On June 20, 2019, the European Parliament and the Council of the European Union issued Directive (EU) 2019/1023, referred to as the “Restructuring Directive”. The directive is to be implemented into national law by July 17, 2021. The directive is intended to create a restructuring framework that will enable viable companies in financial difficulties to continue their operations. In short: the honest businessperson should be able to enjoy full debt relief in a timely manner, and the length of national procedures should be shortened.
New risk situation for entrepreneurial loans in Germany
The concept of the planned restructuring framework is designed in a debtor-friendly manner and has the potential to significantly aggravate the existing risk situation of banks in the entrepreneurial lending business.
The directive creates the regulatory framework for a restructuring procedure that precedes insolvency proceedings and offers the debtor the possibility of restructuring in the event of probable insolvency in order to avert insolvency and ensure viability.
Practical effects for entrepreneurs and companies
- Restructuring under the debtor’s own management
The core of the restructuring process is the restructuring under the debtor’s own management. However, the appointment of a restructuring officer is only envisaged in exceptional cases. In this case, the debtor retains full or partial control over the assets and the daily operations of the company.
- Restrictions in the event of an insolvency appeal
Transactions related to restructuring in a subsequent insolvency of the company are generally privileged and are not readily subject to insolvency proceedings.
- Suspension of individual enforcement measures (moratorium)
The possibility for the debtor to claim a suspension of individual enforcement measures (moratorium) is another important element of the restructuring guidelines. This means, first of all, that the bank can no longer enforce overdue credit claims during the moratorium by way of enforcement. This also applies to the enforcement of claims via the liquidation of collateral. The moratorium also has a blocking effect on contractual changes. With regard to overdue claims, the creditors concerned may not refuse to make payments from essential contracts still to be fulfilled, terminate these contracts, make them due prematurely or change them in any other way to the detriment of the debtor if the moratorium is waived solely on the grounds of non-repayment. Furthermore, the suspension effect of the moratorium applies to the initiation of insolvency proceedings as well.
Practical effects for the credit industry and banks
- Enforcement of credit claims become harder
The moratorium, which serves as a temporary protection for restructuring efforts, prevents the bank from enforcing its loan claims as well as terminating the loan despite an existing right of termination and may at the same time lose access to the collateral. Furthermore, there are fears that the requirements for backing the loan with equity will become stricter.
- Adjustment of internal control systems
German banks will have to counteract the restructuring process and the associated protective mechanisms in favor of the borrower by adapting their internal control systems, especially as far as lending decisions and the use of appropriate contractual clauses are concerned.
- Adjustment of contractual clauses
Furthermore, banks should examine to what extent the Restructuring Guideline requires adjustments to their contractual clauses. Banks should adjust their termination rights in case of arrears in time to improve their negotiating position during a moratorium. As a supporting measure, it is possible to use contractual clauses that oblige the borrower to give the bank a few days’ notice of the intention to declare a moratorium in the event of existing arrears. Possible restructuring processes can also be countered by selling the loan receivable at an early stage. This is done by means of a contractual clause that obliges the borrower to give early notice of any future payment difficulties.
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