Early warning under StaRUG – the new German law adopting the EU Directive on Preventive Restructuring

Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks requires Member States to put in place early warning tools that inform managers when the enterprise starts to experience financial difficulties and about ways to respond, as well as to incentivise them to take action early on. The early warning tools should be adapted depending on the size of the enterprise. The early warning tools should warn debtors of the urgent need to act, taking into account the limited resources of SMEs for hiring experts. In addition, Member States should make information about early warning tools available online, for example on a dedicated website.

These requirements are reflected in sections 1, 101 and 102 StaRUG. Section 1 obligates managers of legal entities and companies without legal personality, irrespective of legal form, to identify crises at an early stage and respond to them. They are obligated to monitor all developments that could  jeopardise the enterprise’s existence, whereby the specific form and reach of this obligation depends on the size, industry and structure of the enterprise, as well as its legal form. In addition, managers are required to take appropriate counter-measures and report to the supervisory bodies. Managers are to promptly solicit the involvement of any other bodies responsible for taking counter-measures. However, the provision establishes only minimum requirements. It does not affect more extensive requirements under other statutes, such as those in section 91 (2) of the German Stock Corporation Act (Aktiengesetz, AktG) or section 25a (1) sentences 3 and 4 of the German Banking Act (Kreditwesengesetz, KWG).

Sections 2 and 3 of the government bill for the StaRUG had defined liability standards to accompany section 1. These had specified that where imminent illiquidity exists – i.e. prior to material insolvency – managers may be liable in the event of an intentional infringement of the interests of the majority of creditors when performing their duties. These provisions were deleted in the parliamentary legislative procedure on account of the uncertainty in the way they would relate to the obligations laid down in company law. It remains to be seen whether a breach of the obligation to identify crises at an early stage and, in particular, to respond to them outside of the area of material insolvency will now be relevant in practice on the basis of the obligations established in company law. However, once a restructuring case becomes pending, the debtor is obligated to act with the due care of a prudent and conscientious restructuring manager and in doing so protect the interests of all creditors (section 32 (1) StaRUG). In the event of a breach, the managers are liable to the debtor (section 43 (1) StaRUG).

In addition, the warning obligations specified in section 102 StaRUG have a bearing on the liability of professionals involved in the preparation of annual financial statements. Tax advisors, certified public accountants and lawyers must make the client aware of the existence of possible grounds for insolvency pursuant to sections 17 to 19 of the German Insolvency Code (Insolvenzordnung, InsO) and of the obligations that this places on managers and members of supervisory bodies if there are obvious indications of such grounds and if they have reason to assume that the client is unaware of possible material insolvency. These warning obligations are in conformity with case-law (see German Federal Court of Justice (BGH), judgment of 26 January 2017, IX ZR 285/14, BGHZ 213, 374-394, margin nos. 19 and 44), such that the German Federal Chamber of Tax Advisors (Bundessteuerberaterkammer) was able to prevent them from being adopted in the German Tax Advisor Act (Steuerberatergesetz) and in the Act on the Code of Professional Practice for German Certified Public Accountants (Wirtschaftsprüferordnung), as well as in the draft ministerial bill for the German Act on the Advancement of Restructuring and Insolvency Law (Sanierungs- und Insolvenzfortentwicklungsgesetz, SanInsFoG). Other early warning tools within the meaning of the EU Directive include the warning obligations incumbent on statutory auditors in connection with the audit of the financial statements of medium- and large-sized enterprises within the meaning of section 267 of the German Commercial Code (Handelsgesetzbuch, HGB). For instance, statutory auditors are required to give their opinion on the assessment of the enterprise’s position by the managers and to report on facts that could jeopardise the existence of the audited enterprise or influence its performance. The audit opinion must separately address risks that jeopardise the continued existence of the enterprise.

Finally, in section 101 StaRUG, the legislators required the Federal Ministry of Justice and Consumer Protection Information to provide information on its website about the availability of the sets of tools supplied by public authorities for the purpose of early identification of crises. The website should include, in particular, the governmental consultation offers of the German Industry of Chamber and Commerce. It should also link to the checklists for identifying signs of a crisis, the “early-warning flowchart” and the “crash test for early identification of vulnerabilities”, all of which can be found on the website created by the Federal Ministry for Economic Affairs for start-up businesses. Particularly important for acceptance of the new framework: comprehensive check-lists for restructuring plans, adapted to the needs and specificities of SMEs, should be made available.

Dr Annerose Tashiro, Attorney at Law in Germany, Registered Foreign Lawyer (SRA)

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