Germany reforms insolvency code

Germany has altered its insolvency laws to support investment in distressed assets which is widely perceived as a key opportunity for private equity.

The main change to the law will allow creditors to significantly enhance the means by which they can convert their debt claims into equity, no longer needing existing shareholder approval while restructuring the company.

This should increase restructuring flexibility and provide greater predictability for converting a distressed investment into a control position in a target company, according to a client memo from law firm Debevoise and Plimpton.

Creditors are now able to self-administrate or nominate a specific individual to become administrator through a court appointed “Preliminary Creditors’ Committee”. 

The committee may be selected at an early stage of the insolvency, which allows creditors to influence restructuring proceedings. Previously there was no method to influence restructuring between insolvency filing and initial creditors meeting.

In an exception to this rule, a court may refuse to appoint a committee if such an appointment could “negatively affect the debtor’s financial situation”. It remains to be seen how the courts interpret this and if the exception effectively makes the rule meaningless, legal sources said.