Restructuring mediation

in the corporate crisis

in times of the COVID-19 epidemic

Guest article by Uwe Kassing

Hamburg – Leipzig – October 2020

Legal scholar, Ass. jur,
Specialist lawyer for insolvency law (DAA),
Certified mediator (DAA)
Reorganisation mediation,
Certified ESUG consultant (D.I.A.I.)

A. Restructuring mediation – the mediation approach for (insolvency) threatened companies

The Restructuring mediation is a mediation approach that focuses on the special circumstances of a corporate crisis and differs in terms of complexity and duration from a typical mediation case (as a 2-party conflict) deviates.

A corporate crisis regularly creates internal and external conflict situations that provide an opportunity to resolve them with the help of mediation. In the context of overcoming the crisis situation, if the entrepreneur realises this in good time, the path of restructuring is taken. This regularly means that decisions are made in an exceptional situation under great time pressure and physical and psychological stress for those involved. This situation is currently being exacerbated by the effects of the COVID-19 pandemic, which is placing an additional burden on companies in several respects.

The – necessary internal structural changes, also due to the COVID-19 pandemic, usually in all areas of the company, must also be implemented in the face of resistance, which often arises from the change in habits and traditional business processes alone (keyword: digitalisation). For example, those involved are required to make financial concessions or personal contributions to changes in work processes to support the reorganisation. This leads to internal conflicts, which must not remain unresolved if the implementation of the reorganisation approaches is to be successful in the long term.

As soon as the implementation of internal reorganisation approaches also requires the involvement of the company's external (contractual) partners, the entrepreneur's/company's personal and economic network of relationships must be Remediation contributions to negotiate. In most cases, this essentially involves changing the external financing structures and the measures derived from this. For example, credit institutions, suppliers, service providers and landlords are approached in order to achieve financial support for the reorganisation process, typically by increasing the financing volume, changing payment terms or agreeing (partial) waivers.

If the company is already in a crisis stage, which affects the earnings and liquidity situation in such a way that a situation close to insolvency arises, this typically results in a External distribution conflict between the company and its creditors. The pressure on the company management to act increases in particular when the Duties of the executive bodies of corporations that the deadlines for filing for insolvency must be observed if there are grounds for insolvency (Sections 15a, 17, 19 InsO).

B. The avoidance of insolvency through Restructuring mediation

Against the backdrop of the COVID-19 pandemic, which has been ongoing for months, it is important for corporations although the obligation to file for insolvency is temporarily suspended (pursuant to COVInsAG – in the event of insolvency pursuant to Section 17 InsO until 30 September 2020; in the event of over-indebtedness pursuant to Section 19 InsO until 31 December 2020), but this does not change the fact that the companies concerned should actively deal with the crisis situation in order to avoid court insolvency proceedings.

The COVID-19 epizootic, Increasing threat of insolvency for companies has already become known nationwide ( Galeria Kaufhof/ Karstadt, Condor, Esprit ). According to experts, this should lead to a "Insolvency wave" This will also not be avoidable by the countermeasures adopted by the federal government, in particular the renewed extension of the short-time working allowance and the temporary suspension of the deadline for filing for insolvency. This measure would only postpone the otherwise necessary filing for insolvency. "Zombie company" the talk (see FOCUS online, at www.focus.de, dated 19 August 2020, "Up to 800,000 zombie companies threaten economic situation in Germany").

This is the starting point for meaningful "mediation in a corporate crisis", a topic that I have been dealing with intensively in practice as a mediator under the "restructuring mediation" approach and as an author for years (see most recently Handbuch Mediation ed. Haft/ von Schlieffen, 3rd edition, Munich 2016).

A corporate crisis contains a "bouquet" of potential conflicts that are amenable to mediation. To avoid lengthy explanations, I will list the Areas of conflict that are currently in the foreground in practice (could) only in brief:

• Ordering of short-time work and internal conflicts between employee groups due to "discrimination" in the ordering and organisation of working hours
• Disputes between companies as suppliers and/or customers regarding the supply and acceptance of products (disruption of contractual relationships)
• Critical financing discussions with banks (negotiations on new loans/ prolongations in the event of uncertainty regarding forecast decisions – planning uncertainty due to COVID-19 – industry-specific)

In these exemplary conflict situations, mediation offers the opportunity to work out a solution in good time so that the risks of impending insolvency can be defused or avoided.

Ailing companies should use the postponement of a reorganisation attempt with the help of a ReorganisationMediators  utilise.

C. The Restructuring mediation in the Restructuring process (Implementation of the EU – Directive)

The EU Commission is also pursuing a pre-insolvency and mediative reorganisation approach in its Restructuring Directive on a preventive restructuring procedures

("Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 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 and amending Directive (EU) 2017/1132 'Directive on restructuring and insolvency'"),

which the Federal Ministry of Justice is currently working hard to transpose into national law, also against the background of the companies threatened by the COVID-19 epidemic.

In the September 2020 the Government draft of a law on the further development of reorganisation and insolvency law (SanInsFoG) has been published. There, in the so-called "Corporate Stabilisation and Restructuring Act (StaRUG)" a procedure of the "Remodelling moderation" as a possible variant for the realisation of a  restructuring process. However, mediation approaches are not yet bindingly defined as a requirement profile for a mediator to be appointed. Reorganisation moderator presented. In addition, the Reorganisation facilitator  appointed by the court and is subject to a duty to report to the court and to supervision by the court.

The principles of mediation, in particular  the joint appointment of a mediator by a decision of the parties. Ultimately, this also represents an encroachment on creditor autonomy and an encroachment on the freedom of choice for a mediator between the parties, as the court, according to the structure of the law, has to take both the Selection decision of the reorganisation moderator as well as the Dismissal decision meets. This will be one of the reasons why the term Remodelling moderation instead of the term Restructuring mediation was chosen by the legislator. If the law is passed in its current form, the opportunity to implement a creditor-autonomous, cost-effective and efficient procedure of Restructuring mediation wasted.

Nevertheless, it can already be assumed that a personal Mediation expertise of the Restructuring officer and one Reorganisation moderator/ – moderator will be absolutely necessary, especially since it is to be an independent person who will ensure the fulfilment of the restructuring task of the company by means of the proposal of a restructuring plan to be submitted by him. Restructuring plan impartial must be promoted. In terms of its content, the restructuring plan must protect the equal interests of all parties involved in the proceedings and not unilaterally represent the interests of the creditors. In this respect, the function of the restructuring officer in preventive restructuring proceedings differs significantly from that of a controlling administrator in so-called self-administration proceedings (pursuant to ESUG – Sections 270, 270a, 270b InsO) and that of an insolvency administrator in standard insolvency proceedings. Due to the liability function of substantive insolvency law, the latter are primarily responsible for safeguarding the interests of (aggrieved) creditors in court proceedings.

The role of the restructuring officer differs significantly from the role of a controlling administrator in self-administration proceedings and from the role of an insolvency administrator in standard insolvency proceedings. 

In the preventive restructuring procedures For example, special rights are provided for the company concerned in such a way that only certain creditors can be included in the reorganisation measures. This can also include a Extrajudicial restructuring moratorium be agreed. In this phase, it is particularly important to familiarise the parties involved in the conflict with a specific Communication concept to the negotiating table. In order to save the company, the conflicting parties must approach each other. This is where the Restructuring mediationwhich everyone must voluntarily commit to. The Reorganisation mediator can help the parties to the conflict to overcome reservations and resolve hardened positions with special communication and methodological skills.

Selective mediative support, e.g. in internal labour law conflicts or conflicts within supply or customer relationships that stand in the way of an overall solution to overcome a corporate crisis, can also be very helpful.

Rescuing the company quickly can benefit both parties more in the long term than protracted insolvency proceedings with an uncertain outcome. With this realisation, the parties involved in the conflict have a real chance of finding a restructuring solution while at the same time balancing their interests. It is to be hoped that the legislator will revise the current draft on the instrument of reorganisation moderation accordingly.

Leipzig, 13 October 2020

Uwe Kassing

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