Lending in times of crisis – restructuring concepts and monitoring obligations pursuant to BTO 1.2.5 MaRisk

The economic consequences of the Corona crisis, inflation, increased energy prices and continuing supply bottlenecks are having a considerable impact on companies in Germany. Public support measures have had an effect and - until now - saved credit institutions from a flood of non-performing loans (NPL). The need for financing and loans, however, is high, as many distressed companies are dependent on third-party funds for restructuring purposes and in order to avoid insolvency.

Due to increased credit risks, credit institutions are more cautious in granting loans. This is imperative so that the companies to be financed can survive in a challenging market environment.

Requirement of a restructuring concept

Statutory provisions oblige credit institutions to assess credit risks and provide for different stages of loan processing. Pursuant to BTO 1.2.5 para. 4 of the minimum requirements for risk management (Mindestanforderungen an das Risikomanagement, abbreviated to MaRisk) an institution considering accompanying a restructuring must have the borrower submit a restructuring concept to assess the borrower’s ability to be restructured and, on this basis, make its own judgement as to whether the intended restructuring can be achieved.

In older decisions of the Federal Supreme Court (Bundesgerichtshof, abbreviated to BGH), the aforementioned provision was interpreted as requiring a restructuring concept if the borrower is in a stage of insolvency maturity (Stadium der Insolvenzreife). Institutions should already require restructuring concepts when a borrower is in a crisis stage, because in a recent decision (BGH, judgement of 12 April 2016 - XI ZR 305/14), the BGH expressly left open whether the stage of insolvency maturity means the existence of a reason for opening insolvency proceedings pursuant to sections 17, 19 of the German Insolvency Code (Insolvenzordnung, abbreviated to InsO) or whether a need for restructuring may already exist at an earlier stage.

Minimum requirements for restructuring concepts

The scope of any restructuring concept has to be determined in each individual case. According to settled case law, a sufficient concept has been established if there is a coherent concept that is based on the actual circumstances, has a serious prospect of success and includes the settlement of all liabilities. In particular, the following issues must be covered in the restructuring concept:

• Initial economic situation of the borrower, e.g. legal situation, company purpose, markets, products, description of internal organisation, information on the technical status of production processes and investment focus;
• status of the borrower’s economic condition, such as liquidity, assets and earnings;
• description of the causes that led to the borrower’s crisis; and
• description of the measures that are to contribute to overcoming the crisis, possibly with the support of model calculations and on the basis of a timetable for the steps of restructuring.

By submission of a restructuring concept prepared in accordance with the widely accepted IDW S6 standard, lenders fulfil the regulatory and supervisory requirements under MaRisk in case of crisis and restructuring of their client. The BGH requires a positive forecast of business-continuance in the restructuring concept covering a period of three to five years (depending, inter alia, on the industry, the business model or the depth of the crisis). This applies to every business concept that is meant to prove a successful restructuring.

Possible legal consequences of breaches by institutes

The requirement of a restructuring concept is indispensable for credit institutions if the granting of new loans is intended in times of crisis. Failure to obtain a restructuring concept despite the existence of a need for restructuring within the meaning of BTO 1.2.5 para. 4 MaRisk may have the following legal consequences:

• invalidity due to violation of bonos mores (Sittenwidrigkeit) by way of granting credit, section 138 of the German Civil Code (Bürgerliches Gesetzbuch, abbreviated by BGB);
• claims for damages from third party creditors, section 826 BGB;
• insolvency challenge (Insolvenzanfechtung), section 133 InsO; and
• criminal liability - (complicity in) delay in filing for insolvency (Insolvenzverschleppung), section 15a Abs. 4 InsO.

Information and monitoring obligations of the institutions

The submission of the restructuring concept and the subsequent decision of the credit institutions to grant a loan despite the crisis stage of the client fulfil the obligations of the institutions only at the outset. From then on, the implementation of the restructuring concept must be continuously monitored, BTO 1.2.5 para. 5 MaRisk.

Scope of the monitoring obligations

First of all, credit institutions have to review whether the client does in fact initiate the announced and planned restructuring measures. But also as the restructuring progresses, the credit institution involved is obliged to monitor the implementation on a regular basis. This can be done, amongst others, by checking agreed schedules or schedules provided for in the restructuring concept or by regular comparison with the targeted performance, in doing so institutions may consult with experts.

Deviations from the original planning must be recorded and analysed in terms of their causes and effects. The findings gained through the implementation control must be taken into account by updating and adapting the restructuring concept.

If it becomes apparent that the restructuring concept will not lead to a restructuring of the client, the restructuring measures must be discontinued if an adjustment of the restructuring concept does not have any prospect of success. Not only the initiation of a futile restructuring attempt, but also its continuation despite the futility of the project is associated with putting third-party creditors at risk. The credit institution is therefore obliged to monitor the situation on an ongoing basis in its own interest and also in the interest of the third-party creditors (for possible legal consequences see above).

Ongoing reporting obligations to be agreed in loan agreements

Pursuant to BTO 1.2.5 para. 6 sentence 1 MaRisk, the executive management (Geschäftsleitung) of credit institutions must be regularly informed about the status of the restructuring in the case of significant exposures.

In the relevant loan documentation, borrowers and, if applicable, their restructuring advisors should be obliged, inter alia, to regularly provide detailed information to the lenders regarding compliance with and implementation of the restructuring concept. This also applies to extraordinary events that may have a significant impact on the borrower’s restructuring. Furthermore, the restructuring concept and compliance issues should become essential elements that are integrated into the loan documentation.

In view of the possible liability risks, legal advice should be sought in connection with the contractual documentation.