Germany needs more professional insolvency courts: this is the opinion of more than 90 per cent of the experts surveyed in the insolvency law analysis “InsO Survey 2018” which has now been presented by the management consulting firm McKinsey & Company and the law firm Noerr. Although the experts generally confirm that German insolvency law is more attractive six years after its reform compared to the earlier legal situation, the results of the survey also reveal weaknesses and can be used to adopt further improvements and strengthen the restructuring location Germany in international competition.

To find out how effective reformed insolvency legislation has proven in practice, McKinsey and Noerr surveyed restructuring and insolvency experts, including lawyers, judges and judicial officers, insolvency administrators, creditors and bank employees. Around 350 experts responded to the survey. The background to this was the modernisation of German insolvency law in 2012 with the “Act for the further facilitation of the restructuring of undertakings” (Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen – the “Act”). The intention of the Act was to improve the restructuring chances of companies threatened by insolvency and increase the international competitiveness of German insolvency law. After all, particularly when it comes to cross-border insolvencies, companies can often choose the country where their case is handled. The survey also addresses selected additional insolvency law issues and therefore goes beyond the changes made with the Act.

Key results of the survey:

  • Professionalisation of insolvency courts: 89 per cent of the survey participants are in favour of reducing the number of insolvency courts by at least half.
  • Pre-insolvency restructuring proceedings: a clear majority of 70 per cent considers the introduction of such a procedure in Germany to be “expedient” or even “necessary”.
  • Increased liability in the context of self-administration: according to the majority of survey participants, self-administration bodies should have the same liability as insolvency administrators. Self-administration should also only be possible for reliable debtors.

The Act was largely assessed positively

The majority of survey participants confirm that the changes brought about by the Act have made German insolvency law more attractive. No fewer than 47 per cent say that they “completely agree” or “mostly agree” with this statement and a further 46 per cent “agree somewhat” with this statement. According to the predominant opinion of survey participants (70 per cent), the changes to the German Insolvency Code have brought about a change in mentality: an insolvency is today also seen as an opportunity.

At the same time, the survey reveals weaknesses, both with respect to German insolvency law itself as well as the structure of the regulatory framework. “The survey confirms the impression that some local courts are overstrained by company insolvencies,” says Dr Thomas Hoffmann, the partner in charge of the survey at Noerr. 89 per cent of survey participants agree with the proposition that insolvency courts in Germany should be professionalised. 38 per cent consider this “expedient”, 50 per cent even consider this “necessary”

Fewer courts, more judges for complex procedures

“The experts surveyed want fewer courts, but more judges for handling complex procedures,” is how Klaus Kremers, the partner responsible for the survey at McKinsey, summarises the results of the survey. 60 per cent consider a reduction in the number of insolvency courts by at least half to be necessary. 53 per cent of all survey participants believe that complex proceedings should be handled by more than one judge. As many as 61 per cent of the judges surveyed agree with this statement.

Still no pre-insolvency restructuring proceedings

The instruments provided by German insolvency law are also seen critically. The majority of survey participants, 70 per cent, advocate introducing pre-insolvency restructuring proceedings in Germany “in which an accepted restructuring plan can be limited to a group of creditors”.

“This question addresses the structural disadvantage of Germany as a restructuring jurisdiction,” emphasises Klaus Kremers. “In Germany it is not possible for companies that are essentially healthy to preventatively restructure financial liabilities in order to nip the risk of a crisis in the bud.” Numerous foreign legal systems, however, allow pre-insolvency restructuring possibilities, which have been repeatedly used by German companies in the past.

Pressure is also coming from Brussels: a year ago the EU Commission already presented a draft directive for a preventative restructuring framework. “The adoption of the directive is not to be expected before the end of the year however,” says Noerr partner Dr. Thomas Hoffmann.

Hoffmann and Kremers therefore suggest that the German legislator takes action before the end of this year: “Germany as a restructuring jurisdiction could score points by implementing the directive before it is adopted .”

Self-administration is seen critically

According to nearly all survey participants, there are considerable problems with self-administration, an instrument which was initially highly praised. The Act considerably lowered the hurdles for using this instrument to restructure insolvent companies. The debtor maintains control of the insolvency estate during the proceedings and is merely subject to supervision by a custodian. 87 per cent of survey participants agree with the proposition that self-administration bodies should have the same liability as insolvency administrators, and 88 per cent think that self-administration should be limited: it should only be possible for debtors who have proven their reliability based on objective criteria. “The numbers speak for themselves,” says Klaus Kremers. “The legislator should take action here as well and strengthen self-administration as a useful restructuring instrument.”

After Brexit: competition for the new restructuring hub

“The potentials for improvement revealed by the survey could be starting points for making the restructuring of companies more attractive in the evaluation of the Act which has been announced by the legislator,” comments Hoffmann on the results. Kremers adds that the time for this is also favourable for another reason: “Brexit will mean a competitive setback for the United Kingdom as a formerly very attractive restructuring jurisdiction – the cards are being reshuffled.” The authors of the survey also give a warning: “Which country will become the new restructuring hub is not a foregone conclusion. Germany faces strong competition, for example from the Netherlands or Singapore.”