market participant. But can the reform live up to its promise?
According to the Federal Ministry of Finance's Restructuring Order, a tax deferral or exemption for restructuring profits is possible if the restructuring needs of the company are clear, a complete or partial waiver of the debts takes place, the creditor's intention to restructure is apparent and the tax abatement is linked to the restructuring and necessary for its successful implementation. However, the Great Senate of the Federal Fiscal Court has held that the Restructuring Order is illegal.
In a recent decision, the Federal Court of Justice clarified that no provision in the Insolvency Code clarifies how a compensation payment for deterioration is to be calculated. The court held that it is within the discretion of the court to calculate the amount of the compensation payment based on both the official tables for the depreciation of fixed assets and the actual deterioration of the assets.
A German court recently limited the permissible term allowed for bridging finance loans and declared a loan defined as 'bridging finance' to be void for not meeting the permissible term requirements. The court justified its decision by stating that the loan was not aimed solely at bridging a liquidity gap to facilitate the possibility of effectively restructuring the distressed business, but also at ensuring the survival of the business.
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.