On 17 December 2020 the German Parliament has passed the rules on the further development of the German restructuring and insolvency law and it will now enter into force on 1 January 2021. An essential part of the law is the introduction of a corporate stabilisation and restructuring regime, which establishes a legal framework for out-of-court restructurings in Germany on the basis of the EU Restructuring Directive of 20 June 2019 (Directive (EU) 2019/1023) (the Preventive Restructuring Framework). In addition to several other legislative amendments, the law contains amendments to the German Insolvency Code, which also stem from the results of an evaluation of the Law on the Further Facilitation of Restructuring and Insolvency Law (ESUG) published in October 2018.

Summary of the most important reforms

The most important elements of the Preventive Restructuring Framework are:

  • A debtor-in-possession process, in limited circumstances with appointment of a so called Restrukturierungsbeauftragte to supervise the process
  • Restructuring of secured and unsecured liabilities by way of a qualified majority decision including the possibility of cross-class cram-down
  • Amending or releasing third party security rights
  • Enabling impairment of shareholder rights including debt-for-equity swaps
  • Stabilisation measures in the form of a ban on foreclosure and enforcement as well as the invalidity of ipso facto clauses

Unfortunately, last minute changes have been made as compared to the draft versions. These include the deletion of the right to terminate contracts (such as lease agreements) and the shift of directors’ duties towards the interests of creditors upon the occurrence of imminent illiquidity.

However, Germany will now get a suitable tool to implement financial restructurings of companies to avoid insolvency. Finally, the gap between consensual pre-insolvency restructurings on the one hand and restructuring in the context of formal and comprehensive insolvency proceedings on the other is closed.

The main adjustments to existing insolvency legislation are:

  • Extension of the period to file for insolvency due to over-indebtedness to a maximum of six weeks and reduction of the forecast period as part of the going concern forecast under the over-indebtedness test to twelve months
  • Specification of the access conditions and detailed design of the procedure of the protective shield and the (preliminary) self-administration proceedings with the aim of protecting creditors.