Restructuring

Contributed by Arnold Buessemaker

Part II in a Review of Burden Sharing under the German Act for the Restructuring of Credit Institutions (Restrukturierungsgesetz, Restructuring Act)

In the previous entry, I introduced the German Restructuring Act (Gesetz zur Restrukturierung und geordneten Abwicklung von Kreditinstituten) and briefly described the least invasive of the tools provided under the Act – the Restructuring Proceeding (Sanierungsverfahren).  This entry discusses another tool – the Reorganization Proceeding (Reorganisationsverfahren).
The Alternative:  The Reorganization Proceeding (Reorganisationsverfahren)
If a system-relevant bank considers a Restructuring Proceeding to be unpromising or has unsuccessfully attempted a Restructuring Proceeding, it may initiate a Reorganization Proceeding by notifying BaFin.  The bank is required to submit to BaFin a reorganization plan and to propose to BaFin a reorganization advisor.
BaFin (rather than the bank) may apply to the Court for the commencement of the Reorganization Proceeding, if two requirements are met:

• the bank is system-relevant, and
• the bank is in severe crisis, and such crisis results in a significant danger to the financial markets or to the confidence of the market participants in the functioning of such financial markets.

The Reorganization Proceeding is similar to the insolvency plan proceeding (Insolvenzplanverfahren) under the German Insolvency Code and, unlike the Restructuring Proceeding, may affect the rights of third parties (creditors and shareholders of the bank).
The Reorganization Plan
The reorganization plan may contain, inter alia, the following restructuring provisions:

• The plan may reduce the liabilities of the bank and extend debt maturities, except for liabilities that are secured by a mandatory or voluntary deposit protection fund and liabilities to employees and pensioners for payment of salary and pensions.
• The plan may grant seniority status for liabilities of the bank under loans granted to it as part of the implementation of the reorganization plan in case of future insolvency proceedings.  As with the Restructuring Proceeding, though, such loans are have priority if such proceedings are commenced within the next three years, and the total amount of such loans does not exceed 10% of the bank’s own funds (Eigenmittel).
• The plan may provide for the liquidation of the bank or a debt-to-equity swap, subject, however, to the approval of each creditor concerned and to adequate indemnification of the shareholders to be determined by a Court-appointed auditor.
• The plan may transfer (“hive-down” or Ausgliederung) all or part of the bank’s assets and liabilities to another corporate entity in exchange for the bank’s receipt of shares in such acquiring entity.

Process to Approve the Reorganization Plan and Cram-Down Mechanism
The reorganization plan requires approval by the creditors of the bank voting in groups.  In each group, a majority in number of creditors and a majority in claim amounts is required.
If a particular group of creditors refuses to approve the reorganization plan, the relevant group may be deemed to have approved the plan (cram-down), if all of the following are satisfied:

• the plan presumably does not treat creditors of such group worse than they would be treated without the plan, and
• such creditors participate fairly in the economic value which the plan intends to afford to all creditors, and
• the majority of the other groups has approved the plan with the required majorities.

The reorganization plan also requires approval by the shareholders at a shareholders’ meeting. The plan, however, also can be approved without the approval of the shareholders’ (cram-down), if the majority of the creditor groups has (or is deemed to have) approved the plan with the required majorities, and the measures curtailing the shareholders’ rights are appropriate, required and adequate to prevent significant negative consequences for other businesses of the financial sector as a result of the risk of the bank’s insolvency and to prevent an instability of the financial system.
Finally, the reorganization plan requires the approval by the Court.
Legal Remedy Against the Approval of the Reorganization Plan
Upon a creditor’s motion, the Court shall refuse the approval if there is evidence that the reorganization plan will likely treat such creditor worse than he would be treated without a plan.  If, however, the reorganization advisor provides security for the creditor’s claim, the Court can approve the plan, and the creditor may pursue its claim for adequate participation in the plan against the reorganization advisor outside the reorganization proceedings.  All decisions taken by the Court in the reorganization proceeding are final and binding and may not be appealed.
No Protection Against Enforcement Actions
Unlike the German Insolvency Code, which allows the Court to take measures protecting the bank against enforcement actions by creditors subsequent to an insolvency filing, the new Bank Reorganization Act does not provide for any such protection during the course of the Reorganization Proceeding.  BaFin can establish such a protection by instituting a moratorium under the provisions of the German Banking Act.  However, the institution of a moratorium will likely destroy the remaining confidence of the markets in the bank’s ability to restructure and may, therefore, force rather than prevent the bank’s decline.
In the next installment of this series, I will discuss the most drastic measure available to BaFin – the Transfer Order (Übertragungsanordnung).