On July 13 2010 the Federal Ministry of Finance (Bundesfinanzministerium) published an initial draft (Referentenentwurf) of the Restructuring Act (Restrukturierungsgesetz) (Act). The overall aim of the Act is to establish a regime for the organised winding-up of credit institutions. The Act introduces, amongst other things, a two-tier reorganisation procedure, provisions for the transfer of the whole or parts of the business of “too big to fail banks” to other banks or state run “bridge banks” (Brückenbanken) and an extension of the statutory limitation period in respect of directors’ liability. The Act also provides for several amendments to existing supervisory law.
Scope of the Act
There is a direct link between the Act and the experiences of the Federal Ministry of Finance during the credit crisis, in particular with regard to the nationalisation of Hypo Real Estate. Accordingly, the underlying objective of the Act is to ensure that the dissolution of credit institutions is achieved without jeopardising or otherwise affecting the stability of the financial market.
The Act provides for the following new regulations:
- recapitalisation procedures (Sanierungsverfahren);
- reorganisation procedures (Reorganisationsverfahren);
- debt to equity swaps;
- restructuring funds for credit institutions,
as well as amendments to the following areas of existing supervisory law:
- appointment of special representatives (Sonderbeauftragte);
- transfer of assets to private and state run “bridge banks”;
- extension of the statutory limitation period of directors' and officers' liability.
In addition to the above, the Act also sets out a new Act for the Reorganisation of Credit Institutions (Gesetz zur Reorganisation von Kreditinstituten (KreditReorgG)) and a new Act for the Formation of a Restructuring Fund (Gesetz zur Errichtung eines Restrukturierungsfonds für Kreditinstitute (RStruktFG)).
The KreditReorgG provides for a new two-tier restructuring procedure.
The first tier is a recapitalisation procedure, which targets the management of the credit institution and which is initiated by the credit institution itself. The second tier is a reorganisation procedure, which is noteworthy for the fact that it permits a curtailment of third party rights. Both procedures are subject to supervision by the relevant higher regional court (Oberlandesgericht).
The recapitalisation procedure is open to all credit institutions that require recapitalisation. To initiate this procedure, the relevant credit institution must file an application with the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)). A recapitalisation plan (Sanierungsplan) is then drafted, and the recapitalisation of the credit institution is achieved via the implementation of this plan. The recapitalisation plan may not curtail third party rights. During the recapitalisation procedure the relevant higher regional court has, inter alia, the authority to call for the resignation of the management, to limit dividends and to substitute, overturn or make any decision by the supervisory board of the credit institution.
If the recapitalisation procedure fails or if it is more likely that the procedure will fail rather than succeed, then the restructuring procedure moves on to the second tier. The reorganisation procedure is similar to the current insolvency plan procedure (Insolvenzplanverfahren). However, there are a number of measures which are peculiar to the new reorganisation procedure:
- reduction of creditors’ claims against the credit institution
- transfer of the whole or part of the business of the credit institution to another entity
- conversion of creditors’ claims into equity
The credit institution is entitled to select its preferred restructuring administrator (Sanierungsbeauftragter). However, such selection is, at all times, subject to the decision of the relevant higher regional court. The restructuring administrator, together with the management of the credit institution, must implement the recapitalisation plan and/or the reorganisation plan. In order for the restructuring administrator to fulfil this role, he or she is authorised, under the terms of the KreditReorgG, to give instructions to the management. In terms of legal status, the restructuring administrator is similar to an insolvency administrator (Insolvenzverwalter) or, as the case may be, a special representative.
Amendments to the Banking Act (Kreditwesengesetz (KWG))
Article 2 of the Act provides for several amendments to the KWG.
Section 45 KWG is supplemented by two examples setting out the circumstances when it is legitimate to assume that the capital requirements for a credit institution cannot be satisfied on an ongoing basis. Under these examples, such an assumption is legitimate if (a) between two consecutive reporting dates either (i) the ratio of equity to risk decreases by more than ten per cent, or (ii) the ratio of equity to liquidity decreases by more than 25 per cent; or (b) between three consecutive reporting dates (i) the ratio of equity to risk decreases by more than three per cent, or (ii) the ratio of equity to liquidity decreases by more than ten per cent.
In such circumstances BaFin has the authority to instruct the relevant credit institution to provide it with a plan either setting out appropriate measures to increase equity or measures designed to avoid further deterioration to that credit institution. In addition BaFin is authorised to prescribe certain actions, such as to restrict certain aspects of accounting practices and the payment of variable parts of remuneration (i.e. bonuses).
A new Section 45c KWG will be introduced, importing the concept of Section 36, Paragraph 1a KWG, which deals with special representatives. However Section 45c KWG does not restate the requirements for the appointment of a special representative previously found under Section 36 KWG. Instead, Section 45c KWG provides examples which define under what circumstances a special representative can be appointed and the extent to which powers and authorities can be transferred to the representative from the credit institution. In addition, Section 45c KWG specifies that one special representative cannot be appointed in respect of authorities of both the management board and the supervisory board at the same time.
Under the terms of the amended KWG, BaFin has the right to instruct a credit institution to transfer the whole or part of its business to another credit institution. BaFin can only exercise this right if there is a threat to the existence (Bestandsgefährdung) of a credit institution that could result in a threat to the stability of the system (Systemgefährdung). Furthermore, it must be shown that the threat to the stability of the system cannot be resolved in any other way. If the business to be transferred has a positive value, the transferee must give consideration to the transferor, either in the form of its own shares or cash. If the business to be transferred has a negative value, the transferor must provide a satisfactory level of compensation to the transferee.
The RStruktFG provides for the formation of a new restructuring fund under the Federal Authority for Financial Market Stabilisation (Bundesanstalt für Finanzmarktstabilisierung (FMSA)). The fund is to be used in various ways to ensure the stability of financial markets. Each German credit institution is required to contribute to the fund. The amount of such contribution will be determined according to the systemic risk of the respective credit institution. The restructuring fund will be administered by the FMSA. It is also incumbent upon the FMSA to utilise the fund, as and when required, for the formation of “bridge banks”, share acquisitions and the granting of loans and recapitalisation measures.
Amendments to the Companies Act (Aktiengesetz)
Article 5 of the Act provides for an extension of the statutory limitation period from five to ten years with regard to claims for damages made by the supervisory board of the credit institutions against members of the management board. The extension of the statutory limitation period takes into account the fact that claims for damages against the management board are often only made once the composition of the management and supervisory boards has changed, by which time such claims may already be time-barred.