Impending major reform of German insolvency clawback regime 

A key objective of the current German coalition government is the reform of the clawback provisions in the German Insolvency Act (Insolvenzordnung - InsO). To address this, the German Federal Ministry of Justice and Consumer Protection recently published a draft bill for discussion.

The German government is expected to remain in office until 2017, making it highly likely that this reform will become law, in the course of 2015-2016.

Background and objective of the reform

The Federal Court of Justice (Bundesgerichtshof – BGH) on 5 March 2015 issued a decision (case no. IX ZR 133/14, available here) that is of immense relevance for all creditors and debtors that face the need of a subordination agreement (Rangrücktrittvereinbarung) under German law.

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

INTRODUCTION

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. Further modifications were implemented in a second reform which came into force on 1 July 2014.There is only one primary uniform insolvency procedure which applies to both individuals and companies. In the following, we focus on companies.

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

Facts

Cancellation of commercial agreements under German insolvency law

Commercial agreements usually provide for extraordinary termination rights or even automatic cancellation in the case of insolvency of one of the parties. Such a cancellation right may, however, contradict the general principles of German insolvency law.

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.