In May 2017, the German Federal Supreme Court (Bundesgerichtshof), Az. XI ZR 571/15, has given its views for the first time on bridging loans (Überbrückungskredite) and their validity in a restructuring scenario.
In the context of restructuring, bridging loans are loans that are granted to financially distressed companies until a restructuring plan is formulated in order to avoid the company’s insolvency. Accordingly, they are generally only in place for a limited timeframe. After the restructuring plan is finalised, renegotiations are usually required, in particular between the debtor company, the bridging financier and the company’s other creditors.
In this recent decision, the Bundesgerichtshof decided that a lack of enforceability cannot be assumed merely from the duration of a bridge loan. Rather, the court must undertake a comprehensive overall evaluation of the facts concerning the case.
In early 2015, two chambers of the court of appeal (Kammergericht) expressed contradictory opinions concerning the duration of bridging loans, suggesting that three weeks, and three months respectively, may be considered acceptable.
Federal Supreme Court decision
- To clarify, the Bundesgerichtshof has now commented that a proper judgment of this question requires a comprehensive overall evaluation of the factual matrix surrounding the granting of the ‘bridge’
- The distinction between what the courts will uphold in terms of banks granting credits and securing them, and what they consider legally unethical and unenforceable, cannot be determined with reference to specific time periods
In its decision, the Bundesgerichtshof has implicitly endorsed bridging loans. Accordingly, they can continue to be a first component in an extrajudicial restructuring.
Had the court followed in the footsteps of the lower courts, bridging loans would have had no future, since realistically, three weeks may easily pass before the restructuring plan of the distressed debtor is finalised. Furthermore, the court’s opinion is in accordance with a recent proposal of an EU Directive, which states that temporary financing may be necessary until a restructuring is completed. This endorses the concept of bridging loans.
It should be noted that in the most recent Air Berlin insolvency, the ‘bridge’ was given at a later stage, after filing for insolvency. The above scenario of the pre-insolvency bridging loan is slightly different.
However, it remains to be seen if and to what extent the above Bundesgerichtshof judgment on the criteria of the pre-insolvency ‘bridge’ may also impact on the Air Berlin scenario.