Vol 15 (2018) - Issue 2

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The Permissible Duration of Bridge Financing during the Financial Crisis of a Debtor under German (Insolvency) Law

I. Issue

In a financial crisis, distressed companies are often in need of fresh money. Financial support during a financial crisis (regularly in the form of a loan) can, in principle, be split into two different types: bridge financing (Überbrückungsfinanzierung) and restructuring financing (Sanierungsfinanzierung). The distinction between the two types of crisis financing is quite important in practice as German case law has set out different legal requirements with regard to their legitimacy.
Thus, restructuring financing regularly needs to be based on a positive restructuring opinion (Sanierungsgutachten). It must be assured that the financing provided is sufficient for the purpose of fully financing the distressed company throughout the necessary restructuring period (usually 2-3 years). Where these requirements are not met, the restructuring financing may be considered contrary to public policy and void. In addition, there is the risk that a lender might be held liable to pay damages if it acts in a way that is driven by a personal interest in a delay of the (obviously) inevitable insolvency of the debtor. By doing so, the creditor knowingly accepts the detriment that may befall the creditors as a result.