New restructuring law in Germany could bring advantages for investors

The German parliament (Bundestag) has passed a law to reform the legal framework for corporate restructuring in Germany. It will come into force in January, provided the Federal Council (Bundesrat) does not object.

Olivia Irrgang, an expert for private equity and venture capital at Pinsent Masons, the law firm behind Out-Law, said: "This development creates opportunities for companies to implement restructuring concepts without filing for insolvency and carrying the burden of reputation damages and uncontrolled decisions of a third party insolvency receiver. This opens up new opportunities for financial investors: They can link the continuation of financing to a restructuring plan they have drawn up."

The aim of the draft law is to provide financially distressed companies with instruments to restructure and stabilise prior to insolvency proceedings. The law would permit such companies to pursue a draft restructuring plan, associated negotiations with individual creditors and creditor groups and the coordination of the restructuring plan without the involvement of the court, provided that all creditors agree to the restructuring.

As things stand at present, the draft law is due to come into force as early as 1 January  2021.

"The tight timetable seems very ambitious, as there may still be a need for amendments, but it is understandable: without the legal changes planned in the draft law, over-indebted companies would again be subject to the insolvency filing obligation at the end of 2020, as the temporary suspension of the filing obligation due to over-indebtedness expires at the end of 2020," said Marina Arntzen, corporate law expert at Pinsent Masons. "The onset of the Covid-19 pandemic in spring 2020 temporarily pushed the issue of a general revision of the restructuring framework into the background, but then made it even more urgent: numerous companies are in economic crisis due to the pandemic, which makes it all the more necessary to adapt restructuring and insolvency law."

The proposed amendments would extend the suspension of the duty to file for insolvency and stipulate new options for out-of-court restructuring. Arntzen said: "This basically offers new opportunities for investors since new financing shall be privileged under the new laws and the negotiating position of investors will be improved. As soon as the draft law is implemented, however, it will have to pass in practice. It remains to be seen whether it will also meet the challenges that German companies will have to face in the near future. Especially in the current situation, it will also be judged by how well it can deal with Covid-19-related crises."