Restructuring without insolvency: New procedure is intended to make it possible

It is very likely that an EU Directive on a restructuring procedure prior to insolvency will be issued in 2018. If it is transposed into German law, it will become simpler for companies in Germany to restructure their liabilities without going into insolvency.

If a company with a sustainable business model has encountered financial difficulties, up to now, it has had two options: it either had to reach a mutual agreement with its creditors or file an application for insolvency. In such cases, companies may, under certain circumstances, take advantage of the “protective shield procedure” to reorganize themselves.

Since the shield procedure is also an insolvency procedure and therefore has a strong focus on creditors, many companies avoid the issue by establishing a sufficiently close bond to England, where they can restructure their debts using a “scheme of arrangement.” This, however, is time-consuming, costly, and does not provide the necessary certainty of debt relief.

As soon as the directive has been issued and transposed into German law, this circuitous route will no longer be necessary. Then the Europe-wide pre-insolvency restructuring procedure, which grants more rights to debtors, will come into effect across Europe. German companies will no longer have to pass a comprehensive insolvency procedure in order to restructure their debts.

Companies should keep an eye on the development of the restructuring procedure because there are still some points to be clarified

It is already certain that an out-of-court agreement will be possible with the creditors during the restructuring procedure prior to insolvency, even if not all of the creditors agree. In the future, a company must therefore not necessarily involve all of the creditors in its restructuring – it may involve only individual groups, for example bank creditors. If the majority agrees, binding regulations regarding the restructuring of credit will also apply to the creditors voting against the restructuring. This will increase the chances of the restructuring proceeding successfully and the operating business being affected as little as possible. In the long term, there are expected to be fewer insolvencies as a result of the restructuring procedure prior to insolvency.

Although there are many benefits, there are still some points that require clarification: for example, when companies can use the procedure prior to insolvency and when they will nevertheless have to submit an application for insolvency that they would like to avoid if possible. Under certain circumstances, Member States can force companies to apply for insolvency even if they are participating in an out-of-court restructuring, e.g., if they have no liquidity.

Companies with high levels of debt in particular should observe the development of restructuring procedures prior to insolvency to determine how they could best take capitalize on its advantages if worse comes to the worst. If the directive is issued in 2018, the Member States are expected to have up to two years to transpose it into national law. Finally, the specific implementation in German law and application in practice will show the options that arise for companies with regard to out-of-court restructuring.

We bundle our many years of experience in the area of avoiding insolvency and in company restructuring in the Restructuring Practice Group. Our specialists work hand in hand with our experts from other practice groups and disciplines. This makes it possible for us to provide our clients with comprehensive advice and create and implement integrated concepts for successful restructuring.

Your contacts are the experts from the Restructuring Practice Group. Prof. Dr. Georg Streit, Dr. Kai Uwe Büchler, and the team advise on and represent companies, general managers, executive board members and supervisory board members, but also other parties in the restructuring of companies, measures to overcome crisis situations or to avoid insolvencies.