Class 1 We have two main courses: 1. German corporate Law and 2. Corporate Restructuring. During the introduction he is going to give us the feeling why we are dealing with restructuring. For this reason we need to deal with technical stuff, and that is a insolvency law. Youmust know what are the consequences of company and in order to preserve the value. NPL non-performing loans. SPL-non-performing sub loans. Distressed Debt it is the debt of companies that are insolvent. This is a new market that was developed 3-4 years ago. Today we will start with the introduction. Why we are dealing with restructuring at all. If you look at the events of last months statements. Many banks were in distress. If you look at economic part of Frankfurter Allgemeine Zeitung you will read about many insolvencies. The US was the first country to adopt special law on rescue program. In England they extended the rescue program further than banks. What are Bad banks ? Bad banks are the banks that gather all the bad assets from other banks. It is something in Germany in daily discussion. It is to have one big umbrella bank or this bad bank. Either to get fresh money in return or get equity. Why am I giving you these examples? How we are personally affected with the insolvencies of companies. If you imagine that millions of money should be used to refinance companies what you expect is recession now will hit companies . From macro economic perspective, restructuring insolvency boom is expected from 18 months to 2 years. So let us now start with case study in order to give you an idea of what we are doing in next days. GTBT You have warning provisions such as covenants. One very simply financial covenant is your earnings must exceed your debt by 2 times or or 120% or This is just testing component. It is just to check if it is in compliance with financial expectations. What happens is it gets worth for the bank when it cant keep up with covenants and it cant withdraw money.

OEMs (car Manufacturers) which are car manufacturers they are becoming nervous because they are depending on auto supplier. And they ask can you supply in 6 months or not? Because we need to act now. All the big companies were manufucturesThe car producers became very nervous. In order to react where They need at least 6 months to react to this supplier to another supplier. If they become aware, they are immediately in radar screen. They also get goods from other suppliers and the other suppliers demand cash on delivery. This makes the situation company much worse. These guys are putting the company on the radar screen. Oh , there is a company who is interested in selling his debt. But they are not going to buy such debt 1 for 1 but cheaper. They try to break up the company and do debt equity swap. Difference between bond and loan is you dont know the bondholders and you cant renegotiate. You dont know whom to speak. What are swaps? Exchange of cash flows. What kind of swaps do you know? Debt equity swaps, interest rate swaps, currency swaps. The last two swaps are most used ones. What is a currency swap? You have cash inflows in euros but you have cash outflows in dollars. In this case you can do that. What is a interest swap? You have floating interest rates which can change often. These instruments are used by every international company. If market is in unsafe situation, you have high difference in daily rates. If company is facing a financial distress, they will terminate the swaps. We are at the moment you can have a lot of losses. Within 24 hours huge loss comes in balance sheet. What does Cash pool agreement mean? On a daily basis are delivered to the account of holding company. What is the legal background for cash pool? It is an ongoing discussion. Some describe as loan, coming from roman background, we say some sui generis. Because we dont know what it is ;-) Can a company provide security for its parent in unlimited way? There must carefully check corporate law. Some jurisdiction are more strict, some jurisdictions can. In Germany it is possible with some restriction. In the UK, it is quite flexible. In some roman law jurisdictions, there is more restrictions. Page 7. What is the benefit of such structure? Because they are subordinated not only by agreement but by structure as well. What kind of shareholder loan? It is deeply subordinated. Why do they want to get that? Deduction of interest. In Germany there is high restriction for foreign companies to unlimitedly deduct.

Page 8. There is no formal definition of restructuring in Germany. Who are stakeholders? Suppliers, creditors if you think about working chain of company, you have income and outcome, you receive goods and sell goods. The banks are also stakeholders. Why insurers are important? Who is Allianz insuring? Credit insurers are insuring suppliers. And this is very very important. If you start restructuring, you must know your suppliers. You need to identify the problems very early in order to react early before any damage occurs. What are the advantages of restructuring? What are the melt down scenarios? It is a domino affect. What is the impact of insolvency? Directors duties there will be a supervisor. Claw-back of transactions. The transactions can be challenged. If one creditor received early repayment, such a repayment can be challenged. We have much more complexity in finance market. LBO structures, you have layers of debt, internationally operating banks with cross-border features.

Class 2 The new German law intended to file earlier for insolvency with a view to give a chance to restructuring and rescuing the company. The omission to file for insolvency on time is a crime. Case study 1. Court system in Germany: Amtsgericht (lower court), Landgericht (lower upper court), Oberlandsgericht (Court of Appeal or upper court), Bundesgerichtshof (Supreme Court). There are three stages of court system in Germany. What is the competent court? It is Amtsgericht. When do you have to go to a higher court? Based on the amount at stake. It is usually a small amount. There is a lot of criticism because in many jurisdictions judges are not well qualified for insolvency cases.

Where is the local exclusive jurisdiction? Register of place is criteria for filing. However for tax reason companies register somewhere in Germany where trade tax is lower. Daisytek was a british company with a headquarter in Birmingham. It had two groups one was in France and the other in Germany. Management run the company from Birmingham. The English company filed for insolvency. English directors filed for insolvency in England. Germany and France didnt recognize the opening of insolvency in Birmingham. Insolvency administrator was appointed and went to Germany. German directors werent sure if filing in England would release from duties in Germany, therefore they filed in Germany. Germany also appointed German administrator. So this was the first case where long discussion arose about COMI concept. At the end, France and Germany recognized the proceedings in England because proceedings must be recognized according to EU Directive. The next big case was EUrofood. Italian court claimed responsibility for the whole group although headquarter was in Dublin. If you are managing international group, you have to prove where the competent court is. You look where is the best system which supports my aims. And European court of Justice has then rendered some cases where it has given some orientation what is meant by COMI, what the criterias are. Where you have headquarters, customers, IT systems should be taken into account. Not only internal management should define that. Externally it should be possible to define that. What is necessary for self-management in Germany? There should not be failure of management. It should be evident that the company can stand on its feet and there is support of creditors. Or you have the situation, you have longer period of restructuring and you have the new management. It is under debate whether Germany new arrangement of composition proceedings should be introduced. Companies Voluntary Arrangement (CVA) is a UK principle. It has been used in Deutsche Nickel and Scheyf Naka. It lead to a debate. Pre-opening is German specialty. There is a pre-opening proceeding in which insolvency checks the prerequisites and there is main proceedings where insolvency proceedings commence. B/w these two procedures there is a gap of three months. And why is there such long time? If you file within 24 hours for pre-opening proceedings you will have a court order. Payment of employees up to three months. Insolvency courts are keen on getting this. May 22, 2009 Assets Receivables Investories Shareholding Cash Liabilities Registered capital Capital reserves Surplus Bank debt Customer claims

Shareholders loan Intracompany loan You have to set up overindebtedness balancesheet but it is different from accounting balancesheet. It has to derived from accounting rules but there are things a bit different. For example, whether you can activate the value of company. But overindebtedness rule, that is the old rule, which was in place until 2008 but in 2011 it will come back again. Two fold approachs. First you have to set up a balancesheet. The question is you have to set up as going concern or as liquidation value. The crucial question is to prognose whether the company can go as going concern. IF such perspective is given, you shojld set up the balance hseet as going concern. IF the prognose is negative, as liquidation value. In international group, you need to consolidate the balance sheet so that you can raise the assets value. The problem is you need to file for insolvency three weeks in advance but consolidate the balance sheet may take a month. CRO- Chief Restructuring Officer. June 5, 2009 Case study (1) What does substantial mean? Substantial may indicate not 100 % obligations can be fulfilled. If 10-20 % is not fulfilled, it is OK, usually. What does the management of Holdco have to do? Consolidate the balance sheet of the group. How does it effect my overindebtness? I call my accountants to consider the situation. What is the difficulty from accounting perspective from an international group? Accounting standards vary from country to country. It is time consuming. You want to do it actually as long as possible. You try to choose accountants who work slow instead of big four accounting firms. But banks would prefer of course big four companies. The going concern prognosis for the company is 8 months then it is negative. Is it a problem? Next 24 months (???) Case Study 4(2) What are the signals of a crisis, overindebtness and illiquidity? Opco I is illiquid and over indebted how can creditors, shareholders and other stakeholders help? What will be the manager do? You identify non-core assets and sell them to create liquidity. What is the typical german approach? Good business counts himself as poor. His

balance sheet is full of silent values. What is the asset with most reserves? Real estate. Because you will write it down on annual basis. With respect to lenders? How do you approach them? What kind of subordination do we have? Simple subordination and insolvency subordination. If you subordinate shareholder loan, then it looks like a equity already. The shareholder declares to the financial creditor a subordination of his shareholder loan? Director ignored a warning from his financial officer that the company is over indebted what are the consequences? Civil and criminal liability. If equity of 50 % is blown up, what is the consequence in publicly listed companies? You need to call general meeting. You could be later delisted even. How to deal with shareholder loans and intercompany loans? It is all about subordination. Debtor has filed with incompetent court, has he complied with his duties? There are two fold procedure in Germany. What are the two steps? We have the main proceedings and pre-opening proceedings. Unforunately b/w filing and commencing a procedure sometimes up to three months. That is the reason why we have a situation of limbo. However it is the pre-opening procedure. Application is put on the table of insolvency court. The court immediate resolve freezing measures in order to protect creditors. First of all, he will appoint insolvency administrator. Because it is not main proceedings, but interim insolvency. What powers does insolvency administrator have? He can be strong or weak. If the court renders general prohibition, then the admin is strong. The legal consequences are in such a case, if the admin is backed by such prohibition, he enters into the shoes of management. If for example real estate is not sufficient to cover the liabilities, the admin is personally liable. There are two different concepts: 1. strong 2. weak admins. 1. If he enters into obligations with third parties, then they are binding. 2. if admin approve agreements, they are not binding when insolvency begins. It is quite tricky. Strong admin contract Weak admin contract Preinsolvency binding Not-binding Insolvency

Do we have often strong administrator? No. What is the downside of strong admin ? his personal liability.

Do creditors like filing for insolvency? No, because you may be in trouble if the debtor is not insolvent. Bodies: Court Administrator Debtor Creditors Creditors assembly Creditors committee In plain insolvency, there is not administrator. Who leads the insolvency procedure? In the US, courts. Administrator runs it, creditors take the decision about the going concern or liquidation. Courts govern legal issues, creditors govern business decision. Creditor assemblies can be very bulky and therefore they may delegate the power to creditors committee. June 12, 2009 What is understood by two steps procedure? Pre-opening procedure and main proceedings. Pre-opening proceedings take up to three months. There is interim insolvency administrator. The court will appoint within 24 hours administrator. If there is a prohibition not to dispose over the assets, then there will be strong administrator appointed. What happens if insolvency estate is not enough to cover the obligation? Then interim strong admin has personal liability. Now we want to wrap up about the questions. Who leads the insolvency proceedings? Insolvency managers. Who controls the insolvency procedure? The court supervise in legal sense, creditors assembly which selects creditors committee makes business decisions. Who takes the decision to liquidate or to continue ? Creditors assembly. Could the creditors of Holdco propose James Bond as invoslenvy admin? No. There is no official. It can be done inofficially. It is not foreseen in the law. What kind of creditors do you know? Insolvency creditors and Creditor of insolvency estate. .

It depends on the timing. If I enter into transaction after insolvency then I am not insolvency creditors and I will be under the support of the state. (???) How can you enforce the judgment? In Germany, there is interim step. You instruct the bailiffs. For example, I have a payment judgment and you refer to the bailiff. The bailiff will ask from what assets to enforce it. In Germany you choose your own bailiff. Prior opening After opening

There are three chapters dealing with prior and post insolvency. Performance of legal transactions started prior to opening. Can it be performed? Can the insolvency administrator withdraw? How to challenge the transaction? Avoidance rules. LEgallly, it is somehow bizarre, although insol admin runs the business, the debtor will become the owner of the asset. He takes possession, which is very important when it concerns who can enforce secured estate. What does insolvency estate comprise? What about the mortgage in China? The whole assets in Germany and worldwide attached by insol proceedings. There is hereditary building rights in Germany. In roman law, you cannot distinguish the owner of the house and land. One exception is hereditary building rights, you have the right to build a house on a land. The owner of the land and the house are not identical any more. And we had one big discussion prior reunification, whether there was private ownership. The land belonged to the state. Because of the privatization, it was transferred the owners of the property on it. What is the case if debtor disposes some assets? Such disposals are invalid. Can it be approved by insol admin? Yes it can. What if he does so? Ex tunc - . Purchaser cannot demand the execution of the contract. The admin has the right to decide. The purchaser can demand damages. He is insolvency creditor. Slides on Ranking of creditors will be skipped next time because they are easy. June 19, 2009 Well wrap up with effects of insolvency proceedings. We want to run through the questions together how they are understood. Page 81.

On Jan 1. Can the third party now demand delivery of the land? Yes. Why? It has a priority notice it is almost a land possession under German Law. Page 11. Such power of attorney affected? Yes, it is affected. It is void at the point of time of the opening of proceedings. Mandates of Anglo-saxons and Dutches power of attorneys will not be suspended or terminated with the opening of insolvency proceedings. Page 99. What are the different classes creditors? Secured creditors. Insolvency creditor. Insolvency estate ranks first insolvency creditor ranks second page 105 What is the difference b/w assignment and pledge of shares? Assignment of shares means you are already legal owner of shares. Pledge over shares requires to sell on auction. Also from liability point of view there is big difference. If assignment of shares means legal ownerships, this means holder is the shareholder and shareholders are subordinated! The court was for this reason cautious and . In German law we have simple distinction who can enforce the securities. Secured creditors can enforce securities. Page 107. What question would you ask just comparing with assigning with pledges? What is pledge over receivables? Can this be collected by insolvency admin or creditor? What is pledge over goods or shares? It is something not carefully thought about by introducing insolvency law. This can be enforced by creditors. Why is that important? First of all, creditors are losing control and they are keen on getting control if the company gets bust. The other side is costs, which has to be paid to insolvency admin and these are 4 % for determination of the assets and 5 % for the collection of enforcement. This means 9 % would be distributed. It is very burdensome amount. If you have the opportunity to enforce outside insolvency you could avoid paying this 9 %. Page 108. How can you enforce the mortgage ? Foreclose and sell it. What is another way of enforcing? To take control on receivable. (mandatory administration it is called).

For example, insolvency admin is able to give evidence which banks want to sell needed for business reasons, going concern, then insolvency admin can apply to stop secured creditor by staying the enforcing the mortgage. It can only be done only for limited period of time and there is compensation for stay of enforcement. Page 111. If holdco assigns future receivable and insolvency opened on May 1 and machines put on their way on April 1 and they were received on May 2 and the payment obligations are established on delivery of goods or in other words on May 2 payment obligations ripe. Is this payment obligation enforceable? If a right has not validly into existence prior to opening insolvency and this right can either be acquired or validly assigned and this is the position under German law. Future receivable cannot survive after opening of insolvency proceedings. You see now why from a creditors perspective. You think you have a valid assignement but after opning of insolvency they are gone. If you have a mortgage then receivables belong to the mortgage and this is an exception. It only apply to rents not to receivable. Page 107. If insolvency admin entitled to enforce the mortgage or if you have a mortgage and you dont want to go through time consuming auction then you can also enter agreement with inoslv admin and agree on commercial terms. Then purchase price received belong to creditor. Do you think insol. Admin agrees withough an incenvtive? No of course. What do you think which amount will he ask? He will ask that 9 %. Page 113. What he wants to do to run with us to give us the principles of challenging rights and give us home assignment. Under German Law one threating subject is avoidance rights of admin. They are quick specific. IT is possible you may have long suspension periods within which insol admin can challenge transaction. In some cases, transaction concluded within 10 years can be challenged. Page 124. Ten years is when you disadvantage creditors with wilful intent. So you know this company will not survive nevertheless you are taking away to valuable assets to another company. Such an action can be challenged retroacpectively within ten eyars. Also security was provided for shareholder loans and such loans can be challenged. Next basket is challenging backwards up to four years if there was a transaction without consideration, in other words, like a gift. Most demanding subject here is and htat is not yet by Supreme Court, can you imagine, you have a company on top (holdco), you have below left (company producing lights) and right (company producing mirrors). You identify that business on the right cannot survive and you identify that subsidiary of this right company can be transferred to the left company. There is no consideration within such groups. Can you challenge this transaction within four years ? A big question that not answered.

Transactions with related persons (past 2 years). Sister companies, group companies are related. The transactions within these groups can be challenged. Within last 3 and 1 months most important challenging rights. Here court will be open to confirm the challenge. June 24, 2009 130 Concongruent 3 mon 131 incongruent 3 mon 132 detrimental transaction 3 mo 134 without consideration ( ??) 4 years 135 shareholder loan 1/10 years 133 wilful disadvantage 10 years. It is more difficult in cases of willful disadvantage. In shareholder loans it can be easily determined. Case study page 113. Cash transaction 133. The rule is transaction can be challenged when it is for the disadvantage for other creditors. If it is a cash transaction, where goods are exchanged at arms lengths, then such transaction can not be challenged unless it falls willful disadvantage. Next question is what is the difference b/w congruent When the payment is not carried immediately but at a later period. It is not a cash transaction then but credit. You have to consider the time period. Goods against money and it must be in timely manner up to three weeks. What is incongruent coverage? If a loan has been granted by a bank, and there are financial coverage under the loan, and the bank is aware that the crisis is coming and at later point they required for further security. On April 1 post security for the loan. Is it congruent or incongruent coverage? Incongruent. Is there difference when you ask the security immediately or later? No, there is no difference b/w this security is identified and agreed from the beginning. As long as the security is not identified, you can challenge it within 3 months, it is incongruent. Opco secures the debt of Holdco, is it a challengable transaction? Is this transaction without consideration? What would you do if you have to check with or without consideration. You would look into the documents and ask whether Opco received consideration and what kind of consideration for providing security. The other way indicates no payment has been made, what kind of consideration you can imagine? In our example, Holdco is holding financing company, the money has been used to support subsideiries, is that a benefit? Yeah, it can be. It is not as simple as looking into the documents and interests or upfront payment. You have to look at the

whole transaction, can you identify (corporate benefit is not sufficient, it is too abstract and general, for example for the brand). If it is wilful disadvantage to the other creditors, what do you think about the case where in a business relationship with third party. Third party identified that Opco is under water, and asks for further security in the form of lorry that it noticed in ???????????????????????????????? Back to case study p 113. Would it be different counterparty had knowledge about the illiquidity? Yes of course. The knowledge must be proven. - Opco provided security for an old bank loan.challengable? It is incongruent, is it within three months period? It is. So it is challengbale. What about 15 March 2005? It is over. Now going back to the new bank loan, if it is cash transaction, it is not challengable. Crucial question is when the loan is provided. So fifteenth of April doesnt make a difference. Shareholder loan is challegable? Yes, it is for ten years challengable. Opco provided security for an old outstanding claims with its sister company on 15 April 2009 and on 15 March 2009 but it is unclear whtheth its sister company had knowledge of the illiquidtyof Opco. YOU have to always check you had knowledge or not. Also you need to know one element which reverse the burden of proof. It is the related person. It is deemed to believe, the related person has the knowledge. 138 deals with such situation.

Page 114. Who has the right to challenge? THE administrator. Creditors cant. Is there any exception to this rule? We will come to the self-administration and you will see who has the challenging rights. In principle only the insolvency administrator. If we are outside insolvency proceedings, is it possible the counterparty challenged the transaction? On what ground? Any transaction with a related person can be challenged. does it matter if the insolv. Admins.. became aware of the transaction before august 1, 2012? It is becoming time barred. Principle is here, going back to the normal time barred period which is three years. how is a transaction challenged? He files a claim with the court and the subject will be to get back what it has given away. It is action of performance and avoidance rights should be proven. If the court confirms the claim, and he will render a judgment and what it does mean for the counterclaim? Lets assume, they paid 1 mln after going his money, he has the printing machine and wants the money. Could you imagine tricky legal issue in revival of the counterclaim? Lets assume counterclaim was secured. The security has gone away. So now the insol. Admin challenged the transaction, counterclaim is brought and where is the security? It is gone. If he has transferred the car and meantime has sold the car, bad luck.

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What are the rights of the counter parties? . They have damage claim, what is the nature of damage claim? It will be served on pro rata.

Labor law. Opco has ten 10 000 employees. ON first of June insol. I sopened. What is the impact on employees? Could insolv. Admin (remember when we dealt with consequence of insolv., there were contracts which were valid but frozen, could be chosen to be performed or not) have terminiation right? The same principle is applicable to labor contract. Labor contract is still valid. Can insol. Admin. terminate the employment contracts? Yes and no. Firstly, contract is not affected. Secondly, insolv. Admin can terminate with max terminationa period of 3 motnh. Does the social protection action is applicable or not? You can terminate a contract but the question are you blocked to terminate because you have no social reasons? It is set out in Protection Act. Termination is possible under this Act. There are three social criterias. In case of sick people, you cant dismiss, if they are often sick or wrong behaviour, you can dismiss. You have to shrink the company and you identify and describe operational reasons. You must follow special social catalogue. Employees who are longer with the company can be dismissed last. If the employee wants to object, then the employee has to file an action within three weeks upon receiving termination notice. In the UK, it is liberal. In Germany and France is very strict. Insolvency money will be paid by the Fed. Agency of Labour prior to the insolvency. This is a strong argument that is used. It is one of the big benefits to the restructuring ie against English system which is easy to handle. Employees have such a protection. Agency has become which kind of creditor? Insolvency creditor. Why is that important? Why is this aid important? It guarantees the operation of the business. If you pay them, you can keep the smartest people. Nevertheless, the employee gets the money. It takes a little bit until you get money. In such a situation, insol admin will ask the bank to finance the salary until employees filed for getting their money with the Agency. So there are other modifications of the plant which allows special agreements. We can jump to subject on page 131. Insol admin identifies the non-core business, ie., you are an automotive company, one are wheels and the other are mirros. Mirrors should survive but not the wheels b/c of the competition. The question, what does selling this business unit to employees? The rule is under Civil Law, if business unit is transferred, employees should follow. It is some kind of protection. Purchasers steps into the shoes in terms of employees. DO you think in insol it is supporting provision if insol admin wants to get rid of assets? Purchasers might be interested in employees. Section 613 should be applied or not was debated a lot. This section is still applicable. Benefits which are given under insolvency law, you can easily terminate contract even such improvement will count for the purchaser. If you want to agreement with employees, consent with trade union and employees, on social plan which specific compensation amount agreed on. And there are two limits that social plan has

to provide protection up to (page 132). 1/3 whole value can be used for social plan, it is a substantial amount. On Friday we will go through Labour Law. Case Study 11. What is our next subject is inoslvny plan. What was the insolvency plan? We have mentioned insolvency plan in our first session. What are the three main proceedings? 1. Liquidation. 2. Insolvency plan. 3. Self-management. We are dealing with insolvency plan procedure? What is the plan of insolvency plan? It is adopted from Chapter 11. We have liquidation plan how to liquidate or continue the business. First, liquidate or sell of the assets. You can also identify core or non-core business and find a purchaser by way of a share deal or asset deal. Or you just restructure. You reshape the company, improve the balance sheet and get rid of a lot of obligations by providing setting up strururture for equity swaps. HWo have the initiative for insol plan? It is debtor, insol admin, crediotrs assembly can instruct to prepare the plan. How looks plan? It has two parts? A declatoray part and In the First part, there is description of the company. You want to have clear description of corporate structure and the competitors and market. The same is applicable to insol plan. Then you have the idea how the business survive. The whole issue is you can change legal position of creditors by majority of creditor groups. If the voting passes both criterias set, resolution passes. When insolvency plan becomes effective? When the court approves it. What does this mean? It will then binding on all parties. That could also mean from mortgagees position, which has a mortgage. The plan can say you cant enforce a mortgage. There might be some benefit also. Tricky question: can the plan foresee an equity swap? It is not possible under German Law. You cant change the legal position from a debtor to shareholder. What you can do is ask for consent. He will ask to read us self-administration. We have also the international insolvency code. Intenraitonal insolvency law divided into two parts (autonomous and ). Is the EU regulation on insolvency. June 26, 2009 Case Study 11 - What is an insolvency plan and what types do you know? - Who can establish an insolvency plan? Can the insolvency plan affect creditors position? Yes. - The management of Holdco has prepared an insolvency plan which was approved by the insolvency administrator, however, the creditor Bad Man objects what is his position? Yes, he

can. There is a provision. He may qualify that he is really disadvantaged. What is the position if the majority of the secured creditors object? Yes. Is there a counter strategy for the management and the insolvency administrator? -What is the legal effect of an insolvency plan? It is binding, it is like a judgment.

Case Study 12 What is self-administration? It is still exception of the rule, there are not so many selfadministration. Only in big cases it has been used. Who can apply for self-administration? Debtor. Does the self-administration affect creditors position? It doesnt. The management of Holdco has applied for self-administration however, the creditor Bad Man objects what is his position? What is the position of the Insolvency administrator? To supervise. who can challenge the transactions of the past? Custodian. Who is entitled to enforce the security for the benefit of third creditors? Debtor What is the legal effect of an self-administration? It depends if it is combined with a plan, it is like a judgment.

EXAM. We can take out EU Insolvency Regulation and English translation of German Law from the binder. 2 Hour exam. Can you combine Model for the self-administration and insolvency plan? Yes, you can. That was a little revolution in German law. That is a straight German translation. Some people say selfmanagement. So what is the essence of self-management? Insolvency administrator will act as supervisor and acts like trustee or custodian. He supervises business activities of existing administration. Such administration should receive the consent of the creditor who has requrest the opening of the insolvency proceedings. What are the pro and cons of self-administration? Pro: Management has the best knowledge. Cons: They are the people who are responsible for the collapse of the debtor. If there is no management default in insolvency, then self-administration can be established.

Page 148. Can challenge not can contest. (there is a difference b/w challenge and contest). Case study 13. Why there is three months gap ? Because of Labor Law. State Aid and labor money they are all within three months. Is there any possibility to extend the German insolvency proceedings to the UK and China? Italy recognizes the group insolvency. Which court has jurisdiction ? Germany Can the UK creditor still execute a power of attorney t oenforce a UK mortgage?Probably not anymore. POA extinguishes once insolvency starts in Germany. What is the applicable Law? It depends. Case study 13 (2) Can the German insolvency administrator stay the enforcement of the mortgagee in the UK? In the UK, it is still possible to pay taxes even after the start of insolvency but not in Germany. Who is competent for which proceedings? UK Does the EUinsVO introduce the concept of Group insolvencies? Technically, no. Page 151. Even a subsidiary can be considered as establishment, the Court in Germany opinioned. It was a misleading judgment. Ordre Public means such quality it must be a violation of important principles. Public policy is the body of principles that underpin the operation of legal systems in each state. This addresses the social, moral and economic values that tie a society together: values that vary in different cultures and change over time. CHAPTER 2 CORPORATE RESTRUCTURING Case Study 14. The group needs further liquidity and over-indebtedness is threatening. What is cash pool? Intergroup financing. It gives support for companies which need, and get support from companies which are in good financial situation.

All companies in cash pool are called debtor for external parties. Case Study 14(4) One group of us looking at the management Seniour banks Bondholders There are five working groups. I am in HoldCo management. July 3, 2009 Remember our starting case is Holdco company which is registered in Germany and acquired foreign operating companies. Finance documents follow international standards. The group needs further liquidity. The banks in such a scenario declare draw stop. In London we have distressed debt market, which is called debt wire. Companies facing financial difficulties are put on post. Distress debt traders are looking into such companies. Environment for the whole group has changed because there are newcomers, new participants. Undertakings: It doesnt allow to get more debt Negative pledges. There are pari passu clause. No change of control. If eg you want to raise money for your subsidiary, you can do it via providing equity or through joint-venture. If you want joint-venture do it, you need to contribute 50 %. If you have no change of control clause, you can get more than 50 % in joint venture. Why financial covenants are important? It is a traffic light showing if they can meet certain criterias. If you have interest cover ratio of 150 %, this means the company must have the power to serve the debt and 50 % cushion. Do you know currently financial covenant on daily spot? Long(or low?) to value. We have covered this that is the reason why German gov changed the definition of overindebtness. The fall of the price of assets, esp, in real estates, and many covenants are breached. Low to value breach (if the value of the house (mortgage) decrease although rent is regularly paid). Then we have events of defaults. If representations are breached, if covenants are breached. The worst thing is cross-default. It is a history now (page 171). It is not negotiable in the current situation. Sponsors are asked provide additional support. What are the legal issues to directors? Do directors have to comply with certain When do I have the limitation languages? In 2 cases: 1. where security providers secures own obligations. If you there is third party debt to be secured, you have to protect your share capital in

Germany. As a manager, you must ensure third party security but shouldnt put your own company at risk. If you have identified your company is in distress situation. You can ask your trading ask. You might be informed that some repayment loans are at risk. You can require repayment. It will cause the insolvency or you can ask controlled liquidation is possible. Controlled liquidation is possible in international insolvency? No. Takeover. That is probably third party to solve your problem. If you are a shareholder of the company, do you think it is a good idea? No. can it be accelerated by creditors? How can they do it? You ask the shareholder to provide further liquidity then you say you have possibility either to liquidate or to transfer to a trustee and we start takeover. Out of court composition. England has such composition, Germany doesnt have any more. Before you decide which route to follow, you have to answer : Pre-Restructuring Period (6) - Is a consensus solution possible (5 Ws) ? - What is the liquidity need (fresh money)? - Who are the players? You need to know the counterparts. If you have identified the players, you have to identify from management point of view - What are the needed majority quorums? - What is the value of the assets? You must have an idea the value of an asset if you provide new money. - Who pays the bill? Why does creditor have to pay a bill? Because of subordination. You can probably lift up again. There are a lot of discussion how much value is lost in restructuring. But insolvency will destroy value that is for sure. Therefore restructuring is better way. Even if restructuring takes one or two years. If you know Kirch, a big multimedia company in Munich, which filed for insolvency in 2006 and it is still going. If not, consider the alternatives. controlled liquidation of cash burning entities. (control liquidation is liquidation without insolvency procedure. ) out of court compositions ? enforcement of secuirity triggers collapse of the group insolvency of certain companies may cause insolvency of the whole group due to cash pool and intercompany relations (melt down risk) pre-packs and possible cram down concepts page 183. From commercial point of view, this shows who is in money and who out money. If we are talking about waiver, who do you ask first? What is the issue with bondholders? They are skeptic about the prospect. You need to first identify if it is private placement or public offer. Sometimes pension funds are bondholders. Can we do equity swap by majority vote? You cant do it. It is a public discussion at the moment if it is not in contradiction with EU law. UK has such a possibility.

Standstill Agreement: credit lines will be frozen. Credit exposure will not be increased. Creditor A has provided 10 mln, 8 mln is drawn, does that mean you cant draw more than 8 mln? Just 8 mln. What does it mean for the company? They have less liquidity. It is the protection of banks, on other hand, impact of the group. Do you know what is happening with swaps? At least, in the UK and China. In Germany they are taking view, they are more careful. Swaps are hedging instruments which hedge interest rate or currency exchange rate. Creditors are worried because of the risks rising out of swaps in distress situations because there might not be fixed or regular income that swaps was based.

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Page 186. That is always start of restructuring, identify interest, value of the company. First is to enter standstill and then enter into credit agreement. Who is providing credit agreement ? Probably the same creditors. Can there be conflict b/w new and old creditors? Yes, new creditors can be superpuper creditors. It can only be done on contractual basis (not by operation of law) in Germany. Legal in rem can not be changed. New incomers can not touch already pledged assets. IF the time b/w standstill and restructuring is too long and if you need immediately liquidity, you can use bridge finances. Restructuring loan then refunds bridge loan. Next time we go through the questions.

What are the signs for a up-coming restructuring? Who are the mains stakeholders for a restructuring? What are stakeholders reactions of a distressed situation? why are finance documents of such an importance? Case Study 14(5) - what are the challenges from an international groups perspective? - Where is COMI? - Is a migration of Holdco possible? - What are the stakeholders motivation for a restructuring? - What is meant by - Business restructuring and what are the adequate tools? - Balance sheet restructuring and what are the adequate tools? -Standstill and how does it help? -Waiver and how does it help? Case Study 14 (5) Subordination and how does it help? Debt-Equity Swap and how does it help? Intercreditor/Pooling Agreement