May 29 (Bloomberg) -- When German Economy Minister Karl- Theodor zu Guttenberg this week said that an “orderly insolvency” may be the best rescue option for General Motors Corp.’s Opel unit, he drew fire from government colleagues.

Peter Struck, parliamentary leader of the Social Democratic Party, a partner in Germany’s coalition government, said Guttenberg’s idea is “very strange. Everybody knows what insolvency in Germany means: A company is bust and goes downhill.”

The debate over the best way to rescue the carmaker reflects Germany’s skepticism about using insolvency to revamp companies. The controversy comes as GM and Germany struggle to reach a deal to rescue the Ruesselsheim, Germany-based unit.

While Germany’s insolvency laws were overhauled 10 years ago to help distressed companies execute a turnaround, the procedure is often ignored, said Christoph Paulus, dean of the law faculty of Berlin’s Humboldt University.

“Germany introduced an instrument that is basically like the U.S. Chapter 11 proceedings and used in the right way you can do miracles,” said Paulus in an interview. “It’s a bit depressing to see that this hasn’t yet reached the level of common knowledge or at least not the level of knowledge among the decision makers.”

Merkel, Labor Unions

Chancellor Angela Merkel, seeking re-election on Sept. 27, is under pressure from lawmakers and labor unions to save 25,000 German jobs at Opel. The German government negotiated in Berlin until the early morning yesterday, narrowing bidders for the unit to Fiat SpA and Magna International Inc.. Negotiations which stalled over the financial backing that the U.S. carmaker is seeking for Opel are scheduled to resume today.

Merkel belongs to the Christian Democratic Union. Guttenberg is a member of the Christian Social Union, her Bavarian allies.

While Guttenberg has said that a “planned insolvency” remains an option, Magna Chairman Frank Stronach told Bloomberg Television yesterday that it would be “irresponsible” to force Opel into insolvency. He said bankruptcy would make Opel a “dead horse.” Merkel told Der Spiegel magazine today that the government is also trying to avoid an insolvency case.

Bankruptcy “still carries a stigma, wrongly inferring that it will necessarily kill everything,” said Detlef Specovius, a partner specializing in insolvency at law firm Schultze & Braun. “In Opel’s case, a well-planed and well-structured insolvency may even bring about better solutions than a rush job involving vast amounts of state guarantees.”

SinnLeffers

Specovius advised SinnLeffers GmbH, a German fashion retailer, to file for insolvency in August and to use Germany’s insolvency-plan proceedings, the country’s equivalent of U.S. Chapter 11. The company was restructured and came out of bankruptcy in March.

Company management can stay in control during the proceedings, much like the “debtor-in-possession” model in the U.S. That approach was used to reorganize drugstore Ihr Platz GmbH, which was restructured in eight months. Berlin-based Herlitz AG, one of the first publicly traded companies to use the revised law, saw its court-supervised reorganization completed in about six weeks.

Detroit-based GM will file for bankruptcy in the U.S. on June 1, according to people familiar with the situation.

Wages, Pensions

German companies that file for insolvency can get a government subsidy that covers wage costs for up to three months. Pension obligations can be transferred to a rescue fund, helping them get rid of what’s often an onerous liability.

If Opel files for insolvency, other German businesses would have to contribute to cover the carmaker’s pension obligations of 4.7 billion euros ($6.6 billion), Focus magazinereported, citing Martin Hoppenrath, head of the Mutual Pension Assurance Association, which runs the fund.

One reason the new law hasn’t been used widely in Germany is the country doesn’t have centralized bankruptcy courts, said Paulus.

Many judges aren’t insolvency specialists and haven’t become familiar with the new procedure. Insolvency lawyers are also reluctant to use the process because it means more work and a greater risk of liability, Paulus said.

A centralized bankruptcy court with specialized judges would help make Germany more attractive for turnarounds, said Heinz Vallender, the chief insolvency judge in Cologne.

“The Opel could be the prime litmus test for the insolvency plan proceeding,” Vallender said. “If we can show that you can restructure such a company under our laws, it would boost Germany’s reputation in the international arena.”

No ‘Cure-All’

“You have to look at the options rationally: Is it less costly do to it in court or is it better to stay out of court?” said Rolf Rattunde, an insolvency lawyer with Berlin-based Leonhardt Westhelle & Partner, which handled the Herlitz case. “Insolvency isn’t a cure-all, but rather a painful, if not potentially life-threatening, treatment.”

While an insolvency at the automaker may dissuade potential car buyers who worry that they will lose service warranties, Germany shouldn’t rule out the option, said Rattunde.

“If you rule out the insolvency option, you pretty much raise the price you have to pay to convince any investor to step in,” said Rattunde. “If you tell them you won’t let Opel go bankrupt, they can just lean back and ask for more.”

To contact the reporter on this story: Karin Matussek in Berlin at kmatussek@bloomberg.net

Last Updated: May 29, 2009 09:44 EDT