German insolvency law offers insolvency plans as a means to restructure a company in insolvency proceedings. An insolvency plan can be considered as an in-court settlement agreement which does not require unanimous consent of all parties involved. Compared to regular insolvency proceedings, an insolvency plan can include solutions that are almost as flexible as an out-of-court restructuring agreement. As a rule, insolvency plan proceedings are quicker than regular insolvency proceedings. While insolvency plan proceedings may be completed within a year (or even less, if the plan is thoroughly prepared in advance of the insolvency filing), regular insolvency proceedings usually take several years to complete.
Recent amendments to insolvency law have extended the array of restructuring options in an insolvency plan. For example, since 2012 a debt-to-equity swap or other corporate reorganisation can be part of the plan (under certain conditions without the shareholders' consent).(1) The self-governed preparation of an insolvency plan by the debtor has been facilitated through protective shield procedures – which means that the management or shareholders of the debtor need not necessarily hand over the keys when filing for insolvency.(2) These incentives have helped to promote insolvency plans as a restructuring tool and the plans are gaining in popularity in the German restructuring market.
Some new features of insolvency plans are being tested in practice and ongoing litigation will lead to judicial appeal court guidelines on how to apply them, creating more transaction security. One element is the predictability of the end of insolvency plan proceedings. The basic idea is that once the insolvency proceedings are lifted, the company will be able to continue or restart trading as an ongoing concern. The ex-insolvency debtor will no longer benefit from any privileges. Following the lifting of proceedings, it must fulfil its post-insolvency liabilities and insolvency plan obligations as they become due. If there is not enough liquidity to do so (eg, because the insolvency plan has stipulated payment obligations which the company cannot fulfil), there is a risk of a 'double-dip' insolvency. The company management will be bound to the same insolvency filing obligations as any other legal entity.
In this context, it becomes relevant that German law does not generally provide for a special preclusion period for the registration of insolvency claims. A claim may be asserted within general limitation periods at any point during insolvency proceedings or after proceedings have been formally lifted. Latecomers have the right to receive the same pro rata satisfaction as early birds in their creditor class. However, the plan architects need certainty regarding the amount of claims that the company must fulfil. They also need to know when the proceedings will be formally lifted.
This concerns the end of the insolvency plan proceedings – at what point are latecomers precluded and when are proceedings over because legal remedies against the plan are no longer available?
An insolvency plan may be proposed by a debtor or insolvency administrator. The parties concerned – in particular, the creditors – then vote on the insolvency plan. A best-interest test allows for the veto of a voting group to be overruled if the majority of voting groups favour the insolvency plan.(3) The insolvency court can then finally approve the insolvency plan. Court approval can be challenged with a restrictive legal remedy in order to prevent obstructive behaviour once the legal remedy has been exhausted or, in the absence of any remedy, two weeks after court approval. Its content then binds all parties concerned and the legal steps contained in the plan can be executed. After the insolvency plan has become effective, the insolvency court will lift the insolvency proceedings, unless monitoring of the implementation of the insolvency is included in the plan.(4) In such case, monitoring will be lifted by the insolvency court once all claims have been satisfied or once their fulfilment is guaranteed.
Proceedings may not always be smooth. The predictability of a plan's ending and the amount of claims to be satisfied are key. One aspect in this regard is the possibility for creditors to demand pro rata satisfaction of their claim after the plan becomes effective and when they are precluded from doing so. Another aspect is the restriction of the legal remedy against court approval of the plan.
Preclusion of claims
Two types of pre-insolvency creditors can cause uncertainties. The first are the latecomers – those creditors that did not register their claims because they:
- did not realise that they had to;
- were unaware of their claim; or
- simply forgot to register the claim in time.
The second are creditors which filed their claims with the insolvency administrator before termination of insolvency proceedings, but whose claims have been contested.
For creditors that did not file their claims at the voting meeting (the latecomers), the Insolvency Code prescribes a statutory one-year time limit from the date on which the insolvency plan becomes effective.(5) After a year, unfiled and unknown claims are unenforceable. Although some insolvency plans try to shorten this period, the code does not explicitly permit it and Federal Court of Justice case law (May 10 2012) indicates that preclusion of latecomers cannot be stipulated. This means that the insolvency plan cannot prevent unknown creditors from demanding pro rata payment on their insolvency claims after insolvency proceedings have been lifted. Unknown creditors therefore always have one year to enforce their claims pro rata – unless the regular statutory or contractually stipulated limitation period is shorter.
For creditors with contested claims, the legal situation is different. Creditors with contested claims may be excluded from the distribution of proceeds if they have not brought a declaratory action within a certain time limit. In 2010 the Federal Court of Justice ruled that this time limit may be defined in the insolvency plan and accepted a preclusion period of two weeks. In a recently published July 3 2014 decision, the Dusseldorf Regional Labour Court followed this ruling. The court clarified that a creditor of a contested claim cannot circumvent the limitation period set out in the insolvency plan by arguing that he or she qualifies as a latecomer (meaning that the longer one-year limitation period would apply), and not as the owner of a contested claim to which the shorter preclusion period applies.
This leads to a peculiar situation. A genuine latecomer that has not registered its insolvency claim (intentionally or negligently) generally has one year to react following the plan's entry into force. This compares to a creditor that first registered its claim during insolvency proceedings, but then failed to bring a declaratory action within the shorter preclusion period. It remains to be seen whether an appeal court or the legislature will eliminate this astonishing discrepancy.
Restriction of legal remedy
As a legal remedy, a creditor or shareholder can lodge an immediate appeal against the insolvency court's approval of the insolvency plan.(6) The right to bring an immediate appeal is restricted in several ways.
The appeal requires:
- a formal objection in writing against the insolvency plan at the voting meeting;
- a vote against the insolvency plan by the individual creditor that wants to appeal (irrespective of the decision of its voting group); and
- prima facie evidence that the insolvency plan will put the appellant in a substantially worse situation in comparison to a regular insolvency proceeding.
An appeal suspends the entery into force of the insolvency plan. However, at the request of the insolvency administrator, the appellate court must reject the legal remedy if it deems that the legal effect of the insolvency plan seems paramount because the disadvantages of delay outweigh the potential disadvantage to the appellant. The rejection itself can be appealed only in case of an exceptionally severe violation of the law. In all other cases, the court's rejection cannot be appealed. The appellant can seek financial compensation if the appeal against the insolvency plan would have been well founded. In such case the appellant must pursue the claim for financial compensation in another lawsuit.
Under certain circumstances, this means that the Insolvency Code replaces substantial legal review with financial compensation in order to facilitate quick restructuring by way of an insolvency plan.
This legal regime is under review by the Federal Constitutional Court. In the notorious Suhrkamp case (which involved a famous publishing house), the insolvency plan included a change in corporate structure from a limited partnership to a stock corporation. As this change in corporate structure was detrimental to the minority shareholder of the publishing house, the plan was the subject of several decisions, including appellate judgments. The court must now decide whether the restrictions on the possibility to appeal court approval of the insolvency plan are compatible with the minority shareholder's constitutional right to be heard and the constitutional guarantee of property. It cannot be excluded that this provision of the Insolvency Code will be declared void, with the effect that insolvency plans will be suspended by potentially lengthy future appeal proceedings. If this happens, the efforts of the legislature in 2012 to bolster insolvency plan proceedings with new rules will suffer a setback. The new rules were designed to accelerate lengthy proceedings and curb extensive legal remedies. Both were an obstacle to insolvency plan proceedings and a reason why these proceedings were rarely used as a restructuring tool in the past. If the court intervenes, insolvency plan law may lose part of its edge.
For further information on this topic please contact Stefan Sax or Joachim Ponseck at Clifford Chance LLP by telephone (+49 69 7199 01), fax (+ 49 69 7199 4000) or email (firstname.lastname@example.org or email@example.com). The Clifford Chance website can be accessed at www.cliffordchance.com.
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