Worldwide: International Legislative Update

Last Updated: October 4 2017
Article by Mark G. Douglas

Germany—Major German insolvency law reforms designed to facilitate corporate group insolvencies will become effective on April 21, 2018. When the reforms come into force, they will supplement and complement the Recast European Union Insolvency Regulation that became effective on June 26, 2017.

The new German legislation will permit corporate group insolvencies with individual proceedings, on an entity-by-entity basis, presided over by a single German insolvency court and administered by a single insolvency administrator, unless a unitary approach is impracticable. In the case of impracticability, the courts and administrators involved are obligated to cooperate for the purpose of coordinating the separate proceedings.

The new law also provides a mechanism for creating group creditors' committees, the role of which is to support insolvency administrators appointed in individual insolvency proceedings and to ensure that such proceedings are conducted in a coordinated manner. Each insolvent member of a group and each individual creditors' committee has the ability to initiate a "coordination proceeding" designed to facilitate the individual insolvency proceedings and to maximize creditor recoveries.

The new law does not permit substantive, as distinguished from procedural, consolidation of the group member debtors. Instead, the estates of each entity remain separate, and creditors can receive distributions only from the particular debtor(s) against which they hold claims. This reform is particularly significant because reliance on insolvency protocols is uncommon in German insolvency proceedings.

The legislation defines a "business group" (Unternehmensgruppe) as a group of legally autonomous businesses whose center of main interests is in Germany and who are directly or indirectly connected with each other by means of: (i) the ability to exert a dominating influence; or (ii) centralization under joint management (einheitliche Leitung).

Among the new law's key provisions are the following:

Group venue (Gruppen-Gerichtsstand). If a member of a corporate group files an insolvency proceeding in a particular court, that court can declare that it also has jurisdiction over all the other members of the corporate group. There are certain safeguards designed to prevent smaller subsidiaries from being used to facilitate forum shopping. If the insolvency proceedings over the group members are not procedurally consolidated in one insolvency court, all courts involved must consider whether it would be advisable to have a single insolvency administrator appointed for all of the debtor companies. The courts must also cooperate and share with each other information concerning the insolvency proceedings; if more than one insolvency administrator has been appointed, the administrators must do the same; and in the case of debtor-in-possession ("DIP") proceedings (Eigenverwaltung), the debtor's management is obligated to cooperate and share information with the administrators or management of all other group member companies.

Group creditors' committee. The new law provides for the formation of a group creditors' committee (Gruppen-Gläubigerausschuss) in case of insolvency of a corporate group. The function of a group creditors' committee is to support the insolvency administrator(s), any DIP, and individual creditors' committees appointed in the group debtors' cases.

Coordination proceedings. The new law introduces a group-related coordination proceeding (Koordinationsverfahren) to be overseen and coordinated by a coordinating administrator (Verfahrenskoordinator). The purpose of such coordination proceedings is to harmonize the separate insolvency proceedings pending with respect to the various group companies to the extent that coordination is in the best interests of creditors.

Coordination plans. Corporate groups will have the option of formulating a coordination plan (Koordinationsplan) providing for, among other things: (i) the implementation of measures (including entering into new contracts) necessary to restore the economic viability of the individual group companies and the corporate group as a whole; and (ii) the resolution of internal group conflicts. Such a coordination plan can form the basis for an insolvency plan for each insolvent entity but has no binding effect on the insolvency administrator of each group entity. However, an administrator is obligated to justify any departures from the coordination plan.

Russia—Significant changes to Russian insolvency law became effective on July 30, 2017.

Among other things, new Federal Law No. 266-FZ (July 29, 2017) (the "Amendment") supersedes provisions concerning the vicarious liability of "controlling persons" for a bankrupt corporate debtor's obligations set forth in RF Law No. 127-FZ on Insolvency (October 26, 2002) (the "Insolvency Law").

The Amendment defines a "controlling person" as any individual or entity who, during the three-year period preceding the existence of "signs of insolvency" or court approval of a bankruptcy petition, had the power to direct the debtor's affairs, including the execution of contracts.

Officers, directors, liquidators, members of a liquidating committee, controlling shareholders, and any person who benefited from the unlawful or bad-faith actions of persons authorized to represent the debtor under its constituent documents or by power of law are presumed to be controlling persons, although the presumption is rebuttable. Additional persons can also be deemed controlling if they meet specified criteria.

Under the Amendment, controlling persons may be held vicariously liable if: (i) creditor claims cannot be satisfied as a consequence of a controlling person's actions or inactions, including dismissal of bankruptcy proceedings because of lack of adequate funds; (ii) their actions or omissions resulted in serious harm to the debtor's financial condition, whether or not those actions or omissions caused the debtor's insolvency; (iii) they failed to timely file a bankruptcy application on the debtor's behalf; or (iv) they violated the Insolvency Law by, among other things, causing the debtor to file for bankruptcy when it was still able to pay its obligations in full.

An application to impose vicarious liability upon a controlling person may be filed with the bankruptcy court by a receiver, creditors, and existing or former employees to whom the debtor is indebted or their representatives. An application must be filed no later than three years after the date when the applicant became aware or should have become aware of grounds for vicarious liability, but in no case later than three years after the debtor was declared bankrupt (among other things), with certain exceptions that may extend the limitations period to 10 years.

If the court grants the application, it may, among other things, direct that creditor claims be satisfied as part of the debtor's insolvency proceedings; sold; or, in some cases, assigned in whole or in part to a creditor, in which case the creditor will have a direct claim against the controlling person. To the extent that the controlling person satisfies his or her vicarious liability, he or she will have a subordinated subrogation claim against the debtor's bankruptcy estate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Mark G. Douglas
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