bucharest , 18. september 2013 - towards a romanian chapter 11

Bucharest, 18. September 2013 -Towards a Romanian Chapter 11

A German Perspective on Restructuring

Speaker: Frank Engelhard (attorney at law)

ESCH & KRAMER RechtsanwälteWall 21, 42103 Wuppertalfon: +49 (0) 202-255505-0fax: +49 (0) 202-255505- 5

http://www.eschkramer.de

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Introduction:Financial and Economic Crisis beginning 2007

• In 2007 beginning of the Sub-Prime crisis in the U.S. (housing crisis)

• Expansion into financial crisis with impacts on companies of the financial sector (ex. insolvency of Lehman Brothers)

• Since 2008 also negative effects on the real economy (drop in orders, losses, short time work etc.)

• Transboundary impacts; Shrinking economies in Germany, France and other European countries

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Effects of the financial crisis on the German Economy

• 2009 decrease of growth of 5.1 % • Public revenue in 2009: -47 billion €; in 2010: -65 billion €• Credit crunch for companies • The massive economic crisis 2008/09 had substantial impacts on the

innovation activities of the German economy • Slowdown in Sales; breaking down of productivity• Insolvency records: In 2008 the Federal Statistical Office in Germany

reported 29.291 insolvencies of companies. In only 640 cases a restructuring of the companies was initiated with the measure of an insolvency plan

• Ex. 1: Arcandor AG (until 2007 known as KarstadtQuelle AG) filed for insolvency procedures on 1. September 2009; a company with 100.000 employees and a turnover of 15.3 billion € (in 2004)

• Ex. 2: ThyssenKrupp AG: loss of value since 2007 to 2008 of 50 % 3


• According to the Centre of Insolvency and Restructuring („Zentrum für Insolvenz und Sanierung (ZIS)“ as well as the credit insurer Euler Hermes, 2/3 of insolvent companies with at least 5 Million € annual turnover could be subjects to successful restructuring. 50 % of mid-sized companies (with an annual turnover between 500.000 € and 5 Million €) could be subjects to successful restructuring.

• „Measures of restructuring are used to infrequently“ (ZIS managing director Mr. Georg Bitter).

Demand of insolvency administrators and German industry for substantial changes in German Insolvency Law in order to face the upcoming needs to preserve, to restructure and to rescue companies

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In particular:

I. „Finanzmarktstabilisierungsgesetz (FMStG)“ German Financial Markets Stabilisation Act (17. October 2008) Art. 5 FMStG: new definition of over-indebtedness (§ 19 para.2 Insolvency Act) since 18.10.2008

II. „Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen (ESUG) (7. December 2011)“:

New insolvency law

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I. „Finanzmarktstabilisierungsgesetz (FMStG)“ German Financial Markets Stabilisation Act (17. October 2008) Art. 5 FMStG: new definition of over-indebtedness (§ 19 para.2 Insolvency Act) since 18.10.2008

Change of the definition of „over-indebtedness“


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Legislation before the crisis:

Managing directors were obliged to file for insolvency within three weeks after the occurence of technical over-indebtedness.

Over-indebtedness occurs if the assets of a company no longer cover the existing liabilities.(Using fair market values – not book values).

The obligation to file for insolvency applied even if the company had a „positive prognosis to continue its business“ („positive Fortführungsprognose“).


• Problem: The financial crisis caused heavy losses in values of real estate and shares

• Companies are over-indebted, which may trigger insolvency, despite the fact that their liquidity and profitability may be sufficient in the medium run.

The German legislators passed the „Financial Markets Stabilisation Act“ („Finanzmarktstabilisierungsgesetz“) on 01 November 2008.

Change of section 19 clause 2 of the German Insolvency Act:

„Over-indebtedness is on hand, if the assets of the debtor no longer covers the existing liabilities, unless, it is according to the circumstances highly probable that the business is to be continued.“

In case of a positive prognosis for continuing the business no obligation to file for insolvency procedures exists.

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First, this provision was meant as a “sunset provision”: The legislator’s aim was that the change of this definition remains in effect only temporarily. (The old rule was meant to get back in force beginning January 2011)

Extension until 31. December 2013

In the meantime: The time-limit was abandoned: This means, a company is not overindebted according to German Insolvency Law, if a positive prognosis for continuing the business exists

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II. Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen (ESUG) (7. December 2011)“New insolvency law

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Aim of ESUG:

→ Strengthening the position of a debtor in possession (self-administration, „Eigenverwaltung“)

∙ Measures:

- facilitating a debtor`s reorganisation and- strengthening the position of a debtor in possession- creation of a protective screen- appointment of a Funding Register administrator (Sachwalter)- strengthening the creditors` rights (i.e. a creditors` committee)- support and rationalisation of insolvency plans


∙ Facilitation of the reorganisation

→ Conditions:

- imminent inability to pay or imminent over-indebtedness (to be examined by court)

- Request for self-management (Eigenverwaltung)

- Explanatory statement that the aspired reorganisation does not obviously lack the prospect of success

- Submission of an expert`s certification that the above mentioned conditions are fulfilled or plausible

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∙ Strenghtening the self-administration:

The debtor is entitled to manage and dispose of the assets involved in insolvency proceedings under surveillance of a Funding Register administrator.

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∙ Conditions:

- Request for self-administration- Reason why the person is qualified- Reason why self-administration will not lead to creditors`

disadvantage- Approval of the preliminary creditors` committee

∙ Advantage:- The debtor remains a key player.

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Process:

Preparation of filing for insolvency proceedings at an early stage is crucial (only imminent inability to pay may exist)

→ Step 1: Establishment of a preliminary creditors` committee

→ Step 2: well prepared filing for insolvency proceedings

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Step 1

Establishment of a preliminary creditors` committee

To represent all groups of creditors in the creditors` committee it should comprise persons from the 5 following groups:

- banks` representatives

- creditors holding the maximum claims

- representatives of the group of small sum creditors

- representatives of the employees

- where appropriate any other neutral creditors` representative


∙ Advantages of an established creditors` committee:

unanimous decision

or

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binding vote for self-administration

binding vote for an insolvency

administrator / Funding Registry

administrator

Step 2

To file for insolvency

→ to file for insolvency including an explanation

→ request for self-administration with explantion

→ proposal of a Funding Register administrator

→ announcement of an insolvency plan

→ request to establish a preliminary creditors` committee 18


Summary:

→ The insolvency proceedings may become to procedures governed by the parties

→ The creditor gets more opportunities to reorganise in case he decides early to file for insolvency

→ The creditor obtains influence on the composition of the preliminary creditors` committee

→ The creditor gets impact on the announcement of the Funding Registry administrator through the preliminary creditors` committee

→ If the creditors act unanimously the insolvency court loses impact.

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Effects:

→ Creditors spot the existence of a crisis earlier

→ Creditors can take part in iussing a recovery plan at an early stage

→ Debtor and creditor may co-ordinate the process of insolvency proceedings

→ The success of reorganisation is greater due to co-operation between debtor and creditor


Thank you for your attention!

Frank EngelhardAttorney at law

ESCH & KRAMER RechtsanwälteWall 21, 42103 Wuppertalfon: +49 (0) 202-255505-0fax: +49 (0) 202-255505- 5

http://www.eschkramer.de

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bucharest , 18. september 2013 - towards a romanian chapter 11

Documents

insolvency act

romanian chapter

german insolvency law

financial crisis

centre of insolvency

insolvency plan

insolvency procedures

new insolvency law