Vol 10 (2013) - Issue 3

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The Modern German Insolvency Regime: Process, Reform, Financing and Creditor Ranking

The Modern German Insolvency Regime: Process, Reform, Financing and Creditor Ranking Frank Tschentscher, Partner, Schultze & Braun GmbH Rechtsanwaltsgesellschaft, Hamburg, Germany If you were to ask a company its ideal destination for a restructuring, until recently it certainly would not have been Germany. Not that the German legal system was a bad option; on the contrary, ever since the enactment of the German Insolvency Code ('Insolvenzordnung') which came into force on 1 January 1999, German insolvency law has been focussing on company rescue and offering modern and flexible tools for the restructuring of a distressed corporate debtor.
However, on an international level, the German insolvency regime continued to have a reputation as being fraught with difficulties and plagued by uncertainty. It is probably unsurprising, therefore, that international stakeholders were loathe to commit to a restructuring under German law when, at the same time, other options that were perceived as either more creditor or debtor friendly (depending on the individual case) were available. Some significant German restructuring cases were taken to other jurisdictions as a result of the wide held belief that the restructuring of a corporate debtor – within or outside of insolvency proceedings – had a better chance of success when the procedure was subject to a foreign insolvency regime.
In some of the cases, there was real merit in subjecting the restructuring to a foreign law while other cases simply appeared to follow a trodden path. The trend to migrate continued and 'forum shopping' became a sort of knee jerk reaction when international stakeholders were faced with a distressed debtor in Germany. Ultimately, this prompted the German legislator to react and on the 1st March 2012, the German Company Restructuring Facilitation Act ('Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen') came into force, bringing Germany much more in-line with the well-known and liked UK and US insolvency regimes. The reformed German law now provides for, inter alia, increased creditor influence and offers additional tools for distressed companies to reorganise and/or restructure. Already, in the short period between 1 March 2012 and 8 October 2012, some 1502 insolvency applications were presented that made use of the new tools available under the reformed law, the vast majority being applications for (variations of) debtorin- possession style 'self-administration' proceedings. As the reform gathers momentum and the change becomes the new reality, it may be an opportune moment to look back at the pre-reform law and highlight some of its key aspects that the new German insolvency law has now at its disposal.

1. The German Insolvency Regime
In terms of procedure, the German Insolvency Code provided – and still provides – for a two-step approach: upon the presentation of a petition to open insolvency proceedings (either by the debtor or a creditor), the court may make an order for the opening of preliminary insolvency proceedings and appoint a preliminary insolvency administrator whose task it is to determine, inter alia, whether the debtor is in fact technically insolvent and also whether enough funds are available to cover the insolvency procedure expenses. If the debtor is technically insolvent and sufficient funds are available, the court will, upon receipt of the preliminary insolvency administrator’s report, make the order for the opening of insolvency proceedings proper and appoint an insolvency administrator5 (typically the previous preliminary insolvency administrator).