Introduction

The Law for the Facilitation and Management of the Insolvencies of Groups of Companies was finalised on April 13 2017 and announced on April 21 2017. It will enter into force on April 21 2018. Contrary to certain requests within German legal literature, the new law places no emphasis on a consolidation of the insolvency estates of certain group companies. Instead, it firmly sticks to the principle of 'one company, one insolvency proceeding'. Consequently, the insolvency of a group of companies will still lead to multiple individual insolvency proceedings. However, the new law aims to achieve better coordination of the various insolvency proceedings.

Single court for group

An important step towards the achievement of the goal of better coordination is the establishment of a single local court for all group companies in order to avoid disputes between differing local insolvency court jurisdictions. On application by any of the group companies, unified legal proceedings can take place, centralised in one court and having one insolvency judge. However, creditors do not have the right to apply for the establishment of a single local court for the group. If the group's member companies apply independently of one another to different courts for the establishment of a single court for the group, the first application takes priority. However, the applying company must not be inferior in relation to its significance within the group of companies, as measured by:

  • the number of employees;
  • its balance sheet; and
  • its sales revenue.

Further, the establishment of a single local court for the group must be in the creditors' common interest. Should any doubts arise, the court is entitled to refuse the application. If the establishment of a single local court for all group companies cannot be achieved, the new law establishes information and cooperation obligations between the various insolvency courts.

Choice of insolvency administrator

The consolidation of different insolvency proceedings with one local court will, among other things, simplify an agreement for the engagement of one insolvency administrator for multiple insolvency proceedings. However, the insolvency court is not obliged to appoint the same person as administrator for the insolvencies of all affiliated companies. Rather, the selection process is primarily at the sole discretion of the court. Thus, if different individuals are appointed as insolvency administrators, the new law has established information and cooperation obligations between them. Should it be determined that by performing these obligations a potential reduction of the insolvency estate could occur, these obligations are limited. For example, the appointed insolvency administrator on a request for information from the administrator of another insolvency proceeding, may refuse to share this information if he or she identifies a (well-founded) risk that doing so may limit his or her own claims against the other group company.

New coordination proceeding

A coordination proceeding disassociated from the individual proceedings has been introduced. On application, this proceeding can be opened at a single court for the group and serve for the comprehensive management and coordination of all group proceedings. An independent third party must then be appointed as proceedings coordinator and shall, in the interest of all group company creditors, seek to ensure the highest possible total amount of assets for the insolvency estate and highest possible value from successful coordination proceedings. With regard to existing conflicts of interest between various individual group companies, the proceedings coordinator will take on a management and dispute resolution function. He or she will also have the comprehensive and vested right to information and involvement, through which he or she can attend the creditors' committee meetings of each individual proceeding. In order to achieve the best possible coordination of proceedings, the proceedings coordinator must develop a coordination plan, which, at best, will ensure a collective restructuring of the group. The legal character and implementation of the coordination plan represent new legal territory. However, contrary to an insolvency plan, the coordination plan has no formative part, and thus no binding effect on individual proceedings. Only once the coordination plan has been integrated into the insolvency plan of an individual proceeding can it have a binding effect on those respective proceedings.

Comment

The solution provided by the legislature had good intentions. However, in practice, it will neither accelerate insolvency proceedings nor downsize the multiple insolvency proceedings that occur within a group of companies. The complexity will only increase with continued use of individual proceedings and increase the number of proceedings conducted through the use of superior coordination proceedings. Moreover, the proceedings coordinator is entitled to remuneration based on the cumulative assets of each insolvency proceeding. This leads to the risk of a further unnecessary financial burden on the insolvency estate. Even though the establishment of a single court for a group provides a welcome and legally certain system for the coordination of proceedings, the total worth of the new law comes into question due to these weaknesses.

If a group of companies consists exclusively of individual domestic companies, the new insolvency law is definitive. However, where there is a cross-border issue, the new version of the EU Insolvency Regulation – to be applied to insolvency proceedings opened after June 26 2017 – must be observed. With regard to cross-border issues, the EU Insolvency Regulation takes absolute priority of application. The regulation differs significantly from the new German law, and practice will show whether group insolvency proceedings can be handled with greater ease under the new law.

For further information on this topic please contact Stefan Sax or Martin Jawansky at Clifford Chance LLP by telephone (+49 69 7199 01) or email (stefan.sax@cliffordchance.com or martin.jawansky@cliffordchance.com). The Clifford Chance website can be accessed at www.cliffordchance.com.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.