Companies should get easier access to alternative financing sources
Mr Lürken, as the coronavirus crisis spreads many companies fear liquidity bottlenecks. Could insolvency laws be temporarily amended?
An initial simple and quick step would be the suspension of the obligation to file for insolvency as well as the suspension of liability rules linked to the material insolvency if the reasons for insolvency are due to the effects of the epidemic and the companies are conducting serious restructuring negotiations. This would not be a novelty, but happened before during the flood catastrophes of 2002, 2013 and 2016. In 2008, in the context of the financial crisis, the over-indebtedness threshold was amended, first temporarily, then permanently. It is now the right time to abolish it entirely.
Are there any further options?
Moreover, liability risks for lenders providing new money to a distressed borrower should be eliminated. According to the judgment of the German Federal Court of Justice (BGH), ailing companies can only be granted credit if they have a comprehensive restructuring plan drawn up by an independent and competent third party with overwhelming prospects of success. However, a restructuring plan of this kind cannot realistically be developed in a situation like the coronavirus crisis as its effects are not predictable. Instead, consideration should be given to generally exempting new financing from liability during the crisis, provided that the financing is aimed at averting liquidity problems resulting from the coronavirus epidemic. Furthermore, in order to encourage shareholders to finance their companies during the crisis, the legal subordination of shareholder loans should be abolished if these loans were given due to liquidity problems caused by the coronavirus crisis. Last but not least, from the point of supervisory issues it would be helpful if the requirement of a banking license for the granting of loans would be abolished in order to facilitate access to alternative financing for companies.
Would this adequately protect the rights of creditors?
In our experience, the current rules are hardly effective in protecting creditors anyway. In contrast, they only lead to a paralysis of the stakeholders in the crisis. The most effective creditor protection is to maximize the prospects of satisfying the creditors' recovery by restructuring the debtor rather than putting it in an insolvency process.
What are the options for pushing ahead with restructurings?
It would be important to create further legal instruments to facilitate majority-driven restructurings outside insolvency proceedings. Therefore, the EU Directive on a Preventive Restructuring Framework, should be implemented as soon as possible.
There are considerations of softening credit conditions for ailing companies. Does this once more create higher risks for banks?
The higher long-term risk would be a total breakdown due to an insolvency. Nonetheless, the capital requirement rules for banks should be amended – as intended on EU level – in order to prevent another financial crisis after the real economy crisis.
The public sector apparently also wants to step in as a donor?
The German Federal Government has already announced one important step in maintaining liquidity for the companies by adjusting tax prepayments that are based on profits or turnovers from the past. At the moment, a slump in almost all sectors of the economy is to be expected anyway. In addition, there are already numerous support options for ailing companies at federal and state level, ranging from loans and guarantees to equity investments. The government has already announced that it will significantly expand the KfW (Kreditanstalt für Wiederaufbau) credit line and has not even ruled out equity investments. However, in this case the requirements to access them will need to be lowered considerably. In particular, the requirement to provide a complete financing or the impossibility of obtaining third-party contributions should be abolished. The obstacle here frequently is that such aids conflict with the prohibition of state aids.
Sacha Lürken is partner in the Munich office of Kirkland & Ellis
Interviewer: Sabine Wadewitz