Weil Restructuring

Cross-Border Update on German Restructuring – Who Pays Next Time?

Contributed by Arnold Buessemaker

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

Introduction
On January 1, 2011, the new law for the restructuring and orderly wind-down of credit institutions (Gesetz zur Restrukturierung und geordneten Abwicklung von Kreditinstituten, the “German Restructuring Act”) went into effect.
The German Restructuring Act is the German response to the following lessons learned from the recent financial markets crisis:

These lessons have already prompted legislative action in other jurisdictions:

Overview of the New Restructuring Instruments Created by the German Restructuring Act
The German Restructuring Act intends to respond to the “moral hazard” created by the German government’s interventions to keep system-relevant banks solvent, by creating the following:

This entry describes the first of these tools – the Restructuring Proceeding.
The Initial Attempt: The Restructuring Proceeding (Sanierungsverfahren)
The Restructuring Proceeding is available to all German banks – also to those that are not considered system-relevant.  It is designed to induce banks to attempt a restructuring at a very early stage of their crisis, in which a restructuring may still be achieved by mere management actions.  Therefore, it generally does not allow banks to curtail the rights of third parties.
The Restructuring Proceeding is initiated by the bank’s notification to BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht, the German financial regulatory authority); it is important to note that BaFin is not entitled to take this initiative in lieu of the bank.
The Restructuring Proceeding also requires the bank to submit to BaFin a restructuring plan (Sanierungsplan) and to propose a restructuring advisor (Sanierungsberater).
Following the bank’s application to BaFin, the formal Restructuring Proceeding is commenced in the competent Higher Regional Court (the “Court”) upon BaFin’s application.  The application must demonstrate that the development of the bank’s asset or financial situation or its profitability justifies the assumption that the bank will – in the long-run – not be able to comply with the legal requirements regarding own funds (Eigenmittel) or liquidity (Liquidität) – irrespective of whether the bank is system-relevant or not.
The Restructuring Advisor as “Manager” of the Restructuring Proceeding
The restructuring advisor’s main task in the Restructuring Proceeding is the implementation of the restructuring plan.  He or she reports to the Court and to BaFin, who may ask him to inform them about any issue of relevance in the administration of the bank.  Among other things, the restructuring advisor is entitled to access the bank’s premises, books and records, participate in all meetings of all corporate and advising bodies of the bank, instruct the bank’s management, and investigate with a view to potential damage claims against (former) members of the bank’s management.
The Restructuring Plan as the Basis of the Restructuring Proceeding
The restructuring plan may contain all measures suitable to restructure the bank, provided they do not curtail third parties’ rights.  It may, however, provide that the claims of creditors granting loans as part of the implementation of the restructuring plan are senior to the other unsecured creditors’ claims in future insolvency proceedings so long as (1) such proceedings are commenced within the next three years and (2) the total amount of such loans does not exceed 10% of the bank’s own funds (Eigenmittel), which includes the bank’s Tier 1, Tier 2 and Tier 3 capital.
The restructuring plan is not subject to approval by the creditors.  The Court may only refuse to approve a proposed restructuring plan if it is obviously unsuitable.
Intervention Rights of the Court in Restructuring Proceedings
The Court may implement further measures, if required for the restructuring of the bank and if there is a risk that the bank does not fulfill its obligations to its creditors.  For example, the Court may do an of the following:

In the next entry, I will discuss what happens if the Restructuring Proceeding is considered unpromising or proves to be unsuccessful.

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