Blockchain technology and smart contracts could revolutionise restructuring practice: from automated escrow accounts to transparent creditor voting and programmable distribution waterfalls. An analysis of opportunities, legal frameworks, and practical limitations.
Restructuring Meets Blockchain: More Than Just Hype?
Restructuring practice has traditionally been characterised by a high degree of manual coordination, paperwork, and trust issues between the parties involved. Creditors distrust the debtor, the debtor fears the creditors, and insolvency administrators, custodians, and advisors mediate in between. What if technology could solve some of these trust issues?
Smart contracts — self-executing contracts based on blockchain technology — promise exactly that: the automated, transparent, and tamper-proof execution of contractual relationships. In restructuring, they could be deployed from escrow accounts through creditor voting to the distribution of restructuring proceeds. But how far has the technology actually come, and what does German law say about it?
What Are Smart Contracts?
In technical terms, a smart contract is a computer programme stored on a blockchain that executes automatically when predefined conditions are met. The Fraunhofer Institute for Secure Information Technology defines smart contracts as programmes that technically map contractual clauses and automatically monitor and enforce their fulfilment.
Crucially, a smart contract is not a contract in the legal sense, but the technical implementation of a contractual agreement. The legal foundation remains the underlying contract.
Legal Classification under German Law
Declarations of Intent and Contract Formation (Sections 145 ff. BGB)
Under German law, a contract is formed through two matching declarations of intent — offer (Section 145 BGB) and acceptance (Section 147 BGB). The central question is: can automated declarations by a smart contract constitute valid declarations of intent?
According to the prevailing opinion in legal scholarship, this is to be answered in the affirmative in principle. An automated declaration is merely the product of parameter input by a human being and thus an expression of at least a generalised human will. Legal transactions concluded through automated declarations of intent are generally recognised as being contestable on the relevant grounds.
Limits of Freedom of Form
However, important restrictions apply: smart contracts are suitable only for informal legal transactions. Where the law prescribes written form (Section 126 BGB), notarial authentication (Section 128 BGB), or notarial certification, a smart contract cannot replace the statutory form. This concerns, for example:
- Real estate transactions (Section 311b BGB)
- Articles of association of certain legal forms
- Certain corporate law declarations
The Notary's Advisory and Warning Function
The Ecovis analysis on smart contracts emphasises that the notary's advisory, counselling, and warning function cannot be replaced by automated processes. In restructuring practice, where far-reaching dispositions of assets are frequently made, this is a relevant limitation.
Application Scenarios in Restructuring
1. Automated Escrow Accounts
One of the most obvious use cases is the automated escrow account. In restructuring, funds are regularly held in trust — for example, purchase price payments in transferring restructurings or restructuring contributions from creditors.
A smart contract could assume this function:
- Deposit: The buyer transfers the purchase price to the smart contract
- Condition verification: The smart contract automatically checks whether the contractually agreed conditions are met (e.g. registration in the commercial register, antitrust authority approval)
- Disbursement: Upon fulfilment of conditions, payment is automatically made to the seller or the insolvency estate
The advantage: no delays from manual checks, no disputes over release conditions, full transparency for all parties involved.
2. Transparent Creditor Voting
Voting on a restructuring plan under the StaRUG or an insolvency plan under Sections 217 ff. InsO is a central element of every restructuring procedure. Smart contracts could fundamentally change the voting process:
- Identity verification: Blockchain-based identification of creditors entitled to vote
- Voting rights weighting: Automatic calculation of voting rights by claim amount and group membership
- Tamper-proofing: Immutable documentation of every vote cast
- Real-time evaluation: Immediate determination of results without manual counting
Research on blockchain-based governance and decentralised voting shows that such systems are already technically feasible, although the legal integration into existing procedural rules still raises significant questions.
3. Programmable Distribution Waterfalls
In insolvency, the distribution of the estate follows a legally prescribed priority: estate liabilities, preferential claims, ordinary insolvency claims, subordinated claims. This distribution waterfall could be programmed as a smart contract:
- Automatic priority check: The smart contract assigns each registered claim to the correct priority level
- Quota calculation: Where the estate is insufficient, the smart contract automatically calculates the distribution quotas
- Sequential distribution: Payments are made automatically in the legally prescribed order
4. Monitoring of Restructuring Measures
Smart contracts could also be used for the ongoing monitoring of restructuring agreements. For example:
- Automatic verification of compliance with agreed financial covenants
- Immediate notification to creditors upon covenant breaches
- Automatic adjustment of interest rates or repayment schedules upon the occurrence of predefined trigger events
The EU DLT Pilot Regime as a Regulatory Framework
Regulation (EU) 2022/858 on a pilot regime for market infrastructures based on distributed ledger technology has created a regulatory framework for the use of DLT in financial markets since March 2023. ESMA oversees the implementation and gathers experience.
While the DLT Pilot Regime is primarily aimed at financial market infrastructures, the lessons learned are also relevant for restructuring practice:
- Tokenisation of claims: Creditor claims could be represented as tokens on a blockchain, facilitating trading and transfer
- Regulatory acceptance: With the Pilot Regime, the EU signals fundamental openness towards DLT-based solutions in regulated areas
- Interoperability: The experience gathered in the Pilot Regime on interoperability between different DLT systems is relevant for restructuring
The World Economic Forum forecasts that blockchain technology will fundamentally transform the financial system. The EU-wide European Blockchain Services Infrastructure (EBSI) forms an important building block of public digital infrastructure.
Practical Challenges and Limitations
Technical Complexity
Programming smart contracts requires specialised expertise. Errors in the code can lead to irreversible execution errors — with potentially significant economic consequences. In restructuring, where the survival of companies and the satisfaction of creditors are at stake, such risks are particularly critical.
The Oracle Problem
Smart contracts can only respond to data available to them. However, many restructuring-relevant pieces of information lie outside the blockchain (so-called off-chain data): commercial register entries, antitrust authority approvals, expert opinions. The reliable feeding of this data through so-called oracles presents a technical and legal challenge.
Lack of Flexibility
Restructuring proceedings frequently require flexibility and adaptability. Unexpected developments — a new investor, an amendment to the restructuring plan, changed economic conditions — require swift adjustments. Smart contracts are inherently rigid: what is programmed is executed. The subsequent modification of a smart contract is technically possible but complex and can undermine the trust of the parties involved.
Legal Uncertainty
Despite the fundamental recognition of automated declarations of intent, significant legal uncertainties remain. CMS points out that numerous detailed questions remain unresolved: who is liable for defective execution? How does a smart contract relate to insolvency avoidance claims (Sections 129 ff. InsO)? Can the automatic execution of a smart contract violate insolvency law enforcement protection?
Future Perspective: Hybrid Solutions as the Best Path Forward
The complete automation of restructuring proceedings through smart contracts is still a distant prospect. More realistic and practical are hybrid solutions that deploy smart contract technology selectively for individual, clearly defined process steps:
- Phase 1: Use for escrow accounts and simple payment processing
- Phase 2: Blockchain-based creditor identification and voting
- Phase 3: Programmable distribution mechanisms for standardised case constellations
Human decision-making, legal assessment, and notarial involvement remain indispensable. The smart contract does not replace the restructuring advisor — it becomes their digital tool.
Conclusion: Technology as a Catalyst for Restructuring Modernisation
Smart contracts have the potential to make central processes in restructuring more efficient, more transparent, and more trustworthy. The technological foundations are in place, the regulatory framework is evolving, and initial application scenarios are emerging.
At the same time, it would be misguided to succumb to technological euphoria. Restructuring is a highly complex, people-centred process in which negotiation skills, legal expertise, and commercial understanding are decisive. Smart contracts can support this process, but not replace it.
The future lies in the intelligent combination of proven restructuring expertise with innovative technology. Those who engage with these possibilities early will gain a competitive advantage.
At compleneo, we support you in designing innovative restructuring solutions and integrating new technologies into the restructuring process. Get in touch with us.
