On 1 January 2021 the new German Act on the Stabilisation and Restructuring Framework for Businesses (StaRUG) came into force. StaRUG has led to a profound change in the German restructuring landscape: for the first time the restructuring of imminently illiquid companies outside of insolvency proceedings is governed within a statutory framework. By means of a restructuring plan, these companies can implement restructuring measures with the involvement of creditors, even against the will of individual creditors.
The German Act on the Stabilisation and Restructuring Framework for Businesses (StaRUG) transposes the EU Restructuring Directive, Directive (EU) 2019/1023, into German law. The EU Restructuring Directive requires all EU Member States to establish until Summer 2021 a pre-insolvency restructuring framework to avert probable insolvency.
Main new aspects offered by the StaRUG
The StaRUG provides companies in crisis with a set of instruments which they can use for restructuring without having to open formal proceedings – as is the case with insolvency. The core element of the StaRUG is the restructuring plan, which regulates the main restructuring measures and which, in principle, can be drawn up and put into effect without the involvement of the court. The company chooses – within the limits of the law – which creditors are to be included. Accompanying this, the StaRUG offers a toolbox of instruments intended to facilitate preparing and implementing the restructuring plan.
The StaRUG is primarily suitable for the financial restructuring of companies, such as by cutting debt, for example.
In addition, the StaRUG introduces a duty, normalized by law, of the management to recognise crises at an early stage and to manage them regardless of the legal form of the company concerned.
Early crisis detection, crisis management and liability risks
Early crisis detection as a duty of management
Pursuant to section 1 StaRUG, directors must continuously monitor developments that could put the continued existence of the legal entity at risk. The StaRUG therefore imposes an obligation on the management to set up an early crisis detection system, regardless of the size and sector of the company. This means that directors of a German limited liability company (GmbH) or a German Stock Corporation (AG) must be in a position to continuously monitor the solvency of the company and the absence of over-indebtedness.
The law does not specify how the early crisis detection system must be designed exactly. However, section 101 StaRUG mentions that information on the early identification of crises is provided by the Federal Ministry of Justice and Consumer Protection on the website at www.bmjv.bund.de. However, this is a very general reference to the general assistance and advice available.
A central element of the early crisis detection system is the company's liquidity planning for the next 24 months which every director should draw up for their company, regardless of industry and size. Regularly reviewing and updating the early crisis detection system should be integrated into the company's compliance system.
Suitable crisis management
If a crisis becomes apparent, the management must take appropriate countermeasures and immediately report to the bodies appointed to supervise the management – typically the advisory board (Beirat) or the supervisory board (Aufsichtsrat).
The directors can decide which measures to implement to overcome the crisis within the scope of their discretionary powers. The directors of a German limited liability company (GmbH) must exercise the care of a prudent businessman; the directors of a German Stock Corporation (AG) must exercise the care of a prudent and conscientious director. The respective standard of care in each case is determined by the tax, criminal, employment and other laws as well as the corporate (fiduciary) duties towards the company.
If the measures affect the responsibilities of other bodies, e.g. a shareholders' meeting of a limited liability company (GmbH), the director must at least work towards adopting a resolution without delay. The "shift of duties" provided for in the draft bill was deleted in the final version of the StaRUG. The "shift of duties" stipulated that, from the onset of imminent illiquidity, directors must act primarily in the interests of the creditors in their entirety and that conflicting instructions from the shareholders were to be disregarded. This would have meant immense liability risks for directors.
Liability risks for directors and supervisory bodies
It remains to be seen to what extent breaches of the duty to recognise crises at an early stage and to manage crises within the meaning of section 1 StaRUG actually triggers liability under corporate law in practice. However, if restructuring measures fail and the company becomes insolvent, insolvency administrators have a duty to examine and enforce any liability claims the company may have against directors and supervisory bodies.
In order to protect themselves from potential liability to the company for errors in selecting appropriate crisis management measures and exercising corporate discretion, directors should document that they were entitled to reasonably believe that they were acting in the best interests of the company on the basis of sufficient information. The business judgement rule regulated in German stock corporation law is also applicable here to directors of companies of other forms such as the German limited liability company (GmbH) as a matter of principle. If you are unsure whether a business decision (still) needs to be made or whether a legal decision (already) needs to be made to take countermeasures during the crisis and whether the business judgement rule even applies at all, CMS would be happy to assist you as your expert advisor.
Further information about the duty to detect crises early and on crisis management for directors can be found in our Blog article.
To avoid liability risks, directors should obtain a shareholders' resolution before initiating proceedings under the StaRUG (as well as before filing for insolvency due to imminent illiquidity).
The StaRUG offers tools to simplify the restructuring of companies which are at risk of imminent illiquidity outside of insolvency proceedings. This proceeding closes the gap between free pre-insolvency restructuring and restructuring via (court) insolvency proceedings.
The basis for sustainable restructuring measures on the basis of StaRUG is the restructuring plan (sections 2 ff. StaRUG). The restructuring plan sets out which rights of creditors are to be interfered with in order to restructure the imminent illiquid company. Unlike in insolvency plan proceedings, a restructuring plan does not have to include all creditors and shareholders. Instead, the company makes an objective decision on the parties who are to be affected by the plan.
The restructuring plan allows for far-reaching restructuring of the legal relationships between the debtor and its creditors. Claims against the debtor, security interests as well as certain intra-group third-party securities may be made included. In addition, the shareholding and membership rights of the persons involved in the debtor can also be restructured in the restructuring plan in such a way that, in addition to reorganising the liabilities, accompanying measures under corporate law can be provided for. Further accompanying measures can also be included in the restructuring plan, for example new financing can be agreed.
However, the restructuring power of the restructuring plan is not unlimited. Primarily excluded are the rights of employees (see our Blog post). This should be taken into account when selecting the appropriate type of proceedings for the planned restructuring measures.
In order for the restructuring plan to be able to interfere with the rights of creditors and shareholders, the parties affected by the plan must first accept it. For this purpose, groups of those affected by the plan with comparable legal statuses are formed who then vote on the plan. The restructuring plan must contain all information relevant for the decision on acceptance of the plan by the creditors affected by the plan; this especially includes a comparative calculation comparing the situation of the creditors affected by the plan with the situation of those not covered by the plan. For acceptance of the restructuring plan, it is generally necessary for all groups to agree to the restructuring plan. Therefore it is necessary that the creditors in each group representing at least 75% of all voting rights accept the plan. Subject to certain conditions, one group not voting in favour may not be an impediment.
Accompanying instruments of the stabilisation and restructuring framework
The StaRUG provides companies with instruments that can be used flexibly and independently of one another on the basis of the modular principle:
Implementation of a judicial plan agreement procedure
The debtor decides whether the vote on the restructuring plan is to take place out-of-court or whether a judicial plan agreement procedure is to be conducted. If the debtor files a motion for the implementation of the judicial plan agreement procedure; the restructuring court sets a date for a discussion and coordination meeting to which all parties affected by the plan must be invited. Voting on the restructuring plan in the framework of a judicial procedure makes it possible to avoid the legal uncertainties that can arise from an out-of-court vote on a plan (e.g. risks regarding proof), for example. In all other respects, the judicial plan agreement procedure pretty much corresponds to the voting procedure out of court.
Judicial preliminary examination of questions relating to the restructuring plan
On request the debtor company can have a preliminary judicial examination of significant issues conducted, and it can do this even if the vote on the restructuring plan is implemented out of court. The aim of the judicial preliminary examination is to eliminate any legal uncertainties in the course of the out-of-court plan agreement, such as, for example, regarding compliance with procedural rules or the formation of lawful groups.
Court stabilisation order
To the extent necessary to achieve the restructuring objective, the restructuring court must, at the debtor's request, order a stay of enforcement and realisation (known as a "stabilisation order"). This means that enforcement measures against the debtor are prohibited or temporarily suspended. Rights to assets may not be enforced by creditors. In this case, the debtor may continue to use the corresponding items insofar as they are of considerable importance for continuation of the company. The stabilisation order can generally be imposed for a period of up to three months and can be extended for a maximum of eight months in total subject to certain conditions.
Judicial confirmation of the restructuring plan
On request by the debtor, the restructuring court confirms the restructuring plan once it has been accepted by the creditors. This means that all of the measures set out in the constitutive part of the plan have an effect on all those affected by the plan. This also applies to those affected by the plan who did not participate in the vote on acceptance of the plan or who voted against it.
Notification of the restructuring project to the restructuring court
The accompanying instruments can be used by debtors to eliminate the imminent illiquidity. The requirement for this is that the restructuring court is notified of the restructuring project.
Duties and liability from the time of notification of the restructuring project
From the time the restructuring project is notified to the competent restructuring court, the company's directors must conduct the restructuring case with the diligence of a prudent and conscientious director responsible for restructuring and, in doing so, safeguard the interests of the creditors in their entirety. If the directors breach these duties, they are liable to the company for any compensation due to the creditors for the resulting loss. Claims for compensation can only be asserted by the company itself (this is known as "internal liability"), not by the company's creditors.
The obligation to file for insolvency pursuant to section 15a German Insolvency Act (InsO) is replaced during the time in which the restructuring project is pending by the duty to notify the occurrence of illiquidity or over-indebtedness (also subject to a penalty in case of non-compliance). After such a notification, the restructuring court must normally terminate the restructuring case.
We shed light on the current partial (!) suspension of the duty to file for insolvency in our Blog post and in our Podcast.
Restructuring moderation (sections 94 ff. StaRUG) is a non-public procedure independent of the restructuring plan and the stabilisation and restructuring framework without coercive effects. It is initiated exclusively on request by the debtor and can also be terminated at the request of the debtor.
Eligible to apply are debtors capable of restructuring who are not obviously illiquid or over-indebted. The main object of the procedure is the appointment by the court of a competent person as a restructuring mediator who is to mediate between the debtor and the creditors as a neutral third party. The aim of the procedure is to bring about an amicable solution between the parties to overcome the debtor's economic or financial difficulties.
Restructuring moderation is particularly suitable for small and medium-sized enterprises that need external assistance with their restructuring.
StaRUG – significance for debtors and creditors in brief
Advantages of the StaRUG for debtor companies
A significant advantage of the StaRUG for companies is that it is basically conducted as a non-public procedure in which only the affected creditors and, if applicable, shareholders are involved. The stigma of insolvency is therefore avoided. The dependency on creditors who want to optimise their own position by adopting what are referred to as "hold-out positions" in mandatory restructuring procedures will simultaneously significantly decrease.
Restructuring by means of a restructuring plan is particularly suitable for companies burdened with high financial liabilities and where refinancing is made more difficult by the high level of debt. The StaRUG offers hardly any relief for operative restructuring or restructuring under employment law. In this respect whether restructuring by means of insolvency proceedings is an option must be examined.
-> PDF download "The German Act on the Stabilisation and Restructuring Framework for Businesses (StaRUG) and What It Means for Companies"
Consequences of the StaRUG for creditors
Creditors must expect interference with their rights when participating in a restructuring plan. As members of a group of creditors with comparable legal positions, they must – if the majority of the creditors in the group accept the restructuring plan – allow the planned reductions of their rights to take effect against them. Minority protection applies to creditors rejecting the plan, however. A restructuring plan will not be confirmed by the court at the request of a creditor – and thus will not be effective against rejecting creditors – if the creditor is likely to be worse off as a result of the restructuring plan than it would be without the plan. The comparative calculation must therefore show that the creditors will not have to accept any greater reductions of their rights than they would face without the restructuring plan.
-> PDF download "The German Act on the Stabilisation and Restructuring Framework for Businesses (StaRUG) and What It Means for Creditors"
Duties imposed by the StaRUG on executive bodies
The StaRUG places a duty on directors to recognise crises at an early stage and to manage them. They must report to the supervisory bodies (supervisory board/advisory board) accordingly. They must also ensure that systems for early crisis detection are implemented and regularly updated at the company and that countermeasures are taken in due time when a crisis is detected.
-> PDF download "The German Act on the Stabilisation and Restructuring Framework for Businesses (StaRUG) and What It Means for Company Bodies"
Significance of the StaRUG for shareholders
The StaRUG creates a possibility of cutting debt even against the will of individual creditors. This can also affect (minority) shareholders. It should be noted that cutting the debt of banks against their will can normally only be achieved if the shareholders do not retain any assets.
-> PDF download "The German Act on the Stabilisation and Restructuring Framework for Businesses (StaRUG) and What It Means for Shareholders and Supervisory Board Members"
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Our expertise in the field of restructuring and insolvency – your advantage
CMS has many years of proven expertise in and experience with both providing pre-insolvency advice to companies and insolvency proceedings. We devoted ourselves intensively to the topic of preventive restructuring proceedings in the course of the discussions on the EU Restructuring Directive and accompanied the implementation into German law with numerous specialist contributions and events.
When deciding whether and to what extent the StaRUG is the appropriate set of instruments for your company to overcome an extraordinary situation, our restructuring and insolvency lawyers will be happy to advise you at any time.
Our restructuring experts will look at the following aspects for you in particular:
- Restructuring options at different stages of the crisis: restructuring settlement, stabilisation and restructuring framework, insolvency proceedings (in self-administration and with protective shield)
- Accompanying instruments of the stabilisation and restructuring framework: prerequisites, procedure, effects
- Advantages and disadvantages of the preventive restructuring under the StaRUG compared to the other restructuring options
- Timing requirements for restructuring measures
- Implementation of early crisis detection systems on the basis of the new legal requirements
If you have any questions on the subject of the German Act on the Stabilisation and Restructuring Framework for Businesses (StaRUG), please feel free to contact your CMS lawyers or Alexandra Schluck-Amend at any time.