In our newsletter last week, we provided you with a detailed explanation of the arguments that had been raised by the federal states against the ability of companies in need of restructuring to alter long-term contracts to the detriment of their contractual partners (see the newsletter “No more alteration of ongoing contracts”). As was expected following the first debate in the Bundestag, the pertinent parts of the draft version (sections 51 to 55) were removed from the law.
In addition, the arrangements concerning the obligations and liability of managers were also modified. For instance, the provisions in sections 2 and 3 of the government bill that had placed obligations on managers in the event of the company’s imminent illiquidity have been removed. The stated rationale was that those provisions would have had an uncertain relationship to the restructuring obligations laid down in company law. According to the reasoning, the liability and penalty rules relating to overindebtedness were already slated to have diminished importance in future, since the scope of the element of overindebtedness will be significantly constrained as a result of the shortening of the relevant forecast period to 12 months. It was argued that creditors are nonetheless adequately protected in this regard by the liability rules in company law.
In the event of imminent illiquidity, managers continue to be obligated under the StaRUG to be attentive not only to the interests of the company but also to those of creditors. They must ensure that the debtor carries out the restructuring with the due care of a prudent and conscientious manager and protects the interests of all creditors. If a manager breaches this obligation, he/she must compensate creditors for the damage they incur as a result of such breach. The debtor may not waive this compensation or enter into a settlement with the manager if the compensation is necessary for the purpose of satisfying creditors. The only cases in which the foregoing does not apply is where the party owing the compensation is itself insolvent or where insolvency can be avoided by way of the settlement or overcome with the aid of an insolvency plan.
Requirements for a stabilisation order
In order to benefit from a stabilisation order under the new StaRUG, companies must not have breached their disclosure obligations under the Commercial Code (Handelsgesetzbuch). The law now makes it clear that no breach must have occurred in any of the past three financial years. Otherwise, the court may issue the stabilisation order only if, despite the breach, it may be expected that the debtor is willing and able to align its management with the interests of all creditors.
Effects on group companies
The restructuring plan may structure intra-group third-party collateral. The leeway to do so was further expanded in the final wording of the law. Whereas in the draft, only subsidiaries were included, the enacted version of the StaRUG extends this to cover all affiliated companies within the meaning of section 15 of the Stock Corporation Act (Aktiengesetz). This is intended to facilitate the restructuring of groups. In the view of the legislators, the interests of creditors are also adequately protected in this situation, since the creditor must be suitably compensated in such case.
Restructuring costs must be disclosed
Furthermore, a new aspect is that in its offer to the affected creditors to accept the drafted restructuring plan, the debtor must also list the entire costs of the restructuring procedure – namely, both the costs already incurred and the additional costs that may be expected. The latter include the costs for remunerating the practitioner in the field of restructuring.
The legislators argued that the impact of these costs is twofold: First, they have an adverse effect on the already strained liquidity of the debtor, and second, from an economic standpoint, they are financed in part by the parties affected by the plan. These costs increase the financing needs of the distressed company, which in turn requires the parties affected by the plan to make greater contributions toward restructuring. Therefore, according to the legislators, it must be ensured that the parties affected by the plan are provided with complete information about all costs.
More favourable treatment of creditor groups possible with restrictions
Another important modification concerns the relationship between the creditors groups affected by a restructuring plan. The previous government bill had allowed creditor groups with equal rank to be treated unequally if there were good reasons to do so. The law now provides that this is inappropriate if the creditor group that voted against the restructuring plan holds more than one-half of the voting rights of creditors having equal rank. If, taking all groups into consideration, more than one-half of the affected restructuring claims in this ranking category are attributable to the group that rejected the restructuring plan, it may not be treated less favourably than the other groups of creditors in the same ranking category.
Multi-state restructuring courts
A number of federal states had pushed to allow restructuring courts to be established on a multi-state basis, and the final version of the law also takes this into account. The law now makes it possible for several federal states to specify one local court that is to be competent for restructuring matters irrespective of state borders. In addition, it enables a restructuring department to be created at a local court that has competence for several federal states. This is important, in particular, for federal states that have only a higher regional court, because it allows cross-district competences to be created in this way.
Practitioners in the field of restructuring given more rights
Moreover, the powers of the practitioner in the field of restructuring have been further aligned with those of a supervisor. For instance, the court may give the practitioner in the field of restructuring the exclusive power to accept money paid to the debtor and to make payments on its behalf.
In exceptional cases: the creditors’ council
Another new aspect is the ability to form a creditors’ council in exceptional cases, in the event that a company intends to use StaRUG tools for its restructuring. In its report, the legal affairs committee emphasised that the StaRUG tools do not involve collective proceedings, meaning that the procedural representation of all creditors is not only superfluous but could even be detrimental. In applying the StaRUG, decisions should be made only by the parties who are affected by those decisions.
However, if in an exceptional case, the debtor requests restructuring contributions from all creditors, they may have very different interests, resulting in a need to coordinate those interests and the impact that the restructuring has on them. In such cases, the court may now appoint a creditors’ council, which is also to hear a representative of the employees, even where the plan does not intend to alter their claims in any way.
This creditors’ council is comparable to a creditors’ committee in (preliminary) self-administration. It unanimously appoints the practitioner in the field of restructuring (who in the earlier draft was selected on the basis of the joint proposal of the parties affected by the plan), and it is to assist and monitor the debtor in the management of its business.
The final stretch in the legislative process has resulted in several key changes. The certainly most controversial tool – alteration of ongoing contracts – has been discarded from the government bill by the Bundestag and Bundesrat. This immediately launched a debate about whether the change would lead to new insolvency forum-shopping in other EU countries, for instance in the Netherlands, where such alteration remains possible. The EU directive, which prompted the StaRUG and forms the basis for it, was actually intended to prevent this.
However, even without this ability, entrepreneurs have a wide range of tools at their disposal for restructuring their company prior to its becoming insolvent. The StaRUG closes the gap between, on the one hand, current out-of-court settlement with the consensus of all creditors and, on the other, majority-based restructuring in insolvency proceedings.
It will be interesting to see how companies deal with the new possibilities starting in January 2021. Will, as some fear, only large companies in fact be able to afford StaRUG restructuring? Is the StaRUG really an effective means for avoiding insolvency and restructuring companies?
As always, the good intentions of the legislators will first need to pass the test of practical application. We are prepared for this and would be pleased to offer you our assistance.
Incidentally: If you would like to learn more on the topic of preventive restructuring frameworks and the possibilities for restructuring without insolvency, then visit us at www.schultze-braun.de/leistungen/starug-praeventiver-restrukturierungsrahmen/. There you will find the latest information about stabilisation and restructuring frameworks and further developments in the legislative process.
Dr Annerose Tashiro, Attorney at Law in Germany, Registered European Lawyer (London)
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Eisenbahnstr. 19-23, 77855 Achern/Germany
Phone: +49 7841 708-0
Fax: +49 7841 708-301
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