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SanInsFoG: EU Restructuring Directive implemented with effect from 1 January 2021

As early as 2 November 2016, the European Commission had submitted a proposal for a “Directive of the European Parliament and Council on preventive restructuring frameworks, second chance and measures to improve the efficiency of restructuring, insolvency and debt relief proceedings”. This proposal amended Directive 2012/30/EU” which was intended to help overcome the consequences of the 2008/2009 financial crisis. After long discussions on the topics, a compromise was reached between the Council, the Commission and the Parliament in December 2018. The directive entered into force in July 2019. The directives implementation in Germany is now largely complete with the adoption of two legislative packages on 17 December 2020. More on this below.

The course of the legislative process

To provide the Ministry of Justice and Consumer Affairs (BMJV) with concrete suggestions to finalize the drafts, PASCHEN initiated a first joint statement together with BGA, DIHK, BDI, BDEW and ZDH at the end of 2019. This already contained – independent of industry-specific particularities – joint proposals and demands that all associated companies aforementioned support.

The department responsible at the BMJV then announced the implementation of the directive was planned in three-phases. According to a press release from the BMJV on 7 November 2019, the shortening of the residual debt discharge was to be launched in the first quarter of the year 2019/2020. After some delay, the ministry presented a corresponding draft bill in February 2020.

Based on the proposal, the German government’s draft bill contained a gradual reduction of the current deadline by one month, each month, for the period 17 December 2019 to 30 September 2020. Unlike as previously announced, the period for residual debt discharge was to be abruptly reduced to three years if the insolvency petition was filed after October 1, 2020. According to the draft, both entrepreneurs and consumers were to benefit from the reduction, but the consumer regulations were to be limited until 30 June 2025. By then, the effect of the shortened deadlines on consumers can be evaluated and, in the event of a positive evaluation, a “deferral” by the legislator.

The Bundestag debated the bill in its first reading on 9 September 2020 and subsequently referred it to the Committee on Legal Affairs and Consumer Protection for further discussion. There, an overwhelming majority agreed in principle with the immediate reduction to three years and there was even broad consensus that consumers should benefit from this for an unlimited period.

Concerning the implementation of the regulations on pre-insolvency restructuring proceedings, which is much more significant for creditors, the BMJV submitted a draft bill on 18 September 2020. In addition to regulations on the introduction of pre-insolvency restructuring proceedings under the Act on the Stabilization and Restructuring Framework for Companies (StaRUG), the proposal also contained numerous amendments and new regulations in insolvency law and the legal issues associated with restructuring and insolvency proceedings in other areas. Among other things, some regulation also directly addressed the economic impact of the current pandemic. According to the proposal, the law was set to come into force on 1 January 2021. The trade associations of the affected companies were only given 14 days by the ministry to comment.

Upon reviewing the speaker’s proposal it quickly became apparent that the previous efforts to ensure the protection of legitimate creditor interests had already borne fruit. §59 (3) of the StaRUG contained an express reservation of the rights arising from the plea of uncertainty under §321 of the German Civil Code (BGB) for creditors obliged to pay in advance. However, according to §44 StaRUG in the referendum version, creditors subject to the so-called “stabilization order” were at the same time prevented from raising a defence. The clarification required in this respect was one of six improvements posed by Germany’s largest business associations initiated by PASCHEN.

A considerable number of these suggestions were reflected in the government draft of 14 October 2020, which passed in the Bundestag on its first reading on 18 November 2020. This contained a large number of substantive and also structural changes, whereby the “numbering” of the provisions had also changed.

Particularly important to mention are the provisions on the rights of retention and termination for creditors obliged to pay in advance under current §62 (3) StaRUG, which go back to the Associations’ Declaration, the greatly improved creditor rights in the event of the ordering of a realization freeze in the new §61 StaRUG and the extended liability provisions in §64 StaRUG.

The public hearing of the Committee on Legal Affairs and Consumer Protection, to which the matter had been referred for further deliberation, took place on 25 November 2020. Our partner RA Lutz Paschen was invited to attend this hearing as an expert. Here is his statement on the SanInsFoG as well as an overview of the contributions of all experts in edition10_2020 of the INDat- Report.

Current Status

As the governing parties were determined for the law to enter into force on 1 January 2021, the Legal Affairs Committee met several times in the days following the public hearing. In the end, discussions continued into the evening and, at the last moment, a provision was included in the committee’s recommended resolution that suspends the obligation to file for insolvency until the end of January 2021 for companies that have fallen into financial difficulties as a result of delays in the granting of funds from government aid programs to mitigate the pandemic. The Act on the Further Development of Restructuring and Insolvency Law (Restructuring and Insolvency Law Further Development Act – SanInsFoG) was then passed in the version of the resolution recommendation with the votes of the coalition parties, against the votes of the Greens and FDP, with the abstention of the AfD and the Left Party, and entered into force on 1 January 2021 after the Bundesrat waived its right to object. Shortly before the end of the extended suspension of the insolvency application requirement, it was extended again until the end of April 2021.

Also on 17 December 2020, the Bundestag passed a resolution to shorten the period of residual debt discharge to 3 years, with retroactive effect from 1 October 2020. The corresponding law on the further shortening of the residual debt discharge procedure and the adaptation of pandemic-related provisions in company, cooperative, association and foundation law, as well as in tenancy and lease law, also contains further provisions that address completely different issues, including a rule on the burden of proof, according to which it is presumed that the pandemic-related impairment of the usability of commercial rental space seriously affects the business basis of the rental agreement within the meaning of Section 313 of the German Civil Code (Article 10), and a modification of the regulations on civil proceedings, according to which disputes on such issues are to be processed more quickly in civil proceedings (Article 1).

The year 2021 will therefore begin as 2020 ended: With a large number of further new regulations that intensively affect the interests of creditors. We will keep you up to date on further developments.