1. Justification for infringement of the rights of parties affected by the plan

The justification provided by the legislator for infringing creditor rights and share rights of the parties affected by the plan in connection with a restructuring procedure is that in the event of imminent illiquidity, the debtor could also choose the route of insolvency proceedings, which similarly permit the infringement of creditor rights and share rights. Despite constitutional concerns, this approach by the legislator has not been seriously called into question so far.

With section 64 StaRUG, entitled “Minority Protection”, the legislator created a protective provision – available to all parties affected by the plan who voted against it but were outvoted by the majority of the affected parties – as “compensation” for the infringement of their creditor rights and share rights.

2. Prohibition of less favourable treatment

Pursuant to section 64 (1) sentence 1 StaRUG, on application by a party affected by the plan (“applicant”) that voted against the plan, confirmation of the plan is to be refused if the applicant is likely to be placed in a worse position as a result of the plan than it would be in without one (known as the “prohibition of less favourable treatment”). The prohibition of less favourable treatment is derived from the best-interest-of-creditors criterion in Directive (EU) 2019/1023, but by also including shareholders, it goes beyond the directive’s protection mechanism.

3. Comparative analysis

Whether the applicant is likely to be placed in a worse position with the plan than without a plan is determined by a comparative analysis of the applicant’s financial position with and without a plan. Pursuant to section 6 (2) StaRUG, the debtor must include this comparative analysis in the declaratory part of the plan, and in ascertaining the prospects for satisfaction of the parties affected by the plan without a plan, the analysis must assume that the debtor will continue to be operated, provided that the plan provides for continued operation, as is normally the case (section 6 (2) sentence 2 StaRUG). The reference point for the comparative scenario is the plan scenario developed by the debtor. This plan scenario must not (likely) place the applicant in a worse position than under the scenario without a plan. Therefore, in its comparative analysis, the debtor must demonstrate that it is reasonably likely that the scenario without a plan that is next best for the parties affected by the plan (“next best alternative scenario”) will not place the affected parties in a better position than they would be under the plan scenario. For instance, if the plan scenario calls for the nominal value of the claims of the parties affected by the plan to be reduced by 50%, then in order to avoid infringing the prohibition of less favourable treatment, the debtor must demonstrate that it is “reasonably likely” that the fair value of the claims of the affected parties under the next best alternative scenario are not worth more than 50% and also explain why this is the case. However, in contrast to the law concerning insolvency plans, the debtor may not by default use a liquidation scenario as the comparative standard or the next best alternative scenario. Rather, the debtor is required first to use the typically conceivable continuation-of-business scenarios for its comparative analysis, and only if none of those scenarios is conceivable as the next best alternative scenario may it then use the liquidation scenario for the analysis. In this regard, the following continuation-of-business scenarios in particular are conceivable and must be examined cumulatively, where applicable:

a) Stand-alone scenario

In the case of the stand-alone scenario, the debtor must demonstrate why it is not capable of restructuring the business by its own efforts and without altering the rights of the parties affected by the plan.

b) Continuation of the business in the insolvency plan procedure

Here, for the purposes of the comparative analysis, the debtor must demonstrate that enriching or relieving the hypothetical insolvency estate (see sections 225, 103 et seq., 279 of the German Insolvency Code (Insolvenzordnung, InsO)) is not the better alternative scenario compared with the plan (e.g. due to the costs incurred in the insolvency plan procedure) and also explain why this is the case.

c) Sale of the business outside of insolvency proceedings

Here, for the purposes of the comparative analysis, the debtor must examine whether its sale as a going concern outside of insolvency proceedings would be the next best alternative scenario. To that end, the debtor must, where applicable, commission a valuation appraisal and/or test the market.

d) Sale of the debtor as a going concern in insolvency proceedings

Here, for the purposes of the comparative analysis, the debtor must, inter alia, examine whether, and demonstrate that, the prospects for reorganisation in the case of a reorganisation by business transfer are not better than under the plan, despite the reduced liability risks for a potential buyer, and examine whether, and demonstrate that, the stigma of insolvency either makes a sale impossible or substantially reduces the purchase price, such that the plan is the better alternative.

e) Liquidation

(Only) if none of the potential continuation-of-business scenarios prove to be a financially better alternative scenario for the parties affected by the plan may the debtor, for the purposes of the comparative analysis, assume that it will be liquidated and thus, pursuant to section 6 (2) sentence 3 StaRUG, use liquidation values as the next best alternative scenario.

4. Admissibility requirements

The restructuring court reviews the prohibition of less favourable treatment only on application by a party affected by the plan (section 64 (1) sentence 1 StaRUG). The applicant must have objected to the plan in the voting proceedings and asserted less favourable treatment. Otherwise, a (later) application for minority protection is inadmissible. In addition, in the case of a court-supervised discussion and voting meeting, the applicant must demonstrate, at the latest at this meeting, that it is likely to be placed in a worse position as a result of the plan. The debtor must expressly refer to these obligations placed on the applicant and to the admissibility requirements either in the plan offer or in the notice convening a meeting of the parties affected by the plan (see section 64 (4) StaRUG).

5. Applicant bears the burden of proof

The applicant must demonstrate that it will likely be placed in a worse position as a result of the plan. The presentation of the facts for less favourable treatment must be sufficiently substantiated. It is not enough for the applicant to merely allege that the restructuring plan will likely place it in a worse position. Therefore, by meticulously preparing the comparative analysis pursuant to section 6 (2) StaRUG and painstakingly substantiating it, the debtor will make it more difficult for the applicant to demonstrate that the restructuring plan will (likely) result in less favourable treatment (and vice versa).

6. Inadmissibility of an application for minority protection

Pursuant to section 64 (3) StaRUG, an application for minority protection is to be rejected by the restructuring court if funds are made available in case a party affected by the plan votes against it. This also applies even where an application for minority protection based on an infringement of the prohibition of less favourable treatment is admissible and substantiated. Whether the applicant receives a settlement out of these funds made available by the debtor, as well as the amount thereof, is to be resolved outside the restructuring case (section 64 (3) sentence 2 StaRUG).

7. Summary

Although a single application for minority protection can lead to the refusal of plan confirmation, the legal position of a party affected by the plan that files such application is rather weak. This is because, first, it is normally very time and also cost-consuming for the affected party to demonstrate and sufficiently substantiate that less favourable treatment is likely as a result of the plan. In many cases, an affected party is able to do so only by presenting a (private) valuation appraisal. Second, by lodging an application for minority protection, even where it is admissible and well founded, the affected party cannot prevent confirmation of the plan but instead only achieve a financial settlement if the debtor made funds available in the constructive part of the plan in case the party affected by the plan proves its (likely) less favourable treatment. In case of doubt, therefore, debtors will attempt to make funds available in the constructive part of the plan in case a party affected by the plan proves (likely) less favourable treatment. However, debtors face the problem of striking the right balance in terms of the total amount to be made available. If funds are scarce, which is usually the case when the debtor is facing imminent illiquidity, making too much money available could quickly jeopardise the plan. And on the other hand, making too little or only a symbolic amount of funds available and failing to compensate for the applicant’s less favourable financial treatment under the plan could result in the approval of an admissible, well founded application for minority protection. Therefore, in order to be prepared to fend off an application for minority protection, debtors are well advised not to focus or rely solely on making funds available but rather to ensure that the comparative analysis is carried out with appropriate care and attention.

Dr Alexandra Josko de Marx, LL.M., Attorney at Law in Germany

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