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An Interview With...

JUNE 2012

Christian Koehler-Ma An Interview With...

Leonhardt comments on the new German Enterprise Restructuring Facilitation act

On March 1st, the new German Company Restructuring Facilitation Act came into force, after almost ten years of discussion and preparation with the aim of bringing the German system more in line with the popular UK system. To find out more about the new rules, Lawyer Monthly, as part of our ‘An Interview with…’ feature, speaks exclusively to Christian Koehler-Ma, from one of the leading law firms in Germany, Leonhardt Rechtsanwälte.

Please tell us about your professional background.

I studied law in Germany and, for one year, in Britain at the London School of Economics. In addition, I spent two years at the Kennedy School of Government at Harvard University, where I took mostly business courses and received a Master of Public Administration degree. I have been working for my firm, Leonhardt Rechtsanwälte, for 22 years, as lawyer, insolvency administrator, partner and managing partner. Leonhardt Rechtsanwälte is one of the leading crisis management and insolvency law firms in Germany.

What were the main weaknesses of the previous system of German insolvency proceedings?

The previous system of German insolvency proceedings was bureaucratic and administrator-orientated. The outcome and timing of the procedure was unpredictable. The court and the insolvency administrator held the major influence on the whole

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process, with the court selecting the insolvency administrator. Some courts tended to choose the insolvency administrator arbitrarily, sometimes against the creditors’ express wishes. This was frequently criticized because under German law the insolvency administrator has far-reaching powers and can make the difference for the creditors’ outcome.

Similarly the debtors were at the court’s and the administrator’s mercy and lost control over their companies. While the letter of the law encouraged restructurings in fact they did not happen as often as desired. Debtor-in-possession proceedings especially were often thwarted by courts who appointed administrators against the wishes of debtors.

Finally, debt-equity swaps were possible only under very narrow circumstances, requiring adherence to complicated and time- consuming procedures under German companies law.

As a result several major insolvency cases were restructured outside of Germany, with

the English scheme of arrangement being chosen despite its high costs and legal uncertainty whether it would bind German creditors at all.

All this is what the German parliament tried to remedy when it passed the reform law, the “Enterprise Restructuring Facilitation Act” (German acronym: ESUG), which came into force on March 1st.

What will be the main points of the ESUG?

The aim of the new law is to both increase the influence of the creditors and to create new possibilities for the reasonable debtor, reasonable meaning somebody who files early and not when the enterprise is beyond repair. The main changes of the ESUG concern the preliminary creditor’s committee, improved debtor-in-possession proceedings and the so-called insolvency plan, a procedure roughly similar to a scheme or a chapter 11 proceeding in the US.

The preliminary creditors’ committee

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