Introduction
Background
Decision
Comment
The aim of insolvency proceedings is to achieve the highest possible level of creditor satisfaction. In most German insolvency proceedings, this is achieved by selling the debtor's assets – in the form of either a transfer of the enterprise as a whole or a piecemeal sale asset by asset. Insolvency plan proceedings, which aim to preserve the legal entity as such, are implemented in very few cases.
In most cases, the enterprise value is higher than the total value of the enterprise's individual assets. This general rule also applies to most insolvency proceedings. In order to be able to sell the business as a whole, a solution must be found in respect of the secured creditors. If secured creditors start realising (ie, selling) their security assets in an uncoordinated fashion, the desired sale of the business as a going concern becomes impossible. Insolvency administrators must therefore try to strike a deal with secured creditors, whereby the latter undertake not to enforce their collateral during the investor process. In return they receive a proportion of the purchase price that corresponds to the value of their collateral. However, such an arrangement requires that, instead of a quick realisation of their security assets, the secured creditors decide that it is preferable to wait until the insolvency administrator finds an investor willing to purchase the entire business for an attractive price.
In order to preserve the chances of an asset deal, German insolvency law provides that the competent insolvency court can prevent secured creditors from realising their collateral for a certain period. Such a court order can also apply to creditors with the right to demand the segregation of an asset that does not form a part of the insolvency estate (eg, suppliers under retention of title clauses). From the perspective of the secured creditors, the commercial impact of such a court order is dependent on two things:
- the compensation payable to them for the period that they were unable to realise their security assets; and
- any potential deterioration of the assets that can be attributed to their use by the insolvency administrator.
In a recent decision, the Federal Court of Justice clarified how this compensation payment can be calculated in the case of a dispute between the secured creditors and the (preliminary) insolvency administrator. Creditors prefer to calculate their demands based on the official tables for the depreciation of fixed assets, which are issued by the Federal Ministry of Finance, as they are often more financially advantageous than a calculation based on the actual deterioration of the assets and because of their reliability and efficiency.
Under German law, an insolvency filing is the starting point of preliminary insolvency proceedings, during which the court assesses whether there are insolvency reasons and whether there are sufficient assets to cover at least the costs of the proceedings. As a first step, the competent insolvency court orders provisional protective measures, such as a prohibition on enforcement measures and the appointment of a preliminary insolvency administrator. The insolvency court can also order that assets that are subject to security rights or a segregation right may not be used or collected by the creditors, as such assets may be used to continue the enterprise insofar as they are of considerable significance (Section 21(2)(5) of the Insolvency Code).
Compensation for use (in the form of arm's-length rents or interests) is not payable for the three months following the court order, but only for the time following the three-month timeframe. Consequently, the insolvency estate can use an asset belonging to a third party 'for free' (limited to the three months), which is cause for hefty criticism of that provision. However, at the same time, the Insolvency Code provides that compensation for the deterioration of the assets must also be paid. In respect of the compensation for deterioration, the three-month suspension does not apply. It was unclear how these two forms of compensation payment align, particularly since all compensation for usage factors in compensation for deterioration occurring through use, but not the other way around. In 2012 the Federal Court had already decided (contrary to the views of some legal theorists at the time) that in the first three months following the court order, compensation for deterioration occurring through excessive (and normal) use can be claimed.
In the Federal Court of Justice decision (September 8 2016, IX ZR 52/15), the insolvency debtor was a logistics company which had acquired the 26 trucks needed to run its business by way of financial leasing. The plaintiff was a vehicle dealer who had granted a guarantee to the lessor for the debtor's lease payment obligations. When the insolvency debtor became unable to make the monthly lease payments, the lessor drew the guarantee and, in return for the guarantee payment, transferred ownership of the trucks to the plaintiff. This ownership position entitled the plaintiff to demand segregation of the trucks in the insolvency proceedings of the lessee. However, the insolvency court decided that it was impossible to run the logistics enterprise without the trucks and therefore ordered, as a provisional protective measure, that the insolvency administrator could continue to use the trucks. The plaintiff sued the insolvency administrator for a compensation payment for the deterioration that occurred during the three months following the court order. The plaintiff calculated the value of his compensation claim based on the official tables for the depreciation of fixed assets instead of through an expert assessment regarding the actual value of the trucks conducted at the beginning and the end of the three months.
The court decided that the plaintiff's demand was justified. It clarified that the law allowed only for the free use of the assets, not for use without compensation for deterioration. It further confirmed the distinction, as previously set out by the courts in 2012, between the two types of compensation payment:
- compensation for deterioration in case of excessive use of assets; and
- compensation for standard use.
The court went on to clarify that no provision in the Insolvency Code clarifies how a compensation payment for deterioration is to be calculated. The court held that it is within the discretion of the court to calculate the amount of the compensation payment based on both the official tables for the depreciation of fixed assets or the actual deterioration of the assets (this must be ratified by experts). The standard accounting depreciation tables constitute a transparent and acceptable basis for the calculation of the compensation payment.
Accordingly, the Federal Court of Justice held that the Court of Appeal's calculation of the compensation based on the depreciation tables was no reason to overturn the judgment. An expert opinion was not required.
This decision strengthens the position of secured creditors in insolvency proceedings. The question of how to calculate the compensation payment should no longer be an area of discussion between the creditors and the (preliminary) insolvency administrator, as there is now a simple and reliable way of calculating the depreciation. The creditor is not required to determine the assets' actual loss in value. A calculation on an abstract basis, for example in accordance with the official tables for the depreciation of fixed assets, is now a possible assessment method. Against this background, it can no longer be justified to refer to the relevant legal provision, Section 21(2)(2) of the Insolvency Code, as a 'cold expropriation' of secured creditors. The creditors that cannot make use of their assets will receive fair compensation, calculated according to a reliable and predictable method. Finally, from the perspective of the insolvency administrators, the decision means that there will be less value in obtaining a court order prohibiting the use of the security assets during preliminary proceedings.
For further information on this topic please contact Stefan Sax or Joachim Ponseck at Clifford Chance LLP by telephone (+49 69 7199 01) or email ([email protected] or [email protected]). The Clifford Chance website can be accessed at www.cliffordchance.com.