New Standards for early recovery
The aim of pre-insolvency recovery proceedings is to give the debtor time to work out a restructuring plan and negotiate with affected creditors. For this reason, the relevant EU directive provides for a stay of individual enforcement actions. The restructuring plan is ultimately intended to specify which measures will be used to prevent the debtor from entering insolvency and to ensure the company’s viability. In this regard, these plans closely resemble the requirements for recovery reports and insolvency plans that have been standard until present.
In contrast with the familiar out-of-court recoveries used to date, a unique feature of the pre-insolvency recovery proceedings will be that creditors can be divided into different classes and a lack of consent from individual creditors can be overridden. This aspect is similar to insolvency plan proceedings (Insolvenzplanverfahren) and means that the restructuring plan can be implemented in spite of the lack of consent.
In the near future, the pre-insolvency recovery proceedings are due to be adopted as an additional company rescue mechanism in the German and European business recovery markets. This is based on the EU directive on preventive restructuring frameworks dated 20 June 2019. EU member states have two years to transpose its provisions into their national statute books.The primary objective of pre-insolvency recovery proceedings is to give insolvency-threatened companies under financial strain a preventive restructuring framework, allowing the risk of insolvency to be neutralised and the debtor’s viability to be safeguarded.
The restructuring process under the directive envisages the implementation of measures aimed at improving the capital structure by restructuring liabilities and assets in addition to any necessary operational measures. Legislators have yet to provide a detailed elaboration of the possible operational measures.
In any case, the pre-insolvency recovery proceedings are intended to take the form of debtor-in-possession management in which the debtor retains control. This self-administration process may be accompanied by the appointment of a practitioner in the field of restructuring.