StaRUG: Refusal of plan confirmation

23. November 2021 Newsletter International

The counterpart to plan confirmation is plan refusal. Plan refusal is addressed in section 63 StaRUG (Versagung der Planbestätigung), which merely supplements the confirmation procedure and does not constitute a separate refusal procedure. The elements for refusal are framed as (additional) requirements for plan confirmation in the form of negative confirmation prerequisites.

The provision can therefore be considered a list of “mortal sins” in a restructuring procedure, which oblige the court to refuse confirmation.

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Dr. Philipp H. Esser, LL.M.
Dr. H. Philipp Esser, LL.M. (Chicago)


Attorney at Law (New York State)

The four subsections of section 63 StaRUG differ in terms of their substantive and practical significance.

Subsections 1 and 2 set forth substantive as well as personal requirements for the plan and the debtor so that the plan can be confirmed. Subsection 3 establishes a statutory presumption, and subsection 4 provides a separate ground for refusing confirmation of a formally correct plan that was obtained illegally. However, section 63 StaRUG aims less at having the plan intensively reviewed by the court but instead at preventing a plan from coming into effect that suffers from serious errors. This aspect is also important since a confirmed plan becomes effective in part even before confirmation becomes final and binding. Absent section 63 StaRUG, a party affected by the plan would be at the mercy of its effects until a decision is rendered on appeal. To this extent, section 63 StaRUG is designed to provide the minimum level of protection and ensure that the plan is at least not fundamentally unlawful.

I. Elements of subsection 1

Subsection 1 establishes the minimum standard for the procedure. The listed elements enumerate the reasons why a plan may be manifestly incapable of being confirmed. These elements are to be considered the minimum requirements for the procedure and the plan.

No. 1 specifies that the debtor must actually be facing imminent illiquidity (drohende Zahlungsunfähigkeit). The StaRUG is not designed to be a tool that enables a debtor to rid itself of a portion of its liabilities when it so desires. Interference with the rights of the parties affected by the plan – protected under Article 14 of the German Constitution [Grundgesetz, GG] – is justified only if a crisis actually exists that is to be overcome. The initiation of a restructuring procedure is not allowed without any cause. The StaRUG is not intended to be a free pass for debt relief, and for that reason, only companies facing imminent illiquidity can make use of it.

The element embodied in subsection 2 ensures compliance with the minimum requirements for the plan and plan voting. The provision, which is modelled on section 250, No. 1 of the German Insolvency Code (Insolvenzordnung, InsO), deals with refusal due to non-compliance with the statutory requirements concerning the content of the plan, the procedure and acceptance of the plan. However, refusal may not be based on minor infractions or on errors that have already been remedied. Rather, the errors must have had an impact on the plan, its acceptance and the procedure, and they must be incapable of being remedied within a reasonable period of time. The wording of the provision – i.e. that even significant errors result in refusal only if they cannot be remedied “within a reasonable period of time set by the restructuring court” – makes it clear that the court must give the debtor the opportunity to correct them. In this regard, defects that can be remedied tend mostly to be of a substantive nature. Necessary procedural steps, such as discussion of the restructuring plan, will be difficult to rectify if omitted.

No. 3 serves to protect creditors against plans that are formally correct but clearly cannot be implemented. As a general rule, the debtor is at liberty to design the plan as it sees fit, as long as the plan satisfies the substantive and formal requirements and the procedure was adhered to. But because parties affected by the plan can be out-voted in the procedure, it is necessary to afford them a certain degree of protection. To the same extent, the intent is to prevent subsequent disputes that could have been avoided. However, the court does not perform an exhaustive substantive review but rather is limited to examining whether obvious errors are present. This means errors that are clearly evident and verifiable, such as where the funds are manifestly insufficient for meeting the plan’s payment objectives.

II. Heightened substantive standard for plans with new financing

Subsection 2 heightens the standard for judicial review if the restructuring plan provides for new financing in accordance with section 12 StaRUG. The debtor should avoid entering into new financial commitments as far as possible, since if the plan were to fail, this would have an adverse impact on subsequent insolvency. The aim is to prevent a deterioration to the detriment of other creditors. Here as well, judicial review is limited to the coherence of specific circumstances suggesting that the plan might fail.

III. Presumption in subsection 3

Section 63 (3) StaRUG is not a separate element but instead establishes a presumption. It states that if plan voting took place in out-of-court proceedings, doubts about proper acceptance are to be interpreted to the detriment of the debtor. It is to be viewed in conjunction with subsection 1, No. 2. This constitutes a qualification of section 39 (1) InsO, insofar as the procedure was conducted out of court. The reasoning behind the provision is clear: A debtor that acts outside of the ambit of the courts must also accept that the absence of oversight will be considered to its detriment. In other words, if the court has doubts about whether the procedure was carried out correctly, a decision must be rendered against the debtor unless it resolves the doubts.

IV. Improper attainment of plan acceptance under subsection 4

The last subsection of the provision is designed to protect parties affected by the plan who were encouraged to accept it through improper means. The debtor is not permitted to obtain the restructuring through abusive practices. Improper in this respect means conduct that is in bad faith, such as threats and acts of deception. Consequently, the issue is whether the parties affected by the plan were able to vote for it in the exercise of their free will. The question therefore depends on whether the improper conduct was causally linked to plan acceptance.

V. Trends in case-law

Section 63 (1) StaRUG is among the provisions of the statute that have already been taken up by the courts. In stating its reasons for refusing a plan confirmation, the Local Court of Cologne laid down the standard to be applied for determining whether the negative criteria are present. In its order of 3 March 2021 (case no. 83 RES 1/21), the court held that the court as the trier of fact must conclusively ascertain and be convinced pursuant to section 39 (1) StaRUG that all requirements have been met for plan confirmation. This includes examining whether the debtor is actually imminently illiquid. The Local Court of Cologne considers this strict standard to be necessary in order to prevent misuse of the StaRUG. The intent of the legislators was indeed that the negative confirmation prerequisites must not be present. From the standpoint of legal theory, the approach taken by the Local Court of Cologne is thus entirely reasonable. In practice, this may constitute a substantial burden for the debtor, such as in the form of costs for experts.

It remains to be seen whether this review standard will prevail widely.

Dr H. Philipp Esser, LL.M. (Chicago), Attorney at Law

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