This article looks at ways to restructure debt taken up by a German company. First it discusses financings governed by English law and then moves on to look at options where German law-governs the debt.
Financings governed by English law (restructuring through schemes of arrangement)
In recent years a number of German companies such as Tele Columbus, Rodenstock and Primacom have used English law scheme of arrangements to restructure their debt.
An element of the restructuring toolbox
Schemes of arrangement governed by sections 895 to 901 of the Companies Act 2006 are a tool to compromise liabilities by majority consent of the creditors (holding 75% of the affected liabilities). They are used where a company and the majority of its creditors (or a class of creditors) wish to restructure corporate debt outside of insolvency proceedings and where credit documentation does not allow disregard of any dissenting creditors’ objections. They can be used to restructure the debt of German companies if
- there is sufficient connection with England; and
- the scheme will be enforceable in any relevant jurisdictions other than England and so achieve its purpose.
Sufficient connection with England
The High Court of Justice, whose sanction is needed for a scheme to be effective, only exercises its jurisdiction if a sufficient connection of the company's affairs with England is shown.
One way such a sufficient connection can be established is if the creditor claims to be restructured are or become governed by English law and are subject to the jurisdiction of the English courts. If a company has a financing and the relevant loan documents are governed by English law, it can apply for sanctioning a scheme even though the company’s centre of main interests (COMI) is not in England (if the second criteria discussed right below is also met).
Recognition in Germany as a precondition to sanction
A scheme of arrangement cannot be sanctioned if the English High Court is not satisfied that the scheme will achieve its purpose, i.e. that relevant foreign courts will recognise the scheme. The English High Court, as evidenced in the cases of Tele Columbus, Rodenstock and Primacom, clearly considers that schemes involving German companies are capable of fulfilling the purpose for which they are intended. Where the relevant scheme liabilities are governed by English law one can readily see grounds for proceeding on this basis.
Financings governed by German law (restructuring through protective shield proceedings or schemes of arrangement)
As of recently, German law provides for an attractive means of debt restructuring, i.e. protective shield proceedings (Schutzschirmverfahren). A financing under German law is most likely to be found where most or all lenders are German banks. Faced with a restructuring, even larger German banks may prefer protective shield proceedings before a scheme of arrangement because they know protective shield proceedings much better. However, creditors familiar with English law may also consider a scheme of arrangement.
Protective shield proceedings (Schutzschirmverfahren)
German insolvency law allows a German company’s debt governed by any law to be restructured using protective shield proceedings. These proceedings provide the debtor with a moratorium of usually three months within which he is able to negotiate with the main creditors on an insolvency plan until the insolvency court’s final decision of the opening of the insolvency proceedings.
The debtor may file for the opening of protective shield proceedings if
- he is over-indebted or imminently illiquid (as opposed to being actually illiquid); and
- a restructuring report by a person experienced in insolvency matters testifies that the restructuring is not obviously unpromisingly.
If these requirements are met, the insolvency court
- nominates a preliminary custodian supervising the debtor during the protective shield proceedings;
- on debtor’s application, prohibits compulsory enforcement; and
- on debtor’s application, allows the debtor to create priority claims of suppliers, employees etc.
Within the protective shield proceedings the debtor is supposed to agree with the (main) creditors on an insolvency plan dealing with the debt restructuring. Such an insolvency plan comprises elements like deferral, subordination, and debt to equity swap. The insolvency plan is adopted by the creditors’ assembly provided that in each group of creditors the majority of heads and the majority of claims vote in favour of the insolvency plan.
Scheme of arrangement: German law financings
A recent line of English cases has made it clear that a scheme in England can also be sanctioned even if the relevant claims are governed by a law other than English law – the sufficient connection in such cases being based on assets in England or the likelihood a court could exercise its jurisdiction to make a winding-up order in relation to that overseas company.
In 2012 the German Federal Supreme Court considered an English scheme put forward to compromise the claims of the German branch of Equitable Life. Some of the relevant insurance contracts were governed by German law. The court refused to recognise the scheme on the ground this would be contrary to the Judgment Regulation (Council Regulation (EC) No 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters). However, it did so on specific and narrow grounds that there were special provisions which governed insurance related claims under that Regulation.
Most commentators believe, despite the refusal of the court in the Equitable Life case, that the Federal Supreme Court was leaving the door open to recognise schemes which did not involve insurance related claims. Whilst a decision in a pure financial restructuring scheme is awaited most lawyers in Germany and England believe such a scheme would be recognised by a German court. However, the absence of an affirmative decision of the Federal Supreme Court might suggest that a scheme of arrangement over German law-governed debt of a German company should only be used in specific cases.