Anti-money laundering and market abuse trends in the UK
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With the EU Preventive Restructuring Frameworks Directive, the EU has developed a structure complementing the existing traditional restructuring procedures currently available under German law, namely consensual out-of-court solutions and in-court insolvency proceedings. The latest examples of German corporate insolvencies during the COVID-19 pandemic show that fast and flexible solutions can be obtained under current German insolvency law regimes. However, these existing in-court procedures require that an insolvency event has occurred, i.e. that the company be insolvent. The EU Directive instead offers an alternative in-court solution, allowing for a restructuring at an earlier stage and adding the cross-class cram down thereby avoiding the need for consent among all classes of stakeholders. The draft act for the implementation of the EU Directive has, thus, been awaited with impatience in Germany, since it could be an important additional tool to mitigate the impact of the COVID-19 pandemic. On September 19, 2020, the German Federal Ministry of Justice presented a ministerial draft act which goes far beyond the mere implementation of the EU Directive. The new act, entitled ‘Law for the further development of restructuring and insolvency law’ (Gesetz zur Fortentwicklung des Sanierungs- und Insolvenzrechts (SanInsFoG) lives up to its name and promises to be the start for a new restructuring era in Germany.
In 2016 the European Commission introduced a proposal for a Directive defining certain minimum rules that must be achieved to allow the rescue of viable companies in financial difficulties. The subsequent Directive on preventive restructuring frameworks, on discharge of debt and disqualifications and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt (Preventive Restructuring Frameworks Directive) came into force on July 16, 2019.
A two-year transition period (July 17, 2021) for the implementation into national law has been set for all EU-Member States. The German legislature intended to submit a draft bill this spring, but with the outbreak of the COVID-19 pandemic the focus shifted to an emergency law (the COVInsAG) in order to temporarily amend the strict German insolvency law rules. In particular, for companies that became insolvent due to the COVID-19 pandemic, the COVInsAG provides for a suspension of the mandatory filing obligation, which otherwise requires that the company’s management files for insolvency within at most 21 days upon occurrence of an insolvency event (illiquidity or over-indebtedness). The emergency law further provides for a limitation of liability for managing directors as well as a limitation of claw back and tort liability risks for lenders. The COVInsAG initially was set to expire on September 30, 2020. In light of the ongoing effects of the COVID-19 pandemic and the associated uncertainties for companies in terms of their business forecasts, the German government approved an amendment partly extending the suspension of the obligation to file for insolvency until December 31, 2020. Under the amendment, the filing obligation shall remain suspended until December 31, 2020 for companies that are over-indebted, whereas for companies that are in a situation of illiquidity, the filing obligation shall come back into force as of October 1, 2020. Restructuring experts expect a significant increase in insolvency proceedings after this date.
On September 19, 2020, the Federal Ministry of Justice presented the long-awaited and, due to the COVID-19 legislation delayed ministerial draft of the new law implementing the EU Directive. The core of the draft is the new Corporate Stabilization and Restructuring Act (‘Unternehmensstabilisierungs- und –restrukturierungsgesetz’ (StaRUG)) implementing the EU Directive’s Title II ‘Preventive Restructuring Frameworks’. The draft StaRUG provides for a modular system with various options, ranging from
The StaRUG is, thus, intended to offer companies in financial difficulties various options for a pre-insolvency restructuring, which do not require all creditor consent. These measures shall be available to companies that are in a situation of imminent illiquidity (drohende Zahlungsunfähigkeit) and, thus, not yet under the obligation to file for insolvency. The envisaged date for entry into force of the new law is January 1, 2021.
Under current German law, a company in distress is limited to either finding a consensual out-of-court solution with all relevant stakeholders or to enter into in-court insolvency proceedings. This is because, currently, there is no legal framework in Germany for pre-insolvent status court solutions akin to chapter 11 or the new scheme proceeding in the UK that offer the possibility of confirming or sanctioning a plan over dissenting classes of creditors—the so called ‘cross-class cram-down’. Rather, under the current legal regime, a plan requires the unanimous consent of all classes of creditors. The StaRUG shall close this gap.
It is worth noticing, though, that despite the current absence of such formal pre-insolvent status court restructuring frameworks, the German Insolvency Code (InsO) offers— besides regular post insolvent status proceedings resulting in a liquidation—different types of proceedings that allow parties to reach flexible and fast results in in-court insolvency proceedings. In particular, companies can be restructured under an insolvency plan offering the possibility for a cross-class cram-down with majority vote. In more detail:
Self-administration allows the company’s management to remain in charge of the business activities under supervision of a court-appointed custodian (Sachwalter). Self-administration requires a respective application by the company’s management when filing for insolvency and the insolvency court usually approves self-administration unless circumstances are known that indicate that self-administration is detrimental to the creditors. In contrast to regular insolvency proceedings, the control will not be transferred to a court-appointed insolvency administrator.
Upon receipt of the petition, the insolvency court will order the debtor company to enter into so-called preliminary self-administration proceedings which can last up to three months. During this time the management continues the company’s business operations as usual and prepares an in-court restructuring solution. In most cases, such solution will consist of an insolvency plan, but it may also be an asset sale transaction.
In case of an insolvency plan, the debtor company will submit such plan after the conclusion of the preliminary proceedings and the plan will be subject to creditors’ vote following the opening of the main proceedings.
In contrast to regular insolvency proceedings resulting in the liquidation of the company, there is a large variety and flexibility of options available under an insolvency plan. While the primary guiding principle and objective of all types of German insolvency proceedings is the same, namely the best possible satisfaction of all insolvency creditors, insolvency plans can also pursue additional economic and legal objectives: The “fresh start” and continuation of the company after discharge of debts or corporate restructurings, including debt to equity swaps.
Protective shield proceedings are a special type of preliminary self-administration, offering certain additional options to plan the self-administration in advance. The company in distress is given a special protection period of up to three months from filing for insolvency. During this period, the company can develop a restructuring plan and will be protected from individual enforcement measures by creditors. The proceedings are available for companies that suffer from threatened or near illiquidity and/ or over-indebtedness. If illiquidity already exists, protective shield proceedings are no longer available.
Main insolvency proceedings in self-administration will be opened upon conclusion of the protective shield proceedings and the plan will be submitted to the insolvency creditors for their vote. In practice, a restructuring using protective shield proceedings is usually implemented very quickly—in a matter of a few months.
Since the outbreak of the COVID-19 pandemic, more than half of the corporate insolvency filings were petitions for self-administration (including protective shield) proceedings. The number of protective shield proceedings has doubled compared to the previous year. In particular larger German corporates have successfully applied for protective shield proceedings, with the department store chain GALERIA Karstadt Kaufhof as one of the most prominent examples. These developments evidence the significance and acceptance of this restructuring tool in the German market.
In addition to the proceedings described above, the German insolvency law provides that an insolvency plan may also be submitted in regular insolvency proceedings. However, this scenario is rather rare in practice and is very difficult for the company to achieve since control shifts to the insolvency administrator that is automatically appointed in regular German insolvency proceedings.
The ministerial draft of the SanInsFoG does not limit itself to a mere implementation of the EU Directive by creating a new law (the StaRUG), it also contains important amendments to existing laws, in particular to the German Insolvency Code (InsO).
1. Draft Amendments to InsO and COVInsAG
The amendments to the InsO are intended to improve and modernize the existing German insolvency regimes, in particular the self-administration proceedings. The requirements for self-administration shall be specified in more detail, ensuring that self-administration proceedings are well-prepared, which is a prerequisite for their success. Basis for these amendments was an evaluation of the major insolvency law reform of 2012.
In addition, the definition of the insolvency events ‘imminent illiquidity’ (drohende Zahlungsunfähigkeit) and ‘over-indebtedness’ (Überschuldung), both generally triggering the duty to file for insolvency without undue delay and within 21 days at the latest, shall be redefined. The prognosis period to be covered for the assessment of over-indebtedness shall be 12 months, whereas for imminent illiquidity the period shall be 24 months. For companies that have become over-indebted as a consequence of the COVID-19 pandemic, the prognosis period shall be reduced to four months, provided the company was not yet insolvent on December 31, 2019, had a positive year end result in the fiscal year preceding January 1, 2020 and suffered a decline in turnover in the calendar year 2020 of more than 40 per cent compared to the previous year (Sec. 4 of the draft amendment to the COVInsAG). These amendments shall make it easier to assess over-indebtedness and to distinguish over-indebtedness from mere imminent illiquidity.
2. Draft of the new StaRUG
The draft of the new StaRUG implements the key elements of the preventive restructuring frameworks set out in the EU Directive.
According to the EU Directive the preventive restructuring framework shall be available for companies with a “likelihood of insolvency”. Under the draft StaRUG the criteria to make use of the measures shall be ‘imminent illiquidity’ (drohende Zahlungsunfähigkeit, Sec. 18 InsO).
The EU Directive provides for debtor-in possession proceedings which is also the guiding principle under the draft StaRUG.
Under the EU Directive, Member States shall ensure that a moratorium is available. In accordance with the draft StaRUG, the company may apply for so-called stabilization measures, which provide for a moratorium of a maximum of three months which can be extended under certain requirements.
As far as the restructuring plan and its implementation is concerned, the draft StaRUG contains rules which have various similarities to the rules applicable to insolvency plans. Namely, the restructuring plan shall consist of a descriptive part (darstellender Teil) and a constructive part (gestaltender Teil) and the creditors will be divided into creditor groups for voting purpose. However, in contrast to insolvency plans, the majority per creditor group is 75 per cent of the claim value. Further, the restructuring plan does not need to cover all creditors, it may also be limited to certain claims to be restructured. Employees’ claims, including under company pension schemes as well as tort claims and fines shall be excluded from a restructuring. The German Federal Ministry of Justice will publish a checklist of the key features of restructuring plans for small and medium companies on its internet.
The company may also make use of additional support measures, such as the assistance of a restructuring moderator (Sanierungsmoderator) and/ or a restructuring officer (Restrukturierungsbeauftragter).
In terms of voting on the restructuring plan, the draft StaRUG allows that the plan may be confirmed under certain conditions even if not every class votes in favour of the plan, (‘cross-class cram-down’). The draft StaRUG opts for the so-called ‘absolute priority rule’ with certain limitations. Generally speaking, the dissenting group can be crammed down if its members are not in a situation that is worse as compared to the situation without the plan and if its members adequately participate in the value of the plan. It shall not be an obstacle to an adequate participation of such creditor class if the debtor company or its shareholders retain an economic value, as long as their participation is required for the continuation of the company in order to generate an added value as set forth under the plan or if their creditor rights are only marginally affected, namely the rights are not reduced, but only deferred for a period not exceeding 12 months.
Once the restructuring plan has been approved by the required majority vote, the debtor company may file an application to the restructuring court for confirmation of the restructuring plan. The court shall refuse such confirmation, e.g. if there was in fact no imminent illiquidity of the company, if the claims of the participating creditors as well as of the creditors that did not participate in the restructuring can obviously not be satisfied or if, in a scenario where the plan provides for additional financing, the restructuring concept is obviously incoherent, is based on wrong circumstances or has no chances of success. The court decision is subject to an appeal.
The ministerial draft sets the scene for a new era in German restructurings. The draft does not limit itself to a mere implementation of the EU Directive, but intends to create a flexible toolbox for pre-insolvency restructurings which complements the existing procedures under German insolvency law.
This new restructuring toolbox will offer attractive alternatives, in particular for companies with a solid business model but a heavy debt load. Such companies can achieve a financial restructuring even if there is no unanimity amongst the creditors or classes of creditors, provided that the majority of creditor classes support the restructuring. Critical voices fear, however, that many debtor companies with predominantly considerable operational and/ or strategic problems will also try to benefit from this regime. This is particularly the case due to the possibility to judicially terminate existing agreements as set forth in the current draft. It remains to be seen in how far the draft will be amended as a result of the current consultation process.
Despite certain areas of criticism, the ministerial draft is the right signal at the right time. If the new law is actually enacted by January 1, 2021 as currently contemplated, it will clearly help to further mitigate the impact of the expected significant increase in companies that face a duty to file for insolvency upon expiry of the – extended – suspension under the COVInsAG. Given the existing experience with insolvency plan proceedings and the increased acceptance of German in-court restructurings by way of self-administration/ protective shield proceedings, Germany is very well placed in putting in practice a framework which appears to be both, well elaborated and well received by the market participants.
The anti-money laundering (AML) and market abuse landscapes have continued to be turbulent over the last 18-24 months, and this trend is set to continue.
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On May 12, 2021, the Financial Reporting Council (FRC) published the results of research conducted by the FRC and the University of Portsmouth which assessed a sample of FTSE 350 companies to determine the extent to which they have applied requirements on directors’ remuneration set out in the UK Corporate Governance Code (2018 Code).
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