Fulltext Search

The temporary restrictions on the winding up of companies were lifted on 31 March 2022. This means the legal regime governing insolvency has returned to its pre-pandemic approach.

The pre-31 March position

Objective

The new preventive restructuring procedure aims to deal with companies in financial difficulty before serious problems arise. The measures focus on preventing the insolvency of businesses to preserve their viability.

Main characteristics

Background

Under German insolvency law, employees are generally protected from claw-back claims. The payment of wages is considered a "cash transaction" if the employer pays the salary within three months of the work being performed. A “cash transaction” can only be contested in limited circumstances. Where a third party pays the salary, the cash transaction privilege remains if it is not clear to the employee that a third party made the payment (s.142(2) and s.3 InsO).

A recent German Federal Court of Justice ruling shows that this protection has limits.

A key bankruptcy-related response to the pandemic has ended as the increased debt limits under subchapter V of chapter 11, passed by Congress in the CARES Act, have expired. In an effort to provide bankruptcy relief and access to subchapter V of chapter 11 of the Bankruptcy Code to a greater number of small businesses, Congress raised the debt limit for subchapter V eligibility from the original $2,725,625 million to $7.5 million via the CARES Act, passed in March of 2020.

On 16 September 2021, ordinance 2021-1193 implemented the European Directive on preventive restructuring frameworks into French law. The Ordinance applies to proceedings opened from 1 October 2021.

Key features

The English High Court has rejected a creditor's application to bring a moratorium to an end following the monitors' decision not to terminate the moratorium.

Background

A monitor must terminate the moratorium if they 'think' that the company is unable to pay any pre-moratorium debts for which the company does not have a 'payment holiday'. Surprisingly, debts arising under an agreement involving 'financial services' are excluded from the payment holiday.

Decision

The UK High Court has excluded 'out of the money' creditors and shareholders from voting on Smile Telecoms Holdings Limited’s (Smile) restructuring plan because they did not have a genuine economic interest in the company.

Background

Under German insolvency law, a company is over-indebted when its existing assets do not fully cover its debts and there is no positive going concern prognosis. A positive going concern prognosis is assumed if the company has sufficient liquid funds available for a certain period to satisfy all liabilities at maturity and its profitability will be restored in accordance with a business plan.

Recent court decisions and legislative clarification

Over-indebtedness remains a ground for insolvency

“I did not want you to hear this on the news for the first time, but we are filing for bankruptcy next week.” “This is a difficult call to make. We are going out of business and will probably be filing a chapter 7 in the next couple of days.” Needless to say, bankruptcy is problematic for a licensor: the licensee may cease performing, the royalty stream may run dry, and the licensee or a trustee could attempt to sell or assign the license in bankruptcy to an undesirable licensee, or even a competitor.

A recent case out of the Eastern District of California addressed the split in authority on whether an inaccurate credit report alone is enough to establish a concrete injury in fact for purposes of Article III standing.