• Focus On Insolvency Law - The Right Lessons From The Crisis In The Financial Markets?
  • May 13, 2011 | Author: Rupert Klar
  • Law Firm: Sibeth - Munich Office
  • The Project

    The reform of insolvency law is one of the most important projects of the German government in the area of the economy. The economic crisis was also a test of the resilience of insolvency law. The German Insolvency Act (InsO) largely passed this test, but weaknesses also became apparent. At the same time, the crisis in the financial markets also presented completely new challenges. Due to its magnitude, the reform of insolvency law is being tackled in three stages.

    In the first stage the most urgent reforms will be dealt with. The aim is to strengthen the role of insolvency law as an opportunity to rescue a company. In particular, reforms are needed in the insolvency plan process and in self-administration. Both of these aim to help ensure that insolvency applications are made earlier and the chance of a rescue can be used better. In addition, there is an intention to create a reorganisation procedure for banks which are crucial to the system. And the Insolvency Act is to be modified to take clearing houses into account, an Insolvency Statistics Act is to be created and the privileges of the social insurance funds in contesting insolvency are to be abolished.

    The second stage will focus on a reform of consumer insolvency law. In particular, the good conduct period for clearing the remaining debt is to be shortened. In addition, it is to be checked whether a new reorganisation process can be created which can take place before insolvency.

    In a third stage, long-term projects such as provisions for group insolvencies and insolvency administrators are to be checked.

    First legislation projects

    The first stage was already implemented specific legislation projects in the course of 2010, and some of the resulting laws have been in effect since December 2010:

    • Changes in the Insolvency Act (InsO) in the course of the Budget Supplement Act 2011;
    • Restructuring Simplification Act;
    • Restructuring Act.

    a) Changes in the Insolvency Act (InsO) in the course of the Budget Supplement Act 2011 (HBeglG 2011, effective since 15 December 2010)

    Basically this involves the legal position of public authorities in insolvency proceedings, which led to controversial discussions during the legislation process on the continuation of the "tax office privilege". Articles 3 and 4 combine several provisions which improved the position of public authorities as "mandatory creditors" in insolvency proceedings in comparison with other secured and preferential insolvency creditors. This is justified especially by pointing out that the tax authorities - by contrast with other creditor groups - are not able to chose their debtors and are therefore "mandatory creditors" which never have any opportunity to support their claims by obtaining security.

    b) Restructuring Simplification Act (ESUG, not yet legally valid)

    The main focus of the draft legislation is to simplify the restructuring of businesses by strengthening the influence of creditors on the selection of the insolvency administrator, by extending and streamlining the insolvency plan process, by simplifying access to self-administration and by a greater concentration in the competence of the insolvency courts. Improving the chances of restructuring a company also helps to preserve jobs.

    The changes in the Insolvency Act are also set to strengthen the position of clearing houses which act as a central contract partner and a mediator between the buyer and seller in financial transactions with the aim of ensuring efficient handling and minimising the risks. In the interest of the stability of the markets it must be ensured that financial transactions between a large number of participants which are handled by a central contract partner can be properly completed even if one of the participants becomes insolvent. Finally, the law on insolvency statistics is to be revised so that meaningful data can be obtained in the future about the financial results and the outcome of insolvency proceedings.

    So far there is a discussion draft of the Federal Ministry of Justice of 29 June 2010 and 1 September 2010 which was evidently passed to several periodicals by mistake and was then published and discussed there. On 25 January 2011 the Federal Ministry of Justice presented a draft of the Restructuring Simplification Act.

    c) Restructuring Act (legally effective as from 15 December 2010)

    In the event of an insolvency of a bank, the application of the current provisions, which especially aim to freeze the bank's business operations, is said to have negative effects on other participants in the financial market and on the finance system as a whole. And although the kind of state support that has been provided since the crisis broke out in 2008 can limit the short-term effects of such problems in the financial markets, the state's possibilities for overcoming the crisis are deemed to be limited if no organised restructuring or liquidation is possible. At the same time, it is thought to weaken the entrepreneurial responsibility of the banks involved in the market if they can rely on the state intervening if there is any emergency. This is likely to create incentives to enter into unmanageable risks.

    The Act basically consists of five parts and deals with issues in relation to 1) the rescue and reorganisation of banks, 2) regulatory instruments, 3) the bank levy - restructuring funds for banks, 4) to new tasks for the Federal Financial Supervisory Authority in stabilising the financial markets, and 5) an extension of the period of limitation for the liability of directors & officers under company law.

    Evaluation

    The projects connected with the reform of insolvency law appear on the whole to be sensible and necessary, well structured and practicable. However, the laws which have been passed and become effective as part of the first stage are still very new, so there are not yet any reports of how they work in practice. It remains to be seen to what extent the goals that were set are attained.