The risks facing a lending bank if the borrower becomes insolvent are often twofold. Not only are outstanding repayments in jeopardy, but, in the case of debtor`s insolvency, there is also a risk of voidable preference (Insolvenzanfechtung), where the insolvency administrator may challenge repayments already received and loan collateral granted before the insolvency filing.

The ongoing financial crisis has given rise to an increase in financial restructurings for many German companies, as a way of avoiding possible insolvencies. German companies have taken various approaches towards the painful process of restructuring. For instance, they have streamlined their operations, cut costs and raised capital.

While the members of the Eurozone are still struggling to find an adequate answer to the sovereign debt crisis and the stock markets are on a roller-coaster ride, the German economy is still doing remarkably well and continues to attract foreign investors from all over the world, notably China.

On December 13, 2011, the Act for the Further Facilitation of the Restructuring of Companies (ESUG), whose material provisions will come into force on March 1, 2012, was announced in the Federal Gazette. The ESUG bundles several reformatory efforts with regard to German insolvency law and will likely have significant effects on the daily practice. Generally, the restructuring of companies in financial crisis will be made easier. The creditors’ influence on the proceedings, including the selection of the person of the insolvency administrator, is increased.

German Insolvency Law – a Leap Forward

Creditors have often complained that German insolvency law does not give them sufficient influence in insolvency proceedings. On 1 March 2012 new amendments to the German bankruptcy code came into force which go some way towards ameliorating this concern and make a host of changes which should improve German insolvency law to facilitate an insolvency culture which facilitates reorganisation rather than liquidation of assets.  

On March 1, 2012 a number of important changes to the insolvency regime in Germany came into force.¹ The main objective of the reforms is to facilitate the restructuring of companies and to enhance creditor’s involvement. The German government believes – in light of the recent financial crisis – that these reforms are necessary to facilitate complex restructurings.

NEW PRELIMINARY CREDITORS’ COMMITTEE

We would like to introduce you to a great new feature of the revised German Insolvency Act which makes debt-equity-swaps in Germany (e.g., as part of loan-to-own transactions) a lot more attractive. It eliminates troubles caused by change-of-control provisions in agreements between an insolvent company and third parties.

Introduction: Debt-Equity- Swaps Now Possible Under German Insolvency Act

Recently the German Federal Government introduced a reform of the German Insolvency Code by adopting a draft bill of an Act to Further Facilitate the Restructuring of Businesses (the “Bill”). The Bill primarily focuses on the facilitation of insolvency plans as a tool for restructurings and to eliminate certain obstacles of the German insolvency law. If enacted as proposed, the Bill would simplify the purchase of shares of an insolvent company and would give investors more influence and flexibility in in-solvency plan proceedings.

INSOLVENCY PLANS

The English High court has approved a scheme of arrangement for a company incorporated in Germany which had its centre of main interests in Germany, no establishment in the UK and no assets in the UK likely to be affected by the scheme.

This case is one of a number of recent cases where restructurings of foreign companies have been effected by English schemes of arrangement. The court set out its reasoning in this case in some detail in view of the possibility that the European Court of Justice would consider some of the relevant issues in a forthcoming appeal in another case.

On 23 February 2011, the Federal Government (Bundeskabinett) adopted the government draft (Regierungsentwurf) of an act (Entwurf eines Gesetzes zur weiteren Erleichterung der Sanierung von Unternehmen) that proposes material changes to the German Insolvency Act (Insolvenzordnung). The government's aim is to modify the economic terms for the restructuring of distressed companies .