22.01.2021 – Up to now, German law has not provided a unified framework for the legally secure restructuring of economically distressed companies beyond common insolvency proceedings. Restructuring solutions could indeed be achieved by extensive negotiations, possibly in combination with elements of corporate law. In most cases, however, such a solution failed due the resistance of individual creditors. In the past, one alternative was therefore to draw up an insolvency plan, which was prepared in the course of insolvency proceedings. However, insolvency proceedings suffer from two major disadvantages: besides the significant direct costs of such proceedings, there is also the risk of reputational damage, which is often associated with insolvency.
The preventive restructuring framework offers the opportunity for sustainable restructuring outside of insolvency proceedings.
Pursuant to the Act on the Further Development of Restructuring and Insolvency Law (Gesetz zur Fortentwicklung des Sanierungs- und Insolvenzrechts – "SanInsFoG"), which became effective on January 1, 2021, and the newly created Corporate Stabilization and Restructuring Act (Unternehmensstabilisierungs- und Restrukturierungsgesetz – "StaRUG"), the legislator now offers affected companies a preventive approach and intends to harmonize and complete the restructuring and reorganization law. The Act implements the Directive on the Preventive Restructuring Framework of June 20, 2019 (Directive 2019/1023) and follows directly on the COVID-19 Insolvency Suspension Act.
What is the advantage of the new law for the company concerned?
The StaRUG enables restructuring without public disclosure of the company's economic difficulties.
Central element of the legislation is the preventive character of restructuring, which can now be carried out within a legal framework without the corresponding public awareness. However, if a quick solution is not possible, both the court and a restructuring officer can be called in. The transitions here are fluid and create not only clarity but also scope for all parties involved.
In which case can the company use the possibilities of the StaRUG?
Primarily for a significant and effective improvement of the various proceedings, including the debtor-in-possession management under the insolvency law, the assumptions have been tightened. Distinguishing them from the insolvency proceedings, the instruments of the new stabilization and restructuring framework created by the StaRUG can only be used as long as the company is merely imminent to insolvency, Sec. 18 German Insolvency Code (Insolvenzordnung, “InsO”). As soon as the company becomes insolvent, Sec. 17 InsO, or overindebted, Sec. 19 InsO, the remaining option is insolvency proceedings.
Early measures to counteract over-indebtedness ensure the possibility and success of an out-of-court restructuring.
It is to be expected, that in practice there will be an increased need to first eliminate over-indebtedness that has already occurred by known upstream restructuring measures, in particular by the shareholders, as to open up the possibility of pre-insolvency restructuring in accordance with the StaRUG. By extending the obligation to file for insolvency in the event of over-indebtedness to 6 weeks (Sec. 15a para. 1 sentence 2 InsO), the legislator has also created the necessary basis for this.
What is the difference between imminent insolvency and over-indebtedness?
The amendment to the law creates more legal certainty through a clearer distinction between imminent insolvency and over-indebtedness.
Regarding the rather blurred distinction between over-indebtedness and imminent insolvency, the legislator has now clarified matters by the new provisions of the StaRUG. Previously, there was an overlap between this two categories because the going concern forecast required to assess over-indebtedness which is nothing else than a solvency forecast containing a regularly assumption of a forecast period of two years or the current and the following financial year by case law. Now, over-indebtedness is based on a forecast period of 12 months (Sec. 19 para. 2 sentence 1 InsO), while the forecast period for imminent insolvency is set to the next 24 months (Sec. 18 para. 2 sentence 2 InsO). Therefore, if the company is facing imminent insolvency in the next 12 months, the company could be considered immediately over-indebted, which precludes the usage of the possibilities of the StaRUG.
Does the StaRUG release from the obligation to file for insolvency?
Notification of the restructuring project to the restructuring court temporarily suspends the obligation to file for insolvency.
Should the company undertake reorganization or restructuring measures, it nevertheless does not protect the company from becoming insolvent. In any case, the obligation to file for insolvency is furthermore to be noted by the management. However, the obligation to file for insolvency will be suspended pursuant to Sec. 42 para. 1 StaRUG if and as long as the restructuring matter is pending, which, though, requires notification of the restructuring project to the respective court, Sec. 31 StaRUG. In return, the managing director is obliged to report the occurrence of insolvency or overindebtedness without delay. Failure to do so will result in prosecution.
What leeway does the StaRUG offer the affected companies?
The StaRUG does not provide companies a rigid process, but rather a stabilization and restructuring framework with various instruments. However, the concrete organizational and content-related design is at the discretion of the company, thus restructuring measures can ultimately also be carried out entirely without the involvement of the competent restructuring court or a restructuring advisor appointed by the court. However, the risk of errors within the restructuring plan or the process then remains within the company. In this respect, it should be decided on a case-by-case basis whether and which of the newly created stabilization and restructuring instruments should be utilized with the involvement of the court. According to Sec. 29 para. 2 StaRUG, this includes
- the preliminary judicial review of matters significant to the process of plan reconciliation;
- the implementation of the judicial plan coordination procedure;
- the court confirmation of the restructuring plan and
- the court’s order of stabilization measures.
What does a court order of stabilisation measures mean?
Stabilisation orders can prevent blockade actions by individual creditors.
The so-called stabilization orders pursuant to Sec. 49 StaRUG can be of particular importance for the continuation of the company and the success of the restructuring. These orders can temporarily block the enforcement of judgments. In addition, creditors with security entitlements can be prevented from collecting and realizing their securities (“Verwertungssperre”).
How is the court involved in the proceedings?
If the company intends to apply for one or more of the aforementioned measures, the proposed restructuring must be notified to the competent restructuring court pursuant to Sec. 31 StaRUG, in particular by submitting the draft restructuring plan or at least a restructuring concept. If a stabilization order shall be issued, Sec. 50 para. 2 No. 1 StaRUG additionally requires, among other things, a financial plan for the next 6 months. However, according to Sec. 51 para. 2 StaRUG, significant payment arrears to employees, the tax authorities, social security institutions or suppliers or a breach of the obligation to disclose the annual financial statements may hinder the issuance of such stabilization orders.
How flexible an affected company act within the law?
The StaRUG offers a high degree of flexibility, which allows restructuring to be limited to certain creditors (groups).
However, one of the greatest advantages of the stabilization and restructuring framework, besides the comprehensive discretion to shape the plan, is certainly that the company itself can decide which creditors are included in the restructuring plan and from whom restructuring contributions are to be demanded. Limiting the restructuring plan to financial liabilities, for instance, may be a permissible instrument, likewise the exemption of claims by small creditors (Sec. 8 No. 2 StaRUG). In addition, it is possible, within the framework of group structures, to exempt affiliated companies from the collateral provided if the creditor is paid appropriate compensation (Sec. 2 para. 4 StaRUG). Claims in connection with employment relationships and commitments to company pension schemes, on the other hand, are generally excluded from inclusion in the restructuring plan under Sec. 4 No. 1 StaRUG Insolvency benefits cannot be claimed in this phase either. In addition, the company's discretion in structuring the plan is extended to the degree that, pursuant to Sec. 7 para. 4 StaRUG, claims of creditors may also be converted into an equity interest in the company.
Does the restructuring plan have parallels to the insolvency plan?
Similar to the insolvency plan, the restructuring plan also provides a division of the creditors and shareholders selected by the company into certain groups pursuant to Sec. 9 StaRUG. Although the plan must be approved by a three-quarters majority within these groups (Sec. 25 StaRUG), Sec. 26 StaRUG provides the opportunity to overrule creditors and shareholders across groups, meaning that the restructuring plan can also be concluded contrary to the resistance of creditor minorities. Nevertheless, the overriding principle requires that the restructuring plan does not disadvantage the group members in comparison to the situation without the plan.
Does the law affect the personal liability of the management?
Despite the widespread restructuring options now offered to companies by the StaRUG with its preventive restructuring framework, it is evident that the legislator demands significantly more responsibility from companies and their managers than before, primarily as a result of the experience gained with the debtor-in-possession management under the insolvency law. Corresponding to the increased requirements imposed by the use of both the restructuring and the debtor-in-possession management, the liability of the managers is also extended. The legislator made clear that the imminent insolvency already poses a threat to creditors and therefore justifies a higher degree of care based on the interests of creditors. Accordingly, the legislator has expressly standardized the obligation to identify and monitor crises at an early stage in Sec. 1 StaRUG.
The recently created opportunities for restructuring companies face increasing responsibility for managing directors in identifying and averting crises at an early stage.
Therefore, pre-insolvency restructuring can only be successful if carefully prepared and provided that the various options created by the legislator with the StaRUG are evaluated and specifically combined with regard to the individual interests of the company and the creditor’s structure.
Together with our experts representing a diversity of disciplines, we will be happy to assist you. It is our conviction that only restructuring considered from all perspectives will lead to success.