Frank Grell is a partner at Latham & Watkins who chairs the firm’s German Restructuring and Insolvency Practice. In this interview, he reflects on several successful applications of the German Insolvency Act (Insolvenzordnung) since the law was passed in 2012 and the continued shift towards a restructuring-based approach to large corporate insolvencies.
Fairly recently, two large German corporate restructurings were conducted through a UK Scheme of Arrangement — despite the passage of the 2012 insolvency law reform. Do you see this as an emerging trend?
Grell: No. We have indeed seen two large German corporate restructurings going to the UK and making use of the English Scheme of Arrangement. These two cases were unique because the parties decided to do a pure financial restructuring and to leave any operational issues to be addressed at a future point in time. When the parties involved started planning these two cases, the court precedents in Germany for in-court restructuring under the new regime were not yet there. So at that time they decided to use the known English law route instead of the unknown German.
Can you describe a recent example of the successful application of Germany’s Insolvency Act to a pure financial restructuring?
Grell: IVG, a German a real estate holding company, is a good example. The parties involved tried to agree for some time on an out-of-court restructuring until mid-2013. They came very close to agreeing but the documents, in some cases, required unanimity, and they failed to get that. This is a feature you often have when trying to do an out-of-court restructuring — you get a majority of people agreeing to a proposal, but then you also have people holding out, refusing to agree. That happened in this case, and nobody was available to find an agreement with those hold-outs.
The company then filed for insolvency and proposed in a vote to the creditors under the insolvency plan proceedings exactly the same agreement they would have arranged out of court had everyone agreed at that point. And in court, you only need a 51 percent majority, which they had. So the company was able to achieve the same restructuring using the insolvency law.
Can you describe a recent example of the successful application of Germany’s Insolvency Act to a more complex restructuring involving operational aspects?
Grell: walter services, a business process outsourcing company, was faced with the need for an operational restructuring in which certain measures, unfortunately also involving the closing of certain operations, became necessary. With the help of restructuring practitioners, including the Latham team, the company and its shareholders prepared a very comprehensive plan, which it discussed with its creditors, to do a pre-pack. Prior to and following the filing for insolvency in August of 2013, they held intense discussions with all of the stakeholders, including the customers, suppliers, employees, unions and works council.
By December of 2013, the insolvency plan was voted on and approved and the insolvency proceedings were completed. walter services managed to do a complex restructuring in insolvency in only five months, which in Germany is record time. The new law really speeds up the process because you now have much more influence over who drives the process, i.e. the insolvency administrator or custodian. Companies can select someone who knows the business, is experienced and can do it much more efficiently and quickly than others. And you have the insolvency plan process through which you can, by majority vote, cram down a restructuring on everyone.
What are the advantages associated with using a pre-pack?
Grell: An insolvency for a company is really almost like heart surgery for a human being. You only have one shot at it. The more preparation you can do and the better you can pre-pack it — the higher the likelihood is that you can get it done successfully. Secondly, you need to give comfort to all of the parties involved, including the finance parties, customers and management, that at the end of this process the company will be successfully restructured. Otherwise you risk significant economic fall-outs along the way.
On walter services we also had to deal with business process outsourcing for regulated industries. If those customers were afraid of the restructuring process not succeeding, they would have walked away from the business. As part of the pre-packing, the company together with its advisors managed to explain the restructuring process to everyone, including its customers, and get them comfortable as to the success of the process.