Special: The Insolvency Code

The Act for Further Facilitating the Turnaround of Companies (ESUG) contains far-reaching changes  to the Insolvency Code which came into force on 1 March 2012.

In many cases, previous insolvency law prevented many viable companies from being turned around through insolvency proceedings because the lack of tools for predicting the outcome of insolvency proceedings kept companies from filing an appropriate insolvency application. Instead, the path of extrajudicial restructuring was followed until all reserves were used up and the only remaining possibility was to liquidate the company.

With the current reform of insolvency law legislators are aiming at initiating the early turnaround of companies in order to increase the manoeuvring space for extrajudicial turnaround procedures. At the same time, the path through the insolvency is to become more predictable for the insolvent debtor.

The changes made to the Insolvency Code are also meant to contribute to strengthening Germany’s position as a business location and to making it more attractive to foreign investors.  They will also remove the basis for “Forum Shopping”, i.e. relocating a company in another jurisdiction for the purpose of making use of the simplified procedures for restructuring and maintaining companies that exist there. The focal point of the Act is therefore to facilitate the turnaround of companies by having creditors exert a stronger influence on the choice of an insolvency administrator and also by making it easier to have access to self-administration right from the initiation proceedings. Also, the insolvency plan procedure is to be expanded and streamlined. The main changes/improvements are as follows:

Reinforcing creditor rights

reinforcing self-administration and the protective shield procedure

expanding and streamlining the insolvency plan procedure

simplified cancellation of insolvency proceedings

It remains to be seen whether legislators have scored a big success with the numerous changes to the Insolvency Code which the ESUG has introduced. At any rate, many passages in the Act lend weight to the intention of finally helping to bring about a breakthrough especially where self-administration and the insolvency plan procedure are concerned.

For more information read: Reinforcement of creditor rights