German Insolvency Law
an overview.
The German Parliament has, in response to the ongoing crisis in the financial markets, extended a legislation, which originally came into force on October 18, 2008, amending, inter alia, parts of the German Insolvency Code. These amendments, which had in certain cases lead to a relaxation of the obligation to file for insolvency, will now be valid without limitation in time. It can be expected that it will be published and come into force already this year.
Obligation to File for Insolvency
German insolvency law is governed by a comprehensive Insolvency Code which entered into force on January 1, 1999 and has been amended from time to time, the last major reform being the Act for the Further Facilitation of the Restructuring of Companies (ESUG) which largely came into force as of 1 March 2012. There is only one primary uniform insolvency procedure which applies to both individuals and companies. In the following, we focus on companies.
The US Court of Appeals for the Second Circuit recently held that redemptions of commercial paper made through the Depositary Trust Company (DTC) are entitled to the “safe harbor” protections afforded to settlement payments under Bankruptcy Code Section 546(e), and are, therefore, not preferential transfers, even though such payments were made prior to maturity.1 The Second Circuit is the first Circuit Court of Appeal to address the issue, which arises out of the Enron bankruptcy case.
Legal Framework
The US Federal Deposit Insurance Corporation (FDIC) and the Board of Governors of the Federal Reserve System (FRB) have jointly approved a proposed rule requiring certain companies to periodically submit Resolution Plans (also referred to as “living wills”) and Credit Exposure Reports (the “Proposed Rule”) to the FRB and FDIC.1
The signs for the leveraged finance market in 2011 are mixed. Questions remain as to whether this year will see a fresh spate of restructurings and/or continued growth in primary issuance. Whilst data compiled by Fitch Ratings has shown that European PE backed company default rates slowed in 2010 (and premier league spending during the January transfer window topped £225 million compared with £30 million last year), the primary leveraged finance market has started slowly this year.
The EU Decision
The EU Commission has held on January 26, 2011 that the so called restructuring privilege offered by German corporate tax law, which allows corporations in a distressed financial situation to continue to set off tax loss carry forwards against future profits even if their shareholder structure has substantially changed, is incompatible with EU State Aid provisions.
The recipients, which have applied the restructuring privilege, are now threatened with the reclaim of the tax benefits.