The provisional creditors’ committee: Strengthening creditor participation

The course for a company in insolvency is placed on the correct or incorrect path already within the first 10 to 14 days. Due to this, the new law has given the debtor and creditors the opportunity to influence key strategic decisions from the first day of the proceeding.

Prerequisites for such “controlling participation” are that the company is under professional advisory in at least the last phase of the crisis, is encouraging a dialogue with its key creditors, and is convinced that it will take a mutual path towards restructuring the company under the protection of insolvency law. In contrast, and rightly so, companies that surprise their creditors with an insolvency petition should not have these options of controlling the proceeding avail- able to them. These new possibilities are a meant to be a “reward” from the legislature that simultaneously provided incentives for businesses to move into the protection of in- solvency law in a timely manner. The key control instrument at this early stage is a representative, provisional creditors’ committee. In passing the law, the legislature also intended to ensure that from day one the insolvency court can inte- grate the knowledge of the creditors regarding the debtor company in its decision. 

Committee Members

Each insolvency proceeding is influenced by different group interests. The process should prevent – as the legislature intended - the law of the stronger, i. e., the secured creditors, from prevailing over the legitimate interests of general insol- vency creditors in the insolvency proceedings, because all group interests must be expressed through the represen- tative nature of the members of the provisional creditors’ committee. The legitimacy of the creditors’ early-controlling influence follows directly from the representativeness of the committee members. For this reason, a provisional creditors’ committee that is proposed in the initiation proceeding should consist of at least five members. The members should not overlap and must clearly reflect the groups of the banking industry, the secured creditors, the institutional creditors, the unsecured creditors and representatives of workers’ interests. If simultaneous to a petition from the debtor, the creditors propose a provisional creditors’ com- mittee, in which the five classes of creditors are clearly and discretely represented, the court must be appoint this group as the provisional creditors’ committee. At the same time this ensures that from day one of the proceeding the creditors may influence the on-going structuring, appointment of the preliminary insolvency administrator, performance of reorganization options and how to open the proceedings in the fastest manner possible without any issue emerging that could potentially delay the proceeding.  

The rights of the provisional creditors’ committee, in particular in a self-administration proceeding are very wide reaching. The following are particularly noteworthy: 

  • Participation in all important decisions in the initiation proceeding, e. g., naming of the insolvency monitor, continuation of self-administration or termination of a protective shield proceeding.
  • The insolvency court is bound by the unanimous proposal from the provisional creditors’ committee, in which the provisional insolvency monitor administrator (§ 56a, Para. 2 Insolvency Code (IC)) is named or the profession- al or personal requirements (§ 56a, Para. 1 IC). By means of a unanimous decision, the provisional committee of creditors may deselect a provisional insolvency monitor that has been previously appointed by the insolvency court.
  • Support or rejection of self-administration (§ 270, Para. 3 IC); the insolvency court is bound by an unanimous decision of the provisional creditors’ committee to order self-administration in a proceeding that has already been opened. This is true even if it is obvious that self- admin- istration would be detrimental to the creditors.
  • Consent to all transactions of a particular importance as set out in § 160 IC. 

The “Can Should Must Committee”  

Once one understands the new possibilities for creditor par- ticipation by virtue of the provisional creditors’ committee and recognizes the central importance of setting the proper judicial course, then three different legal options must be distinguished.It is important to note that the creditors, and not the court, have the right to propose suitable persons for the commit- tee. If the creditors do not make use of this right, the court may appoint these members. Any insolvency petition must include all the appendices required in § 13 IC. If any of these appendices is lacking or incomplete, the petition is deemed inadmissible. The necessary appendices are very complex, thus making pro- fessional preparation in the few weeks directly before filing essential. 

The “Can or Discretionary Committee” 

Although it was previously disputed as to whether the law even permits a provisional creditors’ committee to be appointed in as early as the initiation proceeding, this is now a permitted provisional measure under § 21, Para. 2, Sent. 1 no. 1a IC and may be ordered by the court ex officio at any point in the proceeding. A special feature hereto is that non-creditors or third-party experts may not be repre- sented in a provisional creditors’ committee as they lack the necessary relationship to operations, however parties that become creditors upon the very opening of the proceeding may be members of the committee. This includes not only the Pension Indemnity Fund (PSV) and the Federal Employ- ment Agency, but also all creditors holding undisputed or legally enforceable claims. The representation of workers’ interests should also be permitted via a union active in the company.  

The “Should or Petition Committee”  

Even if a company does not reach the threshold values for a “must committee” (sales of approx. EUR 10 million, total assets of approx. EUR 5 million, 50 employees), the court should establish a provisional creditors’ committee pursuant to § 22a Para 2 IC, if this is requested by the debtor, any creditor or a preliminary administrator that has already been named. This means that in effect a provisional creditors’ committee can be utilized in every corporate insolvency to thereby bring in creditor participation. This petition must be granted, if the court receives a proposal stating the compo- sition of the provisional creditors’ committee, the consent declaration of each proposed representative is attached to the petition, and no reasons for excluding them exist (§ 22a, Para. 3 IC). If such a committee petition is filed directly with the insolvency petition, the court may not hesitate in appointing the committee. However, here as well, the principle requiring discrete representation of each group must be respected, meaning that the interests must be balanced within the committee of five members.  

The “Must or Compulsory Committee” 

If the company meets the thresholds in § 22a, Para. 1 IC (sales of approx. EUR 10 million, total assets of approx. EUR 5 million, 50 employees) and it has not yet suspended operations by the filing date, the court is required by law to appoint the provisional creditors’ committee, if a properly composed committee is proposed with the complete insolvency petition and the consent declarations of the nominees are attached. Because such an appointment by the judiciary may take con- siderable time, a petition containing a proposal of suitable persons should always be filed with the insolvency petition. 

If the court initially refrains from establishing a provisional creditors’ committee and immediately appoints a provisional administrator without a hearing, it must convene the hearing of the committee promptly, so that as applicable the latter may make use of its substitution right to substitute and unanimously elect another administrator at the committee’s first meeting (§ 56a, Para. 3 IC).  

Conclusion:  

The provisional creditors’ committee gives creditors and debtors a means to influence all key issues relating to a re- organization under insolvency protection. However, without professional preparation, these rights will bring about noth- ing. If the insolvency debtor has the (provisional) creditors’ committee on its side, it can likewise influence all measures that direct the insolvency. The provisional creditors’ commit- tee and its support offer a further instrument to ensure legally certain structuring of plan insolvency in self-administration.