European Union: Evaluation Of The ESUG – Essentially A Success!?

Last Updated: 14 November 2018
Article by Christine Borries (née Ede) and Maximilian Baier
Most Read Contributor in Belgium, August 2019

The recently published report on the evaluation of the ESUG, the German law to facilitate the restructuring of companies, states that the changes introduced by the ESUG have been received positively overall, but that there is still room for improvement in many areas. Should the EU Restructuring Directive actually be adopted at the beginning of 2019, the legislator would have the opportunity to improve the ESUG legislation and implement the EU requirements for pre-insolvency restructuring proceedings in one bill. This would give the legislator the opportunity to further increase the global competitiveness of the German insolvency code and thereby strengthen the German market as such.

The ESUG came into force in March 2012. The main objective of the ESUG was to create incentives for debtors to apply for the opening of insolvency proceedings at an early stage in order to enhance the chances of successfully restructuring the company. This was intended to bring about a move away from liquidation proceedings towards a “restructuring regime”. The stigma of “insolvency” was to be eliminated and the American approach of “second chance” introduced into German self-understanding.

A good six years after the ESUG came into force, the Federal Government has now presented the results of the evaluation it commissioned on the ESUG. The evaluation report highlights in an impressive 353 pages the issues arisen regarding:

  1. the general reception of the procedure,
  2. debtor-in-possession proceedings,
  3. insolvency plan proceedings,
  4. the selection of trustees, and
  5. court organisation,

as perceived in the first 5 years after ESUG entered into force.

On the basis of 825 questionnaires from insolvency law practitioners and taking into account other ESUG studies, case law, literature and the proposals of the relevant associations, the report deals comprehensively with almost all issues and problems that have come to light. The report also includes recommendations to the legislator on how to proceed regarding each identified issue.

Probably the most fundamental recommendations of the report affect:

  1. debtor-in-possession proceedings,
  2. selection of the trustee, and
  3. the organization of the insolvency courts.

While a concentration of proceedings at certain insolvency courts as well as the creation of specialized knowhow at the insolvency courts are desirable without a doubt, the (very differentiated) recommendations of the report concerning access to debtor-in-possession proceedings and the appointment of trustees should be implemented with care. The legislator must take into account that a serious debtor will only file for voluntary (!) insolvency proceedings at an early stage (i.e. if there is still a good chance for a successful restructuring) if the debtor remains in control of the proceedings. However, control over the proceedings means above all:

  1. certainty regarding the access to debtor-in-possession proceedings; and
  2. certainty regarding the competent conduct of the proceedings by the trustee.

For this reason, the legislator

  • may or even should standardize (and, if necessary, also limit) the conditions to enter into debtor-in-possession proceedings, but at the same time the legislator needs to limit the scope for judicial assessment and discretion and needs to create more effective possibilities to seek legal remedies; and
  • may erase the right to select a trustee only if regulations are enacted concerning the selection and the tasks of the trustee, that (a) ensure his competent conduct of proceedings, that (b) remove the incentives to press for a transfer to a regular procedure and which (c) enable effective legal protection both regarding the appointment of the trustee as well as his way to operate the proceedings; because independency of the trustee as such does not make a good trustee.

In addition, the legislator should bear in mind when making any changes to the law that the evaluation was carried out for a period in which the insolvency figures were sharply declining. Also in the area of large-scale proceedings, which are primarily suitable for debtor-in-possession and insolvency plan proceedings, the good economic situation in recent years has tended to lead to the insolvency of predominantly those companies which, despite the generally good (re-)financing possibilities, have not succeeded in achieving out-of-court restructuring. This may have led to a disproportionate number of debtor-in-possession proceedings identified by the study, in which debtor-in-possession proceedings were inappropriate and therefore detrimental to creditors. In addition, 5 years is a short period of time to implement the envisaged change from a liquidation to a reorganization and restructuring regime in the market (and in people’s minds). This applies in particular to the (not yet completed) realignment of the insolvency sector to the changed market conditions.

We hope that the legislator will address the weaknesses of the ESUG regulations as identified by the evaluation swiftly and will ideally implement the necessary changes together with the upcoming EU Restructuring Directive in 2019. Above all, it is to be hoped that the legislator will continue along the path already taken towards a restructuring regime. It is not without reason that the German Insolvency Code is ranked fourth for the second time in a row in a comparison of global insolvency regimes due to the ESUG regulations and is thus in the top group (The World Bank, Doing Business 2019).

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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