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The German insolvency reforms: Two years on

Two years after the insolvency reforms took place in Germany, the country is starting to assess the benefits from the changes, says Annerose Tashiro, partner and head of the cross border restructuring department at law firm Schultze & Braun

Annerose Tashiro
Partner and head of the cross border restructuring

1 March 2012 saw Germany revolutionise its insolvency laws, with new legislation moving in line with UK and US practices. Providing debtors and/or creditors with more control over the insolvency proceedings, the reforms sought to improve the legal framework of corporate restructuring in Germany.

Two years on, the dust has started to settle. The implementation of the changes have slowly been accepted and there are two key areas where the benefits can be seen.

1) The selection of insolvency administrators

Insolvency administrators had to be truly independent prior to the reforms. This meant that being suggested by a stakeholder would contravene the notion of being independent, making it difficult to recommend suitable experienced administrators.

The reforms have shifted the focus by allowing stakeholders to provide an opinion – they can consent to become a member of the preliminary creditor committees, and once accepted to the creditors committee can air views about administrators which will be listened to.

Once an appointment has been assigned, the courts will only be able to reject the administrator if that person is deemed not fit for the job.

With banks being one of the largest creditors, the new reforms created the opportunity for them to have more influence on the appointment of the insolvency administrator and with the direction of the case. The early written consent to serve on the preliminary creditors committee was treated with trepidation by the banks at the beginning. However, over the past year the banks have adapted to the new circumstances and requirements.

2) Protective shield procedures

Prior to the reforms, debtors who found themselves in financial difficulty had few options to find a solution to its problems.

The reforms have created the protective shield, where debtors that are not yet illiquid can be granted three months to submit an insolvency plan. This application for a protective shield has become fairly popular with debtors who have found themselves in financial troubles.

This has the usual insolvency law featured benefits of the court appointing a preliminary insolvency administrator or moratorium to prevent any further foreclosure actions.

The influx of applications was greater than the courts had predicted, so it has taken time for them and the professionals to find their feet with the process.

Only those debtors who are at risk of becoming insolvent, but are still able to pay their debts and liabilities, on top of a feasible reorganisation, have been able to qualify for this protection. However, it has become clear that there are a number of businesses that are too far gone along the insolvency route – this protection could not help them in the long run and proceedings evolved into ordinary insolvency administrator later on.

The 2012 reform has been beneficial to those businesses which required the support to an early restructure.

The result of the changes are clearly visible within the insolvency sector. The awareness of restructuring-friendly procedures has increased and thus the perception of such in the public has changed. This – hopefully in the long run – will trigger the management of struggling companies to seek early advice from restructuring professionals.

The reforms to the insolvency regulations have demonstrated already that it is possible to find a suitable solution for the debtor and also for the creditor.

The adoption has been slow in some places and sometimes stretched a bit too far. Nonetheless, the changes have moved in the right direction.

Posted on 25th June 2014 by

 

 

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