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Germany’s ESUG Has Simplified Corporate Restructuring

Five years after Germany established its insolvency law to facilitate earlier and simplified corporate restructuring, BCG’s latest annual analysis shows that the law has achieved many—but not all—of its stated goals.

In 2012, German lawmakers fundamentally reformed substantial portions of the country’s bankruptcy legislation when they established “a law to further aid in corporate restructuring” (ESUG). Ultimately, the ESUG was intended to streamline planned insolvency proceedings and thus shorten or condense the bankruptcy process.

Since the law went into effect, BCG has assessed the impact of ESUG legislation on corporate restructuring, surveying insolvency monitors, consultants, and company experts annually on the insolvency proceedings that have been undertaken. After analyzing data from almost 60 months and more than 1,200 proceedings, BCG has concluded in its 2017 report, Five Years of ESUG—Main Objectives Achieved, that the law has been largely successful, with a few exceptions.

Successes for ESUG

Through its analysis, BCG has found that the duration and the process of insolvency proceedings have become easier to plan for corporations and creditors.

Proceedings can now be carried out within just 9 to 10 months. A simplified procedure promotes self-administration of the proceedings. The influence of creditors has been strengthened by granting them more decision-making authority in (temporary) committees and by allowing them to select the liquidator.

And the insolvency protection proceedings grant the debtor a new, stand-alone restructuring process that has contributed significantly to a more transparent approach to insolvency and restructuring in Germany.

Wins Yet to Come

However, the law has yet to deliver on one goal: creating incentives for an earlier start to in-court restructuring.

To date, the data available for BCG’s analysis does not reveal any evidence that restructuring applications are being submitted any sooner in the process than they were before the law took effect.

Additional Significant Findings

BCG also has found through its analysis:

Self-administration of corporate restructuring indeed remains the exception, but it has been established as an important alternative to traditional proceedings. The current share of self-administration proceedings remains at a stable 2.6% of all insolvency proceedings.
Self-administration is becoming increasingly important for insolvencies of larger companies. More than half (58%) of the largest 50 corporate bankruptcies in 2016 were handled as self-administered proceedings, BCG’s analysis has found.
Self-administration remains very attractive to stockholders. In more than half of the proceedings (58%), stockholder rights were not affected. And even in proceedings that affected stock rights, the existing stockholders retained an average of 10% of their shares. Debt-equity swaps are falling out of favor—falling from 36% to 20% over the past year, according the analysis. On the other hand, conducting an M&A processes in parallel with an insolvency plan has gained popularity, rising from 37% in the previous year to 63%.
The restructuring contributions expected by creditors are on the rise. Self-administration proceedings have become less attractive for creditors in the past year. Restructuring contributions are rising, and in 90% of proceedings, creditors have had to renounce more than 50% of their claims.