Vol 13 (2016) - Issue 2

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Third-Party Securities in the Financial Restructuring of Corporate Groups in Germany

In the financial restructuring of groups one of the most relevant issues is the release of third-party securities. This article aims to explain the common group financing structure in Germany and its treatment in insolvency plan proceedings, with a particular focus on the release of third-party securities.

I. Introduction
In group structures, it is common that subsidiaries provide securities for the group financing. Such third-party securities will have to be released if a refinancing of the group becomes necessary due to economic difficulties. At least at the beginning of a crisis, in most cases only the parent of the group will suffer financial difficulties, because the financing will typically have been agreed on the level of the parent company. The group subsidiaries may not even be affected by the financial difficulties.
However, from the creditors’ perspective, the refinancing concerns the group as a whole. They will prefer to restructure focussing on the parent, with the goal to achieve a successful refinancing for the entire group. Under German law, this scenario will often require individual solutions as out-of-court restructuring measures require the unanimous consent of all concerned creditors. If such consent cannot be reached, it will likely be necessary to initiate formal insolvency proceedings for the parent company. Since in Germany no group insolvency laws exist, subsidiaries will not be included in such procedure and third-party securities will not be automatically released. This can constitute a threat to the subsidiaries’ solvency and therefore the entire group restructuring, but as the case studies will show, can be mitigated by careful structuring and creative solutions.
This article outlines the common financial structure of corporate groups and third-party securities (II). Subsequently, it states the legal situation of third-party securities in the insolvency plan proceeding under German law (III). Finally, it examines different case studies where third-party securities were released in order to achieve a financial restructuring of a group (IV). The article ends with a conclusion (V).

II. Financial structure of corporate groups and third party securities
In a group structure, the parent will usually be a holding company with no significant assets. The material assets of the group and the business operations will be located on the level of the subsidiaries.
The financing for the group would be taken out by the parent company. Additionally, the group will manage its liquidity by a cash pooling system, where the involved group entities are jointly liable for any current account debt of the parent company vis-à-vis the financing bank.
Due to this structure, creditors will now require collateral and joint liability on the level of subsidiaries in order to be able to directly enforce their claims where the material assets or the business operations are located. While in the past it was sufficient to pledge shares of the subsidiaries as collateral, now joint liability is as well as third party securities are common practice.
Under German law, third party securities usually occur in different forms such as land charges, the global assignment of receivables, liens, or reservation of title over assets. Securities can also take the form of an upstream guarantee, a suretyship or a collateral promise (Mithaft). The last is most common in German finance practice.