When the reforms come into force, they will supplement and complement the Recast European Union Insolvency Regulation that became effective on June 26, 2017.
The new German legislation will permit corporate group insolvencies with individual proceedings, on an entity-by-entity basis, presided over by a single German insolvency court and administered by a single insolvency administrator, unless a unitary approach is impracticable. In the case of impracticability, the courts and administrators involved are obligated to cooperate for the purpose of coordinating the separate proceedings.
The new law also provides a mechanism for creating group creditors’ committees, the role of which is to support insolvency administrators appointed in individual insolvency proceedings and to ensure that such proceedings are conducted in a coordinated manner. Each insolvent member of a group and each individual creditors’ committee has the ability to initiate a "coordination proceeding" designed to facilitate the individual insolvency proceedings and to maximize creditor recoveries.
The new law does not permit substantive, as distinguished from procedural, consolidation of the group member debtors. Instead, the estates of each entity remain separate, and creditors can receive distributions only from the particular debtor(s) against which they hold claims. This reform is particularly significant because reliance on insolvency protocols is uncommon in German insolvency proceedings.
The legislation defines a "business group" (Unternehmensgruppe) as a group of legally autonomous businesses whose center of main interests is in Germany and who are directly or indirectly connected with each other by means of: (i) the ability to exert a dominating influence; or (ii) centralization under joint management (einheitliche Leitung).
Among the new law’s key provisions are the following:
Group venue (Gruppen-Gerichtsstand). If a member of a corporate group files an insolvency proceeding in a particular court, that court can declare that it also has jurisdiction over all the other members of the corporate group. There are certain safeguards designed to prevent smaller subsidiaries from being used to facilitate forum shopping. If the insolvency proceedings over the group members are not procedurally consolidated in one insolvency court, all courts involved must consider whether it would be advisable to have a single insolvency administrator appointed for all of the debtor companies. The courts must also cooperate and share with each other information concerning the insolvency proceedings; if more than one insolvency administrator has been appointed, the administrators must do the same; and in the case of debtor-in-possession ("DIP") proceedings (Eigenverwaltung), the debtor’s management is obligated to cooperate and share information with the administrators or management of all other group member companies.
Group creditors’ committee. The new law provides for the formation of a group creditors’ committee (Gruppen-Gläubigerausschuss) in case of insolvency of a corporate group. The function of a group creditors’ committee is to support the insolvency administrator(s), any DIP, and individual creditors’ committees appointed in the group debtors’ cases.
Coordination proceedings. The new law introduces a group-related coordination proceeding (Koordinationsverfahren) to be overseen and coordinated by a coordinating administrator (Verfahrenskoordinator). The purpose of such coordination proceedings is to harmonize the separate insolvency proceedings pending with respect to the various group companies to the extent that coordination is in the best interests of creditors.
Coordination plans. Corporate groups will have the option of formulating a coordination plan (Koordinationsplan) providing for, among other things: (i) the implementation of measures (including entering into new contracts) necessary to restore the economic viability of the individual group companies and the corporate group as a whole; and (ii) the resolution of internal group conflicts. Such a coordination plan can form the basis for an insolvency plan for each insolvent entity but has no binding effect on the insolvency administrator of each group entity. However, an administrator is obligated to justify any departures from the coordination plan.