In the past, some distressed German companies have – partially successfully – tried to restructure under UK law. Companies such as Deutsche Nickelwerke, Schefenacker and Broschier transferred their place of business to England and used the Company Voluntary Arrangement ('CVA') to restructure their debt. On the other hand, companies including Tele Columbus and Rodenstock chose to use the Scheme of Arrangement ('SOA'). The SOA is a statutory procedure that does not require a foreign company to transfer its business to England if other connecting factors can be shown to exist, for example, claims subject to UK law, which are supposed to be waived in the course of the restructuring process. Furthermore, it can be initiated independent of whether the company is actually insolvent or not. The reasons for the German companies to use these English procedures were, inter alia, that the German insolvency plan procedure (Insolvenzplanverfahren) was insufficiently calculable for them and a pre-insolvency restructuring procedure did not exist.
The German legislator has reacted to these developments by introducing the law to further facilitate corporate restructurings (ESUG). The ESUG came into force on March 1 2012. One of the announced goals of the law was to strengthen the competitiveness of German insolvency law. With this purpose in mind, preliminary self-administration (vorläufige Eigenverwaltung) and a new 'protective shield' mechanism (Schutzschirmverfahren) was introduced and the possible scope of the insolvency plan (the 'Plan') was extended.
In the following some initial conclusions on whether or not the goal of strengthening the competitiveness of German insolvency law, especially in comparison to the English SOA, will be drawn.
Scheme of Arrangement
The subject matter of the SOA can be any agreement between the debtor and individual or all creditors or shareholders of the debtor in order to restructure the debtor.
There are certain requirements for an SOA to be approved; the SOA has to be accepted by the creditors who are organised in classes. Each class of creditors has to accept the SOA by a simple majority in number (75% in nominal value). Following creditor acceptance, the court will confirm the SOA if all procedural requirements are met and none of the parties involved would be unfairly disadvantaged by the SOA. Once the SOA is confirmed by the court, it becomes binding for everyone involved, including those creditors who voted against the SOA.
On a negative note, preparation for a SOA is very time-consuming. The application in particular requires a high level of detailed information, the absence of which can lead to a rejection of the procedure by the court. Additionally, procedural costs are high and can become even higher in cases where the debtor is a German company with only limited knowledge of UK law and thus has an increased demand for consultancy services. Finally, the German Federal Supreme Court has yet to confirm the extent to which a SOA is recognised by German courts.
Protective shield and Plan according to ESUG
The Plan can generally contain any agreement between the debtor and individual or all creditors or shareholders of the debtor. The ESUG has also opened up the possibility to incorporate the rights of shareholders into the Plan.
Like the SOA, the Plan is voted upon in creditor groups. The Plan requires a simple majority in number and in nominal claim value in each group to vote for the Plan in order to be adopted. In instances where individual groups reject the Plan, they can be outvoted by a simple majority of the groups. After the adoption of the Plan by all groups, the court generally has to confirm the Plan, whereupon the Plan will enter into effect.
In addition, the introduction of the preliminary self-administration under the protective shield has significantly improved the calculability of the insolvency plan procedure. The debtor can combine the insolvency application with an application for self-administration under the protective shield provided the debtor is not yet ultimately illiquid but has based its application on threatened illiquidity or over-indebtedness. Under the protective shield the debtor stays in charge and is granted a period of up to three months to prepare and present an Plan to the court, during which time the protective shield acts to protect the debtor's assets against compulsory enforcement measures (Zwangsvollstreckungsmaßnahmen) by its creditors.
Initial experience with the protective shield
The past 15 months since the enactment of the ESUG have shown that the insolvency procedure consisting of a protective shield followed by a Plan can, in many cases, be successful. Especially, the fact that the debtor remains in charge has meant that an insolvency application is usually filed at an earlier stage, allowing the debtor valuable time in regard to strategic realignment, securing of funding as well as the realisation of restructuring measures, which can be crucial for a successful restructuring. Prominent examples of a successful restructuring under the protective shield procedure were inter alia, Leiser, Solarwatt and Neumayer Tekfor.
The calculability of the insolvency plan proceedings in Germany has significantly increased for the debtor because it remains in charge of the distressed company when conducting the procedure in self-administration. Furthermore, the possibility of including the rights of shareholders into the Plan has brought the Plan in line with the SOA. Additionally, both the SOA and ESUG are comparable when it comes to enforcing a Plan against the will of a minority of dissenting creditors. The majority requirements for the adoption of the Plan are, however, lower than the ones of the SOA. Whilst the SOA retains the advantage of being applicable for companies, which are not actually insolvent, it also can be a more expensive process than the German insolvency plan procedure. In addition, German companies whose place of business is not England will need to be mindful of the necessity to prove a connecting factor to England, should they wish to use the SOA. Finally, they should keep in mind that the German Federal Supreme Court has yet to confirm the recognition of an SOA by German courts.