In the context of German restructuring, bridge loans (Überbrückungskredite) are loans that are granted to financially distressed companies until a restructuring plan is formulated in order to avoid the company’s insolvency. In most cases, such loans are granted for a limited timeframe. After the restructuring plan has been finalized, renegotiations are usually required, in particular between the company, the lender and the company’s other creditors.
On 7 March 2017, the German Federal Supreme Court (Bundesgerichtshof, Az. XI ZR 571/15), made an important decision on the validity of the duration of bridge loans and their validity in a pre-insolvency restructuring scenario. In its decision, the Bundesgerichtshof decided that a lack of enforceability cannot be assumed merely from the duration of a bridge loan. Rather, the court in charge of the legal proceedings must undertake a comprehensive overall evaluation of the facts of each case.
The reason for that decision was that on 4 November 2015, the Court of Appeal (24th Civil Division of the Chamber Court in Berlin-Schöneberg) expressed a contradictory opinion concerning the duration of bridge loans, suggesting that a duration of three weeks or three months might be considered acceptable.
Under German law, parties may file a complaint against a decision of an appeal court (in this case the higher regional court) to refuse to allow an appeal to be made against its decision to the Bundesgerichtshof. The Bundesgerichtshof agreed with the Court of Appeal that there should be no appeal against the Court of Appeal judgment of 4 November 2015, because the case was of no fundamental significance and a decision of the Bundesgerichtshof as the juridical appeal court was not required for the further development of the civil law and the assurance of a uniform jurisprudence in this area. This was the case even though the Court of Appeal had incorrectly interpreted the relevant sections of the Insolvency Code (Insolvenzordnung), stating that such sections set out the permissible duration of a bridge loan.
The boundary between what is still allowed for a lender when granting and securing its loan and that which is unbearable for the public and – therefore morally inadmissible – cannot be drawn with the aid of rigid deadlines. Furthermore, it did not matter that the loan was not provided as a bridge loan to fund a short-term liquidity gap, but was granted to ensure the survival of these companies in the medium term until the completion of projects that had been initiated. The verdict of the Bundesgerichtshof cannot be appealed under German law.
In its decision, the Bundesgerichtshof has implicitly endorsed the possibility of granting bridge loans in a pre-insolvency scenario. If the Bundesgerichtshof had ruled in line with the Court of Appeal judgement, the granting of bridge loans would have become impossible, because three weeks or even three month can easily pass before the restructuring plan of the distressed debtor is finalised. Furthermore, the court’s opinion is in line with the draft EU Business Insolvency Directive, which states that temporary financing may be necessary until a restructuring is completed. This also endorses the concept of bridge loans.
However, it remains to be seen if and to what extent this Bundesgerichtshof decision on the criteria of the pre-insolvency bridge loans may have a juridical impact on loans provided after the opening of insolvency proceedings.