During recent years, a hot topic was the restructuring of Germany-based companies by using an English law scheme of arrangement. German companies used English law schemes of arrangements successfully to implement financial restructurings and to avoid going into German insolvency proceedings, for example: Tele Columbus (2010), Rodenstock (2011), Primacom (2012), Apcoa (2014) and CBR Fashion GmbH (2016).
In a number of cases, the (announced) intention of German companies to use or prepare a scheme of arrangement has apparently helped to achieve a consensual solution for the restructuring of financial debts with creditors (eg, Scholz (2015/2016), HC Starck (2015)).
Schemes of arrangement are (still) in competition with the restructuring measures provided under German insolvency law that, as a consequence of the Further Facilitation of Restructuring Businesses Act (ESUG), provides, inter alia, for the possibility of a debt-to-equity-swap as part of an insolvency plan, including the option to cram down dissenting shareholders. These restructuring measures have been well received by practitioners as a number of prominent cases have already demonstrated (eg, Pfleiderer AG (2012) and IVG Immobilien AG (2014)). Whether Brexit will make a difference to the number of German companies utilising an English law scheme of arrangement still needs to be seen. In this context, it should be noted that the UK government might include rules on cross-border insolvency in a new bilateral agreement with the EU on civil judicial cooperation post-Brexit to facilitate European companies to use schemes of arrangements for restructuring.
A further hot topic relates to the financial restructuring of outstanding bonds under the German Bond Act 2009. Over the past few years, a large number of Mittelstandsanleihen (mid cap-bonds), which had been increasingly used as an alternative to bank credits, had to be refinanced or restructured. Under the German Bond Act 2009, which has replaced the Bond Act dating back to 1899, a bond may be modified (eg, in respect of principal or value) by a majority resolution of the bondholders (75 per cent of the bondholders by amount present at a bondholders’ meeting), if the bond provides for such modification. Thus, the Bond Act 2009 can offer an efficient out-of-court restructuring tool that has already been demonstrated in a number of cases (eg, Ekotechnika (2015) and Singulus (2016)).
Against the background of the European Commission’s ‘Proposal for a Directive on Insolvency, Restructuring and Second Chance’ (see the European Union chapter), there is a broad discussion among German legislators and insolvency experts:
- whether a pre-insolvency proceeding has to be introduced to fulfil the requirements envisaged by the EU or whether the existing German insolvency proceedings that have been modified by the aforementioned ESUG in 2012 are already sufficient;
- how such pre-insolvency proceedings should be arranged; and
- whether the implementation of the directive will lead to the abolition of certain key elements of the German Insolvency Code.
In connection with this, the Federal Ministry of Justice issued a research project in April 2017 that has been awarded to a consortium of leading insolvency law professors to evaluate the experiences gained with the application of the ESUG five years after its entry into force. The results of the evaluation have been set out in a report that was released by the Federal Ministry of Justice in October 2018. Generally, the report comes to the conclusion that the changes introduced by the ESUG have been largely well received in the market and that no corrections to the orientation of the ESUG are necessary. The main findings of the report can be summarised as follows:
- the creditors’ rights to participate in the selection of insolvency administrators has not led to any impairment of their independence;
- as regards the possibility of influencing shareholder rights by way of an insolvency plan, no significant impairments were found, but there is still room for improvement or clarification in some specific areas of the insolvency plan proceeding;
- the ‘protective shield procedure’ (in the meaning of section 270b of the Insolvency Act) is rarely used, and it is not very advantageous compared to the regular ‘early self-administration procedure’; and
- the statutory allocation of duties between judges and judicial officers has essentially proved effective.
The federal goovernment plans to examine the results of the evaluation report in more detail to decide whether concrete legislative action is necessary. The results shall especially be considered for the implementation of the aforementioned Directive on Insolvency, Restructuring and Second Chance. At this stage, it seems likely that a new pre-insolvency proceeding will be introduced, especially because, according to the aforementioned report, such pre-insolvency could be a further option beside the existing proceedings, and a large number of insolvency experts hold the view that there is a need for such a proceeding (as shown, for example, by the aforementioned German companies that used English law schemes of arrangements (even) after the introduction of the ESUG). However, so far, no legislative Act has been drafted by the Ministry of Justice (in particular because of its intention to assess first the outcome of the aforementioned report) and it is not expected that there will be one before 2019 or 2020, also in view of the potential innovations in connection with the implementation of the European directive.
In the course of the ongoing reform of German Insolvency law, the German parliament has passed an Act on the Facilitation of the Handling of Corporate Group Insolvencies that came into force on 21 April 2018. This act addresses the current lack of coordination between parallel insolvency proceedings of group companies (see question 49). However, it does not offer a consolidation of the individual group insolvency proceedings. Actually, the act contains an explicit rejection of the substantive consolidation of assets and liabilities of group companies.
In essence, the new act includes the following provisions:
- an optional common place of jurisdiction for the different insolvency proceedings;
- the obligation of the different insolvency courts to coordinate with each other on the appointment of one joint insolvency administrator for the group-wide insolvency proceedings;
- an obligation of the different insolvency courts, insolvency administrators and creditors’ committees to cooperate; and
- coordination proceedings to further enhance the coordination between the different insolvency proceedings over group entities.
New developments in the area of the tax treatment of restructuring measures are also notable. On 28 November 2016, the German Federal Tax Court (GrS 1/15) dismissed the application of the ‘restructuring decree’ (Sanierungserlass) that had been issued by the German tax administration in 2003 to allow for a suspension and subsequent waiver of corporate income tax on cancellation of debt income resulting from loan waivers or a debt-to-equity swap (for example as part of an insolvency plan). The German Federal Tax Court held that the restructuring decree violates the rule of law in article 20 of the German Constitution, which requires that generalising rules have to be established by the legislator itself (instead of the tax administration by issuing a restructuring decree). Interestingly, the German Supreme Tax Court did, however, not comment on the controversial question whether the restructuring decree violates the prohibition of state aid under EU law.
Following the aforementioned decision of the German Federal Tax Court, which caused significant concerns to the restructuring practice because of increasing legal uncertainty in terms of the tax treatment of restructuring measures, the German tax administration issued an interim application letter (dated 27 April 2017) according to which the restructuring decree should be applied for ‘old’ cases (ie, waivers completed before 8 February 2017). However, such interim application letter was also considered to be illegal by the German Federal Tax Court in a decision dated 23 August 2017 (I R 52/14).
In the meantime, a non-application decree of the German tax administration, dated 29 March 2018, pursuant to which the principles of the aforementioned judgments are not to be applied beyond the decided cases, is supposed to create legal certainty in terms of ‘old’ cases, in particular since the German legislator approved this non-application decree
In addition, on 27 June 2017, the German legislator already introduced a bill that intends to establish a firm legal basis for the exemption of restructuring measures from taxation, and, therefore, to provide legal certainty in respect of the tax treatment of restructuring measures. However, the bill provides for that, the new provision will not come into force until the European Commission grants - by way of a formal decision - its approval under state aid law. In August 2018, the European Commission granted its approval, but merely by way of a comfort letter (rather than a formal decision). Therefore, it is concluded that the new provision cannot come into force automatically, but only through the introduction of a second bill by the German legislator, since the comfort letter does not constitute a formal decision as requested by the introduced (first) bill. Against this background, on 21 September 2018, the German legislator passed an official legislative
draft bill, pursuant to which, the aforementioned new provision shall come into force without condition. It is expected that this bill will come into force shortly.
With regard to another restructuring tax provision, however, legal certainty has now been obtained. The European Court of Justice has ruled that the ‘restructuring clause’ provided for in section 8c, paragraph 1a of the Corporation Income Tax Act, according to which loss carry-forwards are not forfeited in the event of a change of control for restructuring purposes, did not contravene European state aid law. Thus, the European Court of Justice rejected the European Commission’s decision of 2011 that qualified the provision as illegal state aid. Before the aforementioned restructuring clause is formally reinstated, however, it is necessary to publish the ruling in the Federal Law Gazette, which is expected to be done in 2018. Nonetheless, the current decision is a welcome ray of hope for the German restructuring market as a whole and for the companies concerned specifically.
With regard to cross-border restructuring, the insolvency of the Air Berlin group in 2017 to 2018 became the first test for the EU Recast Regulation. Concerning Air Berlin’s subsidiary NIKI Luftfahrt GmbH (NIKI), the lack of clarification of the term COMI has caused a conflict of competence between German and Austrian courts.
On 13 December 2017, the local court of Berlin-Charlottenburg (Germany) found it had international jurisdiction over the case and took measures (inter alia, the appointment of a German preliminary insolvency administrator) to safeguard the continuation of the business. Even though NIKI had its registered office in Vienna, the court was satisfied that the company’s COMI was located in Berlin and that the presumption that a company’s COMI is located where it has its registered office (see question 54) was therefore rebutted. In particular, the following considerations were highlighted by the local court:
- NIKI was part of the Air Berlin group and indirectly controlled by Air Berlin, which was already in insolvency proceedings in Germany at that time;
- NIKI’s operational business was mainly driven from Berlin; and
- most of the flights conducted by Niki departed from Germany.
On 8 January 2018, the German Regional Court of Berlin overruled the decision of the local court that was appealed by a creditor pursuant to article 5 of the EU Recast Regulation. The Regional Court found that, based on the following facts (among others), NIKI’s COMI should be held to be in Austria:
- the fact that NIKI was part of the Air Berlin group could not rebut the COMI presumption;
- the seat of NIKI’s management was irrelevant, as it has frequently travelled between Vienna and Berlin;
- the fact that most flights departed from Germany was irrelevant, as an entity could have a number of establishments; and
- NIKI’s employment contracts are 80 per cent governed by Austrian law.
The decision was further appealed by the appointed German preliminary insolvency administrator before the German Federal Court. Nevertheless, even before a decision was made by the German Federal Court, on 13 January 2018, the Austrian Higher Court of Korneuburg opened a (second) main insolvency proceedings in Austria, and appointed an Austrian administrator. The Austrian court took the stance that it could open the main proceedings in Austria, as the first decision of the German local court was invalid following the decision on the appeal of the German Regional Court and therefore there were - despite the pending appeal before the German Federal Court - no longer any parallel main insolvency proceedings in Germany.
To continue and finalise the initiated sales process of NIKI’s assets to a third party, (i) the German main insolvency proceeding was converted into a secondary insolvency proceeding, (ii) the German insolvency administrator dropped its appeal before the German Federal Court, and (iii) both the German and the Austrian administrator agreed to cooperate closely. Ultimately, NIKI’s assets could be sold to Niki Lauda.
Consequently, the German Federal Court neither has provided further guidelines on the determination of the COMI nor made a judgment whether an insolvency proceeding continues until a pending appeal has been finally decided. There are, however, strong arguments in favour of the view that an insolvency proceeding continues until a pending appeal has been finally decided. Accordingly, most of the German insolvency practitioners are of the opinion that the Austrian court was not allowed to open a main insolvency proceeding in Austria before the German Federal Court had decided on the appeal.
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