Restructuring & Insolvency

The German government announced on 9 March 2011 that it plans to appeal against the decision of the European Commission (EC) of 26 January 2011 which stated that the German so-called restructuring clause (Sanierungsklausel) contained in § 8c (1a) Corporate Tax Act (Körperschaftsteuergesetz) is incompatible with the EU state aid rules.

In its decision of 26 January 2011 the EC decided that the German restructuring clause in § 8c (1a) Corporate Tax Act which allows certain fiscal loss carry-forwards to continue for ailing companies in case of a significant change in their shareholding is incompatible with EU state aid rules as it selectively favours companies in difficulty (see our previous article on the EC decision). The German government is of the opinion that the restructuring clause does not provide for selective state aid as defined in Article 107 (1) of the Treaty on the Functioning of the European Union. It therefore plans to bring an action for annulment of the decision of the EC before the General Court of the European Union (German government's press release of 9 March 2011).

On 26 January 2011 the European Commission (EC) concluded its formal investigation of the German so-called restructuring clause (Sanierungsklausel) in § 8c Corporate Tax Act (Körperschaftsteuergesetz) which allows certain fiscal loss carry-forwards to continue for ailing companies in case of a significant change in their shareholding and decided that this law is incompatible with EU state aid rules as it selectively favours companies in difficulty (press release reference IP/11/65). The EC ordered Germany to recover any aid granted under the restructuring clause.

As to the Commission’s formal investigation and the background of the restructuring clause see our previous article in the Restructuring & Insolvency blog.

On 1 January 2011 the German Restructuring Act (Restrukturierungsgesetz) came into force. The new law provides special rules to save ailing credit institutions and introduces:

• a special two-tier pre-insolvency restructuring reorganisation regime for credit institutions and
• supervisory powers to transfer assets and liabilities held by a system-relevant (meaning "too big or too connected to fail") credit institution to another bank (incl. special "bridge banks") in order to restructure the business of such bank and in order to prevent insolvency.

The Restructuring Act also sets up a new restructuring fund (Restrukturierungsfonds) to finance the measures under the Restructuring Act. The new restructuring fund has a target size of 70 billion € and is financed by a bank levy. The new bank levy is payable first time on 30 September 2011.

For more details on the new law read our previous article on the draft of the Restructuring Act.

On 1 January 2011 two amendments to the German Insolvency Code (Insolvenzordnung) will come into effect. They were only recently adopted by the German Bundestag as part of the Act Accompanying the Budget (Haushaltsbegleitgesetz).

The changes relate to:

• taxes payable by the debtor during preliminary insolvency proceedings and
• the possibility to continue insolvency proceedings despite payment of outstanding debts by the debtor.

In consequence, the continuation of the business during preliminary and main insolvency proceedings will become more challenging due to the increased liquidity needs. Another planned amendment that would have privileged German tax authorities by granting them better set-off rights was not implemented by the new law.

The German Federal Ministry of Justice (Bundesjustizministerium, "BMJ") recently released its first official draft legislation for reforming the German Insolvency Code (Diskussionsentwurf für ein Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen). According to the BMJ, a reform in three steps is planned, the now proposed legislation is part of the initial step. To allow for more effective restructuring of debtors and more influence of major creditors, in particular the creditors' influence on the appointment of the insolvency administrator is increased, the regulations on insolvency plans are modified and the debtor-in-possession insolvency (Eigenverwaltung) is made more accessible for debtors.

The Federal Court of Justice's 11th Senate (BGH, 20 July 2010, XI ZR 236/07) recently explained obiter dictum how banks can make direct debit payments (Zahlung per Einzugsermächtigungslastschrift) more insolvency proof. Following this judgement, banks may now want to change their general terms and conditions accordingly. Further, the 11th Senate ruled on conditions of implicit approval of debits in the direct debiting system by the debtor. The 9th Senate, responsible for insolvency law, supports the 11th Senate's view on both issues.

On 29 September 2010 DLA Piper held a briefing in its New York office on the latest strategies and insight into the maze of European corporate restructuring options.

By judgement of 20 September 2010 the Federal Court of Justice held that in a letter of comfort (Patronatserklärung) it would be possible to validly agree a termination right for the parent company which could be exercised even in a financial crisis of the beneficiary of such letter of comfort (BGH, 20 September 2010, II ZR 296/08).

The Higher Regional Court of Hamburg (OLG Hamburg, 25 June 2010, 11 U 133/06) ruled that the business continuation prognosis according to § 19 (2) of the German Insolvency Code is based only on the view of a prudent director at the time of assessment. Subsequent findings concerning the director's assessment made on such a basis do not give rise to any liability of the director. In addition, the court held that in exceptional circumstances a director may have more than three weeks after the company has become illiquid or over-indebted to conclude restructuring efforts.

On 25 August 2010 the German government endorsed the Draft Restructuring Act (Restrukturierungsgesetz) aiming to provide special rules to save ailing credit institutions. The draft bill introduces:

• a special two-tier pre-insolvency restructuring & reorganisation regime for credit institutions and
• supervisory powers to transfer assets and liabilities held by a system-relevant (meaning "too big to fail") credit institution to another bank (incl. special "bridge banks") in order to restructure the business of such bank and in order to prevent insolvency.

The Restructuring Act will also set up a new restructuring fund (Restrukturierungsfonds) to finance the measures under the (draft) Restructuring Act. The restructuring fund shall be financed by a bank levy.

In order to give interested readers the possibility to learn more about insolvency proceedings in Germany, DLA Piper published a booklet summary of German insolvency law. The booklet gives an insight into the course of insolvency proceedings, the role of the administrator, the debtor's and creditors' positions, directors' duties and many related topics. You can access the pdf version by clicking here.

By two decisions of April and June 2010 the Federal Court of Justice further consolidated its case law on the requirements for challenging payments made to creditors not by the debtor itself but a third party (BGH, 27 April 2010, IX ZR 122/09 and BGH, 17 June 2010, IX ZR 186/08).

The German laws on challenging third-party payments as "gratuitous benefits" become particularly relevant for bank creditors when restructuring group financings. In this situation, proposed third party payments by German members of a group should be checked as to whether they may be challenged as a gratuitous benefit.

In a judgement of April 2010, the Federal Court of Justice (BGH, 22 April 2010, IX ZR 8/07) confirmed its established case law that an assignment of future receivables does not cover claims arising after opening of insolvency proceedings.

To avoid double payments, scheduled payments to creditors (and other transactions) should be reviewed by debtors as soon as the actual creditor or a predecessor creditor becomes insolvent.

The Federal Court of Justice (BGH, 22 April 2010, IX ZR 208/08) ruled that an insolvency administrator – when realising movable assets which are subject to a security interest – has no duty to notify the secured creditor a second time before the administrator may sell the assets to a third party for a price better than the offer previously made by the secured creditor.

When realising movable assets, the insolvency administrator is not obliged to start a competition between an interested purchaser and the secured creditor. Following the notification of an envisaged sale, secured creditors should therefore carefully consider the option to offer the takeover of the assets below value.

In July 2009, the German parliament tried to improve the tax situation for German restructurings by enacting the so called restructuring clause (Sanierungsklausel) in § 8c Corporate Tax Act (Körperschaftsteuergesetz) which allows certain fiscal loss carry-forwards to continue for ailing companies in case of a significant change in their shareholding. The rule was designed to establish a tax advantage for certain share deals in restructurings.

On 24 February 2010 the European Commission (EC) opened a formal investigation as to whether the German restructuring clause complies with European state aid rules (press release reference IP/10/180). Following that, the Federal Ministry of Finance (Bundesfinanzministerium) announced by letter dated 30 April 2010 that the restructuring clause shall not be applied anymore by German tax authorities until the EC has decided on its compatibility with the European state aid rules.