German Insolvency Law Research Articles

Equity in German Private Law

The German legal system, as in most continental legal systems, is primarily based on statutes. When deciding a case, judges apply the law as written in norms and do not put their own idea of a just and equitable result in place of the solution provided by the legislature. Seen in this light, statutes are “curdled equity”. This leaves little room for deciding a case under the principle of equity, understood as a means to find a resolution of the tension between the abstract-general provisions of the law and the particularities of the case at hand, i.e., the establishment of justice in individual cases. In this article, the relationship between statute and equity will be illustrated for German private law, highlighting the principle (predominance of statutes) and the exemptions (gateways to equity for legislature and courts). Further examples from German insolvency law complete the picture.

The development of an insolvency privilegle for derivatives in German law

The article outlines the development of insolvency privilege with respect to derivatives under German law in its historical perspective. It traces the evolution of special privilege from the moment when it was first announced in the German insolvency statute (Insolvenzordnung) and came into force on August 1, 1994, up to the moment when legislative provisions securing the functioning of derivatives in insolvency context were amended in response to the 2016 Federal Court of Justice Verdict. This court ruling ended the long-standing consensus on “friendliness” of the German insolvency law to derivatives and other financial transactions. German highest court concluded that contractual clauses on the termination of obligations under derivative contracts in the event of bankruptcy are invalid unless their legal result is identical to the one prescribed by law. This court decision created significant legal uncertainty for recognition of claims under derivative transactions and directly influenced the use of standard master agreement for over-the-counter derivatives. Drafted under the auspices of the German Banking Union (GBU), an organization representing the interests of German financial institutions, German Master Agreement for Financial Derivatives Transactions ( Deutscher Rahmenvertrag fur Finanztermingeschäfte ) provided a contractual framework for the relevant market, and it came under significant pressure. Overall, German insolvency rules were significantly enforced to achieve the enforceability of close-out netting thus expanding the insolvency privilege for derivative transactions.

Subordination of Shareholder Loans between Creditor Protection and Rescue Culture

In financially distressed companies, shareholders have the tendency, as recorded throughout all major jurisdictions, to provide finance by way of loans for purposes of accomplishing a better position in the prospective insolvency proceedings to the detriment of the external creditors while “gambling” on the company’s resurrection. Insolvency Law seeks to intervene to limit such practices by subordinating this type of shareholder loans to the claims of the other creditors, thus upholding its nature of “creditor protection law”.This paper provides a critical overview of the existing legal framework concerning the subordination of shareholder loans and, in doing so, examines the function of Insolvency Law when dealing with it. In the first place, this paper describes the conflict in corporate law between shareholders and creditors brought about by the practice of shareholder loans. Secondly, it discusses and examines some of the rules that US Bankruptcy Law and German Insolvency Law developed in this area. Thirdly, in light of the resulting findings, the paper will focus on the issue raised concerning the lack in the norms with respect to the role that shareholder loans could efficiently perform in rescuing companies on the eve of their insolvency.It is argued in this paper that an unselective subordination of shareholder loans and the unconditioned protection of creditors should not be persistently regarded as the “panacea” . It is rather the opinion of this paper that the function of Insolvency Law in the context of shareholder loans should be reviewed by policymakers to encompass the benefit of the company as a whole.

Conflicts of interest, intra‐group financing and procedural coordination of group insolvencies

AbstractModern insolvency law instruments recognise the specificity of enterprise group insolvencies, premised on the existence of close operational and financial links between group members. It is widely accepted that maximisation of insolvency estate value and procedural efficiency depend on coordination of insolvency proceedings opened with respect to group entities. Such coordination is prescribed in the European Insolvency Regulation (recast), the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Enterprise Group Insolvency and the recently reformed German insolvency law. Yet in insolvency, group members retain their own insolvency estates and pools of creditors. This is based on the traditional company law principle of entity shielding. Active communication and cooperation between insolvency practitioners and courts do not sit well with the separate (atomistic) nature of insolvency proceedings, as well as different and oftentimes conflicting interests of creditors in such proceedings. As a result, communication and cooperation may be restricted in a situation of conflicts of interest. This article explores how in the context of group distress the risks arising from conflicts of interest can be controlled and mitigated, while ensuring efficient cross‐border cooperation and communication to the maximum extent possible. It analyses three cutting‐edge coordination mechanisms, namely (a) cross‐border insolvency agreements or protocols, (b) special (group coordination and planning) proceedings and (c) the appointment of a single insolvency practitioner. It concludes that both the likelihood and significance of conflicts of interest correlate with the degree of procedural coordination. Therefore, conflict mitigation tools and strategies need to be tailor‐made and targeted at a specific level and coordination mechanism.

Personal Data in Insolvency Proceedings: The Interface between the New General Data Protection Regulation and (German) Insolvency Law

When the General Data Protection Regulation (henceforth: GDPR) came into force, it quickly became clear that the new data protection law would strongly influence many different areas of law. This article deals with the relationship between data protection law and insolvency law, which was hardly considered before the GDPR was adopted. This relationship is particularly relevant where personal data is to be sold as asset in insolvency proceedings. As will be shown, the new data protection law imposes requirements on such data transfers which are very difficult to fulfil. The main problem is that in German law, personal data is not transferable because it is considered part of a subject’s personality. This situation is comparable to German copyright law, since the copyright itself is a non-transferable good. However, just as usage rights in copyright, the rights to use the personal data can be transferred to a third party provided that the requirements of the GDPR are satisfied. This article will comprehensively analyse under which conditions a transfer of such rights would be possible in insolvency proceedings. To create a balanced relationship between data protection law and insolvency law, the principle of proportionality is of crucial importance in this respect.

The balance of power between creditors and the firm: Evidence from German insolvency law

In 2011, German legislators passed the latest reform to German Insolvency Law (ESUG). ESUG mandates that creditors of larger firms can exert more influence on the appointment of the insolvency administrator, resulting in a shift of power from shareholders to creditors. Based on difference-in-differences estimation, we find that larger firms reduced financial leverage by about 4–7 percentage points relative to control firms. Furthermore, after the enactment of ESUG, larger firms spend less money on investment and pay higher interest rates. Overall, the evidence is consistent with the view that German creditor protection has become too strong.

Information Flows in the Insolvency of Enterprise Groups

The article deals with the information flows within restructuring proceedings of the companies groups, as the most important instrument for the coordination of the proceedings of the single members of them. The problem is analysed from a comparative perspective – considering Uncitral legislative Guide, EU Regulation (recast) about transnational insolvency, German insolvency law – as a premise to overview the possible solutions for the problem in Italian regulation.

Debt Restructuring in Germany

For a long time, German restructuring and insolvency law had no pre-insolvency restructuring scheme binding on dissenting creditors. Only in opened insolvency proceedings a restructuring plan could be used for debt restructuring. Now the German legislators has taken means to improve German law in three ways: first, by updating the German Bond Act (also known as the German Debenture Act), especially through permitting the change of the bond conditions by a majority vote of the creditors if the conditions allow for such majority vote; second, by improving German insolvency law through the “Act for the Further Simplification of Company Restructuring (ESUG)” which enables the debtor to start early restructuring preparation proceedings (“protective umbrella proceedings”); and, third, by announcing the introduction of new pre-insolvency restructuring proceedings as a reaction to the EU Directive proposed by the European Commission on 22 November 2016.

The Balance of Power between Creditors and the Firm: Evidence from German Insolvency Law

The Balance of Power between Creditors and the Firm: Evidence from German Insolvency Law

The Balance of Power between Creditors and the Firm: Evidence from German Insolvency Law

In late 2011, German legislators passed the latest reform to German Insolvency Law (ESUG). ESUG mandates that creditors of larger firms can exert more influence on the appointment of the insolvency administrator, resulting in a shift of power from shareholders to creditors. Based on difference-in-differences estimation, we find that larger firms reduced financial leverage around this event, while firms below the size threshold of the law increased debt levels. Furthermore, after the enactment of ESUG, larger firms spend less money on investment, while smaller firms invest more and benefit from lower cost of debt. Overall, the evidence is consistent with the view that, in an environment where creditors are already well protected, even stronger creditor protection does not necessarily foster borrowing.

Zgromadzenie wierzycieli w postępowaniu restrukturyzacyjnym

The article concerns Creditors’ meeting in Restructuring Proceedings. Creditors’ meeting in Restructuring Proceedings is collegiate creditors’ authority representing the interests of all members. The main competence granted to Creditors’ meeting is the vote by them on the arrangement. The Creditors’ meeting as authorities’ representing the interests of creditors should be convened in restructuring proceedings in any case when adoption of resolution regarding the interest of all creditors is required. The scope of their powers is regulated in Article 104 Restructuring Law. Due to the fact that the most important privilege granted to Creditors’ meeting is to vote on the arrangement, legislature established a system of separate regulations governing on both, convening the meetings and voting by the creditors’ meeting on the adoption or rejection of the agreement. An important novum introduced by the legislature based on the German Insolvency Law is the principle of voting on acceptance of the arrangement. For adoption by Creditors’ meeting, it is necessary that the system in each of the groups, which vote separately, obtains two majorities: most personal and most of the capital.

Recovery Rate in the Event of an Issuer’s Insolvency — Empirical Study on Implications for the Pricing of Credit Default Risks in German Corporate Bonds

According to the Jarrow–Turnbull model, coupon bonds are valuated as a portfolio of zero-coupon bonds that, in the event of insolvency, pay a recovery rate at the end of their term. However, when it comes to valuations, the German insolvency law differs in certain respects. To find out whether a model adapted to the German insolvency law will prove to be more empirically robust, an empirical study of 103 corporate bonds was carried out over more than 800 trading days.

Company Restructuring Pursuant to German Insolvency Law

Coming into force on 1 March 2012, the German Act on the Further Facilitation of the Restructuring of Companies (Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen), in particular in conjunction with the insolvency plan and through what is known as self-administration, serves to align German insolvency law more closely with the restructuring proceedings of Chapter 11 of the US Bankruptcy Code. Insolvency law is no longer primarily about the liquidation of the debtor or insolvent company; instead, the legislature has, through the reform’s main agenda, the insolvency plan procedure (Articles 217 ff. InsO) and selfadministration (Articles 270 ff. InsO), placed the main emphasis on the debtor company in the restructuring process, and has made it possible to effectively organise insolvencies on the basis of creditor autonomy. In addition to the restructuring of the company, it also allows for what is known as the transferred reorganisation of the debtor’s assets, and also liquidation. A subsequent step will involve defining regulations to deal with the issues associated with group insolvency, and considering whether a projected income procedure comparable with the “scheme of arrangement” should be developed. Below, we will examine the changes made to insolvency law to date, and show how boosting creditor autonomy, similar to Chapter 11, makes it possible for the debtor company to be released from its obligations and enable it to make a fresh start.

Do Economic Downturns Have an Impact on the Loss Given Default of Mobile Lease Contracts? – An Empirical Study for the German Leasing Market

Reagieren die Verlustquoten von Mobilien-Leasingverträgen auf einen konjunkturellen Abschwung? – Eine empirische Untersuchung für den deutschen Leasingmarkt – Die Verlustquote im Insolvenzfall (Loss Given Default, LGD) gehört neben der Ausfallwahrscheinlichkeit zu den zentralen Größen bei der Quantifizierung von Kreditrisiken. Für Leasinggesellschaften stellt der LGD dabei eine besonders wichtige Variable dar: Das deutsche Insolvenzrecht ermöglicht es dem Leasinggeber, bei Nichterfüllung des Leasingvertrages durch den Leasingnehmer sehr schnell auf das Leasingobjekt zuzugreifen und es selbstständig zu verwerten. In den besseren Verwertungsmöglichkeiten wird ein Vorteil von Leasing gegenüber der Kreditfinanzierung gesehen. Um diesen Vorteil nutzen zu können, müssen Leasinggesellschaften in der Lage sein, den LGD zuverlässig zu schätzen. Unter Verwendung umfangreichen Datenmaterials zweier großer deutscher Leasinggesellschaften wird im vorliegenden Artikel der LGD von Mobilien-Leasingverträgen analysiert. Die Autoren sehen den Beitrag zur Literatur auf den folgenden drei Gebieten: Erstens erfolgt eine Erweiterung der empirischen Erkenntnisse über die Höhe und Verteilung des LGD in Bezug auf unterschiedliche Objektkategorien. Zweitens wird der Einfluss systematischer Risikofaktoren auf den zeitlich aggregierten LGD getestet und darauf aufbauend eine Möglichkeit zur Bestimmung eines "Abschwung-LGD„ für die interne Risikosteuerung vorgeschlagen. Drittens wird das Phänomen thematisiert, dass Leasingverträge, die als ausgefallen eingestuft wurden, zu einem späteren Zeitpunkt "wiedergesunden„ können, was in der akademischen Literatur bislang vernachlässigt wurde. Die empirischen Ergebnisse zeigen, dass die LGD-Verteilung eine bimodale Gestalt aufweist und das LGD-Niveau in Abhängigkeit der Objektkategorie stark variiert. Ein signifikanter Einfluss makroökonomischer Risikofaktoren auf den LGD konnte lediglich im Fahrzeug-Segment nachgewiesen werden. Dagegen finden sich in allen betrachteten Kategorien Hinweise auf eine Konjunkturabhängigkeit der Wiedergesundungsquote. Die Studie ist für Leasinggesellschaften von praktischer Relevanz im Hinblick auf eine verbesserte Ausgestaltung ihres internen Risikomanagements für den LGD.

Preventing Bank Insolvencies in the Financial Crisis: The German Financial Market Stabilisation Acts

The Financial Market Stabilisation Act of 2008 and the Supplementary Financial Market Stabilisation Act of 2009 allow the German state to gain unlimited control over banks of systemic importance. The emergency character of both acts is to be understood against the background of the turbulences of the financial crisis and the short time span available for bank rescue. Prior to the Acts, neither German insolvency law nor company law nor capital market law provided the means to safely restructure troubled banks. The content and evaluation of these state interventions in the banking sector under the pressure of the financial market crisis are relevant not only for Germany, but in a broader international context.

Conditional Debt Waivers in German Commercial Law, Insolvency and Tax Law

Conditional Debt Waivers in German Commercial Law, Insolvency and Tax Law

Reform of the Private Limited Company Act and codification of the private international law of companies in Germany

Presumably in November of this year German corporate and insolvency law will undergo substantial changes. This article describes the most important changes introduced by the relevant act (“Gesetz zur Modernisierung des GmbH-Rechts und zur Bekämpfung von Missbräuchen”, MoMiG) and its consequences. The focus of the article is on the international aspects of the reform act.

Equity Substitution Loans in German Commercial, Insolvency and Tax Law: Current Status in Anticipation of Modernization

Equity Substitution Loans in German Commercial, Insolvency and Tax Law: Current Status in Anticipation of Modernization

Insolvenzrecht zwischen privatautonomer Gestaltung und offentlicher Regulierung

: The paper discusses the ex-ante- and ex-post-incentives that result from different insolvency regimes. It concentrates on the problem of how to evaluate and utilise the debtor's seizable assets after bankruptcy proceedings are commenced. This is closely related to the problem of creditor co-ordination. We compare the proceedings following the direction of the new German insolvency law with some reform proposals suggested in the literature, such as the auctions approach by Roe and the options approaches by Bebchuk and by Aghion/Hart/Moore. The options approach in particular seems to solve the evaluation and co-ordination problem at low cost.

Insolvenzen in Deutschland: Entwicklung und ordnungspolitische Perspektiven

Zusammenfassung Am 1. Januar 1999 trat in Deutschland eine neue Insolvenzordnung in Kraft. Die Einführung fand in einer Phase des starken Anstiegs der Unternehmensinsolvenzen statt, die seit Anfang der 1990er Jahre anhält und alle bisherigen Entwicklungen übertrifft. Die Auswirkungen der neuen Insolvenzordnung auf die Insolvenzentwicklung lassen sich noch nicht eindeutig abschätzen. Von ordnungspolitischem Interesse ist jedoch die Frage, ob das neue Insolvenzverfahren Fehlsteuerungen in volkswirtschaftlichen Anpassungsprozessen vermeidet, korrigiert oder begünstigt. Im vorliegenden Aufsatz wird zunächst die neue Insolvenzordnung erläutert. Als Neuerung ist vor allem die Erweiterung des Verfahrens um den Insolvenzplan sowie die Offenheit des Verfahrens bei vollständiger Gläubigerautonomie zu nennen. In einem weiteren Schritt wird die Insolvenzentwicklung in Deutschland empirisch dargestellt und erörtert. Erkennbar ist, daß seit Einführung der neuen Insolvenzordnung der Anteil mangels Masse abgewiesener Insolvenzverfahren deutlich zurückging. Letztlich werden Insolvenzen und das Insolvenzverfahren aus ordnungspolitischer Sicht diskutiert. Hierbei läßt sich als positives Ergebnis festhalten, daß im neuen Insolvenzverfahren trotz zahlreicher Mängel ein Zuwachs an Markt und Privatautonomie enthalten ist. Die Autoren kommen zu dem Schluß, daß als wirtschaftspolitische Konsequenz der Insolvenzentwicklung in Deutschland nach wie vor die Notwendigkeit besteht, insbesondere institutionelle Marktbarrieren struktureller und strategischer Art forciert abzubauen.