German insolvency reforms (part III): Insolvency of group companies

by DLA Piper

In January 2012 the first step of the reform plans for German insolvency law came into effect, remodeling the restructuring opportunities for companies in insolvency proceedings and increasing the influence of creditors. The second step, remodeling the insolvency proceedings applicable to individuals, has passed the Bundestag and the Bundesrat in May and June 2013. Now the focus of the legislative is on the third and final step: special regulations for insolvency proceedings affecting groups of affiliated companies.

Despite the often strong ties and interdependencies between group companies, currently each insolvent group company is processed separately in German insolvency law. This may lead to jurisdiction for the proceedings over the companies spreading between several courts and the courts appointing different insolvency administrators. This may lead to the insolvency administrators following separate strategies for restructuring or liquidation of the companies, rather than one joint strategy for the group. The draft legislation presented by the Federal Ministry of Justice for public discussion seeks to mitigate the negative effects of procedural separation by introducing options for concentrating jurisdiction at a single court and by codifying and expanding cooperation mechanisms between courts and administrators.  Key parts of the reform as presented in the draft legislation are:

Concentration of proceedings at a single court
A court that has jurisdiction for the insolvency proceedings over at least one of the affiliated companies shall be allowed to assume jurisdiction for insolvency proceedings over all affiliated companies, if (i) an admissible application for insolvency proceedings against one of the group companies has been filed before the court, (ii) this company (or, after opening of proceedings, an insolvency administrator) requests concentration of the group proceedings at the court,(iii) a concentration of jurisdiction at this court is in the mutual interest of the creditors and (iv) the company for which the court has original jurisdiction is not obviously of only minor importance for the entire group.

The jurisdiction assumed by the court shall be an optional jurisdiction in addition to the original jurisdiction of other courts. If an application for insolvency proceedings is filed before a court with regular jurisdiction, the court may transfer the proceedings to the court that has assumed jurisdiction for the group. The court is obliged to transfer the proceedings to the court with group jurisdiction if the debtor company against whom the proceedings are applied for or its preliminary insolvency administrator immediately request so. Despite concentration of jurisdiction to one court, depending on the court-internal distribution of cases, different judges may preside over the individual proceedings of the group companies.

Statements by the German Bar Association (Deutscher Anwaltverein), the Association of German Insolvency Administrators (Verband Insolvenzverwalter Deutschlands) and the German Association of Judges (Deutscher Richterbund) have welcomed the concentration of jurisdiction in principle, but criticized the details as too complicated. Lawyers and insolvency administrators suggested to concentrate jurisdiction at the court that has jurisdiction over the group's highest ranking company in Germany.

Consolidation of insolvency administrations
If insolvency proceedings over affiliated companies are pending before different courts, the courts shall be required to discuss whether it would be advantageous to the creditors to appoint a single insolvency administrator for all affiliated companies. While courts are not obliged to agree on appointing a single administrator, it is hoped that discussion between courts encourages the appointment of a single administrator for related group companies when that is  reasonable. The German Association of Judges, however, warns that this can cause delays in the proceedings.

Coordination of insolvency proceedings
To improve coordination between the insolvency administrations, the insolvency administrators and courts responsible for the group companies shall be explicitly obliged to exchange information. On request of one creditors' committee (Gläubigerausschuss), a joint creditors' committee for all insolvent group companies, the group creditors' committee (Gruppen-Gläubigerausschuss), shall be formed to support the insolvency administrators in coordinating the proceedings. In addition, on request of an affiliated company not yet subject to insolvency proceedings, of an insolvency administrator or of a creditors' committee, a court with concentrated jurisdiction for the group may appoint one of the involved insolvency administrators as coordination administrator (Koordinationsverwalter) for improving coordination between the insolvency administrators.

The coordination administrator shall have a role of mediator and may, for example, develop a coordination plan detailing proposals for coordinated restructuring or liquidation of the group. The coordination plan is not binding to the other insolvency administrators, except to the extent that a creditors' assembly (Gläubigerversammlung) has decided to adopt the coordination plan as basis for the insolvency plan in the proceeding the creditors' assembly is involved in.

This part of the reform has received most criticism. Key concerns are that the coordination provisions are unnecessary, especially if jurisdiction is properly concentrated and administration consolidated (Association of German Insolvency Administrators), too bureaucratic and, due to lack of sanctions, potentially ineffective (German Bar Association), too costly due to additional fees granted to the coordination administrator (German Association of Judges), and that the draft provisions subject the insolvency administrator acting as coordination administrator to conflicts of interests (German Bar Association and German Association of Judges).

With upcoming federal elections in September, it seems unlikely that the current draft will be passed this year. Yet, as public discussion is initiated and similar discussions are taking place on a European level in the context of a reformed European Insolvency Regulation, we expect that this matter will remain on the agenda of lawmakers in Germany and in Europe.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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