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Upd@te Germany/International
24 March 2011
Restructuring Consulting Legal and Tax Consulting International Affairs Insolvency Administration Business Consultancy
German and Other International Legal News

Our newsletter of the International Department of Schultze & Braun presents you the bill concerning the further facilitation of the restructuring of companies in Germany which has been decided by the German federal cabinet. Weaknesses of the Insolvency Code should be abolished, predictability and calculability increased. Furthermore, we inform you about the conditions for opening a secondary insolvency proceedings in the EU as well as about the actual situation of the insolvency proceedings of Japan Airlines, one of the most important in Japanese history.

Dr. Volker Beissenhirtz, LL.M.
Attorney at Law in Germany
Registered European Lawyer (London)

Dr Volker Beissenhirtz

Reform of German Insolvency Act takes another step

After less than one year preparation time, the German federal cabinet decided the bill concerning the further facilitation of the restructuring of companies (“Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen”, abbr.: “ESUG”) on 23 February 2011. This bill of the German government is now to be referred to the Lower House of German Parliament for discussion and decision. The understanding is that the bill will be passed before the summer break of the Lower House of German Parliament and that essential parts will become effective shortly afterwards.

Beside extensive alterations of the Insolvency Code, an insolvency statistics law will now be introduced and the jurisdiction of insolvency judges for insolvency plans will be determined by this omnibus bill.

These reformatory efforts were preceded by years of discussions in which not least due to the “migration” of insolvency proceedings from Germany (cases like Deutsche Nickel or Schefenacker), the weaknesses of the Insolvency Code – introduced eleven years ago –  were denounced. Especially the lack of predictability and calculability of insolvency proceedings for both debtor and creditor were criticized. The introduction of insolvency plan proceedings aimed at company restructuring by the Insolvency Code has also not led to more restructurings as was hoped for. Actually, only two percent of insolvency proceedings are currently effected as insolvency plan proceedings. Experts, however, assume that a multitude of plans would be possible – if insolvencies were filed early enough. The latter was already not the case under the Bankruptcy Act and is also not the case under the Insolvency Code: according to inquiries by Euler Hermes insolvency petitions are filed tens months after the occurrence of insolvency grounds like illiquidity or over-indebtedness. Frequently too late for any useful restructuring effort.

The ESUG is supposed to eliminate these perceived shortcomings. On the one hand, debtor and creditor are supposed to be granted more influence on the organization and the management of proceedings, on the other hand, incentives shall be created for the earlier setting in motion of proceedings. Thus, creditors will be granted more influence on the appointment of the key person of insolvency proceedings, the insolvency administrator. According to the status quo of the bill, the court will appoint a preliminary board of creditors in the case of bigger companies to begin with, which will then provide the requirements for an administrator to the court. Furthermore, the court will only in exceptional cases be allowed to deviate from the person suggested as administrator who was unanimously recommended by the entire board of creditors.

Additionally, the regulations for insolvency plan proceedings will be improved in order to promote the acceptance of this restructuring instrument. The main issue is the limitation of shareholder rights, first on a formal level, with the consequence that shareholders in insolvency proceedings cannot remove e. g. the company management from office without the consent of the insolvency administrator. The shareholders will also be involved into the proceedings in the material aspect. Thus, a debt-equity-swap can be planned and executed against the will of the shareholders. The regulations for this conversion of accounts receivable into equity are created in such a way that the existing danger for the new shareholders’ liability for a difference in value between the actual value of the accounts receivable and the actual value of the shares received (“Differenzhaftung”) due to the false assessment of the total value of receivables will be eliminated in insolvency plan proceedings.

Furthermore, the focus on appeals against the insolvency plan as well as the requirement to provide for liquid means for the execution of the plan will be reduced and the binding force extended upon inactive creditors. Newly introduced will be so-called “independent restructuring proceedings” in which the debtor company can take refuge under the protection of the insolvency court in order to prepare an insolvency plan within three months. These improvements of insolvency plan proceedings are flanked and complemented by a strengthening of debtor-in-possession procedure (dip) as incentive for the general management to set the petition for insolvency in motion earlier than it is the case up to now. Thus, the requirements for the annulment of dip are higher for the insolvency court. Furthermore, the court must adhere to the unanimous decision of the board of creditors which applies for dip.

In the end, the professionalization of judges is supposed to be promoted by the reform. Thus, insolvency courts (over 190 at the moment) shall be further concentrated with regard to corporate insolvencies and the requirements for the training of insolvency judges further increased.

The current bill differs substantially especially with regard to the appointment of the insolvency administrator from the discussion bill submitted to the public in autumn 2010. That bill had provided that the insolvency court can only deviate from the suggestion for an insolvency administrator by a vote of “substantial creditors” under special circumstances. The new formulation means that the participation of the creditors in the appointment of the administrator will be more formal – and thus more time-consuming. Because first of all the court would have to appoint a board of creditors which then has to convene and decide. If and how proceedings can be accelerated, remains to be seen. It is certain that through this construction gateways were opened for judges who rather like to choose the administrator without the participation of creditors. The rest of the bill does partially also not seem very courageous: regarding claims not registered in insolvency plan proceedings, not an exclusion of those claims but a limitation period (with one year after confirmation of the plan also a rather long one) was determined. This does not remove the insecurity concerning possible still pending claims in insolvency plan proceedings.

Anyhow, the reformatory measures are one step in the right direction since generally creditors’ participation was improved and an incentive for an as early as possible filing of insolvency applications was provided. 

Dr Volker Beissenhirtz, LL.M., Attorney at Law in Germany, Registered European Lawyer (London)

German Federal Supreme Court: Inactivity of foreign insolvency administrator no reason for secondary insolvency proceeding (art. 3 para. 2 sent. 1 EIR regulation) without local establishment

A recent appeal before the German Federal Supreme Court (BGH) concerned the question whether a secondary insolvency proceeding can be opened in Germany in addition to a main insolvency proceeding in another EU member state under the European Insolvency Regulation (EIR). The debtor had assets in Germany, however, no local establishment pursuant to art. 3 para. 2 sent. 1 EIR. The BGH rejected the appeal as inadmissible and found that the case did not warrant further review.

Dr H. Philipp Esser

In the underline case, a German insolvency court had appointed a preliminary insolvency administrator. Soon thereafter and still during the German preliminary insolvency proceeding a British insolvency court opened an insolvency proceeding based on the insolvency partition of the debtor in the end of 2008. Once the German court orders had been vacated, a creditor filed for the commencement of − at least − a secondary insolvency proceeding in Germany, where the debtor had substantial assets. The German insolvency court opened the secondary insolvency proceeding, but on appeal the regional court reversed. The BGH confirmed the reversal.

The judges considered the appeal inadmissible because it had no general importance and it was not necessary for the evolution of the law or for securing uniform case law. Pursuant to art. 3 para. 2 sent. 1 EIR, the commencement of a secondary insolvency proceeding within the EIR requires an establishment in the state of such proceeding. In the present case, the debtor has no such establishment in Germany.

Here the autonomous, German insolvency law is not applicable insofar as it only requires that in exceptional cases, assets are located in another state in order to open secondary insolvency proceedings at such location (para. 354 German Insolvency Act.). The court sees no exception in case the foreign insolvency administrator does not use sufficient efforts to realise foreign assets. German case law and the legal literature do not advocate such exception either.

The decision emphasises that within the scope of the EIR creditors must assert their rights and interests abroad – not before the local insolvency court − if insolvency proceedings over the assets of the debtors are commenced. This follows from the principal of mutual recognition of insolvency proceedings (article 16 EIR). In the present case the creditor must bring the foreign insolvency administrator to act on the basis of British insolvency law and with the support of British attorneys. If the foreign insolvency administrator considers the realisation of German property not economically viable, the parties involved have to discuss this issue in Great Britain.


Generally, the costs of realisation of real property in German-British insolvency proceedings are not significantly higher than such costs in mere national cases. Therefore, a realisation is often economically recommendable as long as the real property has at least minimal value.

Dr H. Philipp Esser, LL.M. (Chigaco), Rechtsanwalt, Attorney at Law (New York State)

One year later – Japan Airlines is still confronted with problems

Due to their dismissal, 146 former employees of Japan Airlines have taken legal action at the Local Court Tokyo on 19 January 2011 with the goal to annul the decision of the airline concerning their dismissal – this exactly one year after Japan Airlines has submitted its petition concerning the opening of reorganization proceedings. Japan Airlines had already hit the headlines with these opening proceedings. The company has debts in the amount of 25.6 billion US $ and, thus, its insolvency proceedings were the sixth biggest in the history of Japan and the biggest Japanese insolvency proceedings which ever occurred in the country outside the financial sector.

Dr. Annerose Tashiro

Dr Annerose Tashiro

The employees were naturally strongly affected by the insolvency proceedings – pensioners and employees had accepted to give up pension claims in the amount of more than 11 billion US $ and the reorganization plan envisions the dismissal of 16,000 jobs until 31 March 2011. In order to achieve this, Japan Airlines has made offers to its employees concerning early and voluntary retirement and, indeed, the better part of the staff reduction is supposed to be effected by pensioning (whereas pension benefits were significantly reduced). However, it became clear soon enough that the airline would not be able to reach its goal by these measures. Only 1,470 employees accepted the offer for early retirement. Therefore, Japan Airlines had dismissed 165 pilots and flight attendees on 31 December 2010 – 116 of them, as they had exceeded e. g. the age limit of 55 years for captains, and the others for different reasons.

The claimants now argue that Japan Airlines attach more importance to higher profits than to security measures as so many experienced employees were dismissed. Moreover, the trade unions argue that the dismissals were unfounded as the company now makes more profit than expected and that no sufficient steps were taken to avoid dismissals. Additionally, the selection of employees due to their age were an unduly discrimination. Japan Airlines, however, argue that the dismissals were necessary as they were obliged to effect the stipulated provisions according to the reorganization plan, inclusively the staff reduction.

The legal dispute will ultimately have to be settled by the Local Court Tokyo. This is rather unusual insofar as only in the rarest cases legal disputes between employers and employees are tried in court. This is also a reason why the outcome is rather open. This legal dispute is one of the biggest legal disputes in employment law of the last years. As the Japanese government and the state, however, have taken over the high debts of Japan Airlines and are shareholders at the moment after the shares were withdrawn from the original shareholders for the purpose of selling them later to an investor, it can surely be expected that the reorganization plan is supposed to be protected and pushed through at any price.

Moreover, there are further disputes with the provinces in which many dispensable and unprofitable airports will be abolished together with loss-making routes. In the rather rural areas, many small- and medium-sized companies depend on the airports which means that at the same time their existence is at risk. So politics are also in disagreement about this point. Thus, the pressure is growing in many places against the very tight reorganization plan.

According to Michael Wascom, director of American Airlines, all airlines which have ever been involved in insolvency proceedings have not been able to resume a good and healthy profitability with a global service. Additionally, such legal disputes mean unwanted publicity for Japan Airlines.

It is certain that drastic measures were necessary, those dismissals, however, rather stirred up a hornets’ nest as the dismissals resulted into an avalanche of legal actions and will, as the case may be, incite further staff members not to accept such offers or to even take legal action against them.

How the crisis after the earthquakes, tsunami and nuclear power problem in Tohoku will additionally affect the flight and tourism sector cannot be entirely estimated at this point.

Dr. Annerose Tashiro, Rechtsanwältin, Registered European Lawyer (London)

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