Insolvency Plan Proceedings

What an insolvency plan can do

An insolvency plan (Insolvenzplan) is the tool German insolvency law offers for restructuring a company in formal insolvency proceedings rather than liquidating it. The plan can regulate the satisfaction of secured and unsecured creditors, the realisation and distribution of the estate, the conduct of the proceedings and the debtor's liability after they end differently from the statutory default rules; where the debtor is not a natural person, the shares and membership rights of its shareholders can also be included (§ 217(1) InsO).

The plan can therefore reduce or defer debt, convert debt into equity, change the capital structure, release the debtor from residual liabilities and allow the business to continue with its existing legal entity, contracts and permits.

Insolvency plans are used in regular insolvency proceedings, in self-administration and after protective shield proceedings. Compared with a sale of the business by an administrator, a plan preserves the legal entity, which matters where licences, public contracts, tax losses or long-term customer contracts cannot easily be transferred. Compared with a StaRUG restructuring plan, it offers the full toolkit of insolvency law, including operational measures, but requires formal insolvency proceedings.

Who submits the plan and what it contains

Both the insolvency administrator and the debtor may submit an insolvency plan to the court; the debtor may combine its plan with the petition for opening proceedings, and a plan submitted after the final meeting is not considered (§ 218(1) InsO). The creditors' assembly can instruct the administrator to prepare a plan. In self-administration, the creditors' assembly instructs the custodian or the debtor, and where the debtor prepares the plan the custodian participates in an advisory capacity (§ 284(1) InsO).

The plan consists of an explanatory part and a constitutive part. The explanatory part describes the measures taken or planned and all information relevant for creditors' decisions and the court's confirmation, including a comparative calculation showing creditors' prospects with and without the plan. The constitutive part specifies how the legal position of the parties is changed by the plan. Annexes typically include a statement by the debtor that it is willing to continue the business, a financial plan and, where the plan provides for continuation, a plan balance sheet and profit and loss and liquidity forecasts.

Groups and voting on the insolvency plan

Where parties with different legal positions are affected, groups must be formed. The statute distinguishes secured creditors whose rights are affected, non-subordinated insolvency creditors, each rank of subordinated creditors whose claims are not deemed waived, shareholders whose rights are included and holders of rights under intra-group third-party security (§ 222(1) InsO).

Within the same legal position, further groups may be formed for creditors with similar economic interests, for example suppliers, banks or bondholders, if the criteria are stated in the plan; employees should form a separate group if they hold more than insignificant claims, and small creditors and shareholders with very small stakes may be grouped separately (§ 222(3) InsO).

The court sets a discussion and voting hearing, which should be scheduled within one month (§ 235(1) InsO). The plan is accepted by the creditors if, in each group, a majority of the voting creditors consents and the claims of the consenting creditors amount to more than half of the claims of the voting creditors (§ 244(1) InsO). This double majority by head and by amount differs from the StaRUG, where only a 75 per cent majority by amount is required. For shareholder groups, the majority by capital is decisive.

Cram-down of dissenting groups

If a group does not reach the required majorities, its consent is deemed given if its members are likely not to be worse off than without the plan, they participate appropriately in the economic value distributed under the plan and a majority of voting groups has consented with the required majorities (§ 245(1) InsO). Appropriate participation of creditors requires, among other things, that no other creditor receives more than the full amount of its claim and that no junior creditor, the debtor or a shareholder receives value without full compensation. These rules are similar to the StaRUG cram-down; our insight on cross-class cram-down under the StaRUG explains the parallel concepts.

Shareholders, debt-to-equity swaps and corporate measures

Shareholders' rights remain unaffected unless the plan provides otherwise (§ 225a(1) InsO). The plan can, however, convert creditors' claims into shares, although not against the will of the creditors concerned, and can provide for a capital reduction or increase, contributions in kind, the exclusion of subscription rights or compensation payments to departing shareholders (§ 225a(2) InsO). Any measure permissible under company law can be included. Declarations and shareholder resolutions included in the plan are deemed to be made in the required form once the plan is confirmed, which replaces notarial deeds for GmbH share transfers and shareholder meetings (§ 254a InsO).

This allows investors to take over a company through a plan, including by contributing new equity in exchange for the shares and a release from old debts. Change-of-control clauses in contracts with the debtor do not entitle the counterparty to terminate solely because a plan provides for a change in ownership (§ 225a(4) InsO). Our insight on debt-to-equity swaps covers valuation and tax issues.

Confirmation, appeals and effects of the insolvency plan

After acceptance by the parties and consent of the debtor, the plan requires confirmation by the insolvency court, which should hear the administrator, the creditors' committee and the debtor (§ 248 InsO).

On application by a creditor or shareholder who objected in writing or on record at the latest in the voting hearing, the court must refuse confirmation if the applicant is likely to be worse off under the plan than without it; the application is admissible only if the applicant credibly shows this at the hearing (§ 251(1), (2) InsO). Plans usually provide funds to compensate any creditor who proves worse treatment, in which case the application is rejected and the creditor is referred to those funds.

An immediate appeal against confirmation is available to creditors, the debtor and shareholders, but only for those who objected in time, voted against the plan and credibly show material disadvantage that cannot be compensated from funds provided in the plan (§ 253 InsO).

Once confirmation is final, the effects set out in the constitutive part apply for and against all parties, including those who did not participate or voted against (§ 254(1) InsO). Rights against co-debtors, guarantors and third-party collateral generally remain unaffected, except for intra-group third-party security restructured under the plan (§ 254(2) InsO). The court then terminates the proceedings, and the plan may provide for monitoring of its implementation by an independent person.

Implementation, monitoring and default

Once confirmation is final and unless the plan provides otherwise, the court terminates the insolvency proceedings; before termination, the administrator must settle undisputed administrative claims that are due and provide security for disputed or non-due claims, for which a financial plan can also be used (§ 258 InsO). The debtor then regains full control, and the obligations under the plan replace the original claims. Plans with longer payment periods often provide for monitoring of implementation by the former administrator or custodian, which can extend to obligations of a new acquiring entity if the constitutive part so provides (§ 260 InsO).

If the debtor falls significantly behind in performing the plan, deferrals and partial waivers granted in the plan lapse for the creditor concerned; a significant default requires that the debtor failed to pay a due amount despite a written reminder setting a grace period of at least two weeks (§ 255(1) InsO). If new insolvency proceedings are opened before the plan has been fully performed, the deferrals and waivers lapse for all creditors. These revival rules give creditors a strong incentive to accept a plan with realistic payment terms rather than an overly ambitious one.

Tax aspects must be planned from the outset. Debt waivers under a plan can generate taxable income, which may be exempt as restructuring gains under conditions set by income tax law, and loss carryforwards may be affected by changes of ownership. The plan should be structured together with tax advisers, and binding rulings may be advisable for larger cases. Our insight on debt-to-equity swaps discusses the tax treatment of restructuring gains.

Insolvency plan or sale of the business

Creditors compare an insolvency plan with the alternative of selling the business as a going concern, which the comparative calculation must address. An insolvency plan is preferable where the legal entity carries value that a sale would lose, where a sale process is unlikely to attract adequate bids, or where existing shareholders or a sponsor are willing to contribute new money.

A sale may be preferable where the business needs a strategic owner or where the plan's projections are doubtful. Often, investors are approached in a dual-track process, and the plan becomes the vehicle for the best offer. Administrators and custodians document the process carefully, because the comparative calculation must show that the plan delivers at least what a sale would have achieved for each group. Our page on insolvency proceedings and self-administration and our insight on self-administration in practice describe the procedural setting.

How TRW & Co helps

We advise debtors, administrators, custodians, creditors and investors on insolvency plans. We draft explanatory and constitutive parts, design group structures and comparative calculations, structure debt-to-equity swaps and investor contributions, conduct voting hearings and represent parties in confirmation and appeal proceedings. For creditors and investors, we assess plan proposals and negotiate improvements. This page is general information, not legal advice. To discuss an insolvency plan, please contact us.