Introduction

Today, the UK Supreme Court considered for the first time the existence, content and engagement of the so-called “creditor duty”: the alleged duty of a company’s directors to consider, or to act in accordance with, the interests of the company’s creditors when the company becomes insolvent, or when it approaches, or is at real risk of, insolvency.

The High Court in London gave judgment on Friday, 3 July 2020 on the relative ranking of over $10 billion of subordinated liabilities in the administrations of two entities in the Lehman Brothers group.

The recent decisions in Re MF Global UK Ltd and Re Omni Trustees Ltd give conflicting views as to whether section 236 of the Insolvency Act 1986 has extra-territorial effect. In this article, we look at the reasoning in the two judgments and discuss a possible further argument for extra-territorial effect.

The conflicting rulings on section 236

With a recent draft act to amend the German Insolvency Code (Insolvenzordnung – InsO), the German Federal Ministry of Justice and Consumer Protection intends to reduce uncertainty regarding insolvency claw-back, in particular regarding Sec. 133 InsO. The result may be that restructuring opinions that are now market standard when (re)financing financially troubled companies in Germany become redundant.

Current legal status

In a situation where the survival of a German company depends on restructuring measures by third parties (mainly lenders) who fear that the shareholders may use their hold-out position in a potential subsequent exit by sale of the shares, it is an option for the lenders to demand from the shareholders that the shares are transferred to a trustee to be held in a “double-sided trust” (doppelnützige Treuhand).

Key point

In a financial restructuring, creditors have to pay attention that the restructuring undertakings of the insolvent company are likely to be achieved.

Background

Under German insolvency law, the insolvency administrator may challenge a transaction if an insolvent company intended to disadvantage its creditors (and the other party knew that intention). The German Supreme Court presumes such intention if a company knew about its impending illiquidity.

Facts

This article looks at ways to restructure debt taken up by a German company. First it discusses financings governed by English law and then moves on to look at options where German law-governs the debt.

Financings governed by English law (restructuring through schemes of arrangement)

In recent years a number of German companies such as Tele Columbus, Rodenstock and Primacom have used English law scheme of arrangements to restructure their debt.

An element of the restructuring toolbox

To date, the German Insolvency Code (Insolvenzordnung) does not contain provisions governing group insolvencies. If several entities within a group of companies become insolvent, individual insolvency proceedings are opened and sometimes even individual insolvency administrators are appointed for each entity.

German proposals

This is the second part of a two-part article on ways to restructure debt taken up by a German company. The first part looked at financings governed by English law, this second part deals with German law-governed debt.

Part II – Financings governed by German law (restructuring through protective shield proceedings or schemes of arrangement)

This is a two-part article on ways to restructure debt taken up by a German company. The first part looks at financings under English law, the second refers to German law-governed debt.

Part I – Financings governed by English law (restructuring through schemes of arrangement)

In recent years a number of German companies such as Tele Columbus, Rodenstock and Primacom have used English law scheme of arrangements to restructure their debt.

An element of the restructuring toolbox