The New German Insolvency Law

3 min.
COVID-19 has impacted businesses across the world. The effects of the measures and precautions have not only impacted the health care system, but many political and legislative changes followed as a consequence. One of these legislative changes includes a new German restructuring law, which came into place on January 1st, 2021. This new law affects many innovations in the field of German insolvency law.

Avoiding German insolvency proceedings

One of these legislative changes includes the Gesetz zur Fortentwicklung des Sanierungs- und Insolvenzrechts (Act on the further development of the German Reorganization and Insolvency Law). This law allows companies facing insolvency the possibility of an out-of-court reorganization to avoid insolvency.

This means that a company facing insolvency can carry out a reorganization and restructuring process, regardless of if the creditor resists or not. Under normal conditions, a company would have to initiate insolvency proceedings under German law. However, with this new restructuring law, an independent and out-of-court restructuring procedure can be followed instead. The restructuring plan serves as the core instrument to avoid insolvency proceedings altogether.

Implementing a restructuring plan

For the implementation of a restructuring plan, a special restructuring commissioner will be appointed who will manage the restructuring process. However, the control and supervisory mechanisms under this law are less pronounced than in insolvency proceedings that involve an insolvency practitioner.

Differences compared to ordinary insolvency proceedings

Compared to regular German insolvency proceedings, there are two main aspects that differ under restructuring law. For instance:

The restructuring law does not harm a company’s reputation

Whereas regular insolvency proceedings under German law would discredit insolvent companies, this is no longer the case. Under the new restructuring law, the use of the law will not be made public. This will avoid damaging a company’s reputation.

A restructuring plan can be enforced against the will of a creditor

In the event of a disagreement with a creditor regarding the restructuring plan, the plan can be enforced against the will of a minority of creditors by involving the court. If a particular restructuring plan is not collectively approved by the majority of the creditors, then the court will determine whether the restructuring process is enforced against the will of individual creditors. In contrast to ordinary insolvency proceedings, the court decision will be made known to the respective parties affected by the court’s decision and will not be published.

Benefits of the new restructuring law

The purpose of this new law is that such preventive restructuring processes can be positively used as a new instrument for companies heavily in debt as a result of the measures against the coronavirus pandemic. Its primary purpose is to help companies overcome financial problems and avoid strict insolvency proceedings, by indicating that a realistic prognosis of the future for the business can be presented.

This law will allow affected companies to overcome their economic difficulties by their own account, without initiating costly insolvency proceedings. In addition to the suspension of the German obligation to file for insolvency, if financial demands can no longer be met, together with the state’s financial assistance and the new insolvency law, should decrease the number of insolvencies.

Possible pitfalls of the new German insolvency law

Despite the new law aiding companies in financial difficulties, the law has already faced considerable criticism within economic circles. The reason being that the new regulations could very well support several companies that were already facing financial difficulties even before COVID-19. One of the consequences would be that companies that were already structurally weaker, can continue to operate while their creditors will be further placed in a disadvantaged position.

Future predictions

In any case, the new restructuring law is a very complex and complicated matter. Only after the law has been applied in practice and several procedures have been carried out, will the effects of this law become clear. Another factor to keep in mind is that legal advice and consultations can be costly. This means that’s a restructuring plan could be more appealing to larger companies. Retail and SME’s, however, will be more impacted by the effects of the corona pandemic, but will not significantly benefit from this new law.

Our advice

In the light of the above, our advice to businesses and merchants is always to conduct their transactions predominantly based on an advance payment or to secure credits through bank collateral or well-formulated retention of title. For the time being, the results of the practical application of the new law remain to be seen.

Contact our German specialists

Would you like to have more information? Or are you curious to know more about how the new German insolvency law may impact you? Contact us now. Our lawyers at the German desk would be more than happy to help you.