By Stefan Ludwig, Attorney-at-Law in Germany and Certified Specialist in Insolvency Law
In transposition of the European Directive on preventive restructuring frameworks, on 14 October 2020 the Federal Government introduced a government bill proposing an Act on the Advancement of Restructuring and Insolvency Law (Sanierungsund Insolvenzfortentwicklungsgesetz, SanInsFoG). The bill was based on an earlier draft ministerial bill of 18 September 2020 prepared by the Federal Ministry of Justice and Consumer Protection (BMJV). Some parts of the bill underwent further significant amendments during its passage through parliament. The Act on the Stabilisation and Restructuring Framework for Businesses (Unternehmensstabilisierungs- und -restrukturierungsgesetz, StaRUG) entered into force on 1 January 2021.
At the heart of the new law is the creation of a restructuring framework outside of formal insolvency proceedings, which is intended to enable businesses to undergo rehabilitation as early as at the stage of imminent illiquidity by negotiating their own restructuring plan and in that way to head off insolvency.
The introduction of the StaRUG closes the gap between out-of-court recovery and reorganisation as part of insolvency proceedings, as it enlarges the modular toolkit for business recovery by providing a procedure for rehabilitation outside of insolvency proceedings that employs the proven reorganisation methods under insolvency law. It thus constitutes a further milestone toward improving the business recovery climate in the economic hub of Germany and beyond.
The SanInsFoG establishes the rehabilitation and restructuring framework by means of a separate statute. In other words, it is not part of the Insolvency Code (Insolvenzordnung, InsO), as is the cases in the Netherlands, for example. Rather, the StaRUG is a separate, independent statute that exists alongside the InsO. It creates the first specific set of tools for the rehabilitation of businesses outside of insolvency proceedings and thus an autonomous body of restructuring and rehabilitation law that is independent of insolvency law.
The StaRUG contains the following key elements, whose operative content will be addressed in detail below:
- Early identification and management of crises,
- Stabilisation and restructuring framework (particularly restructuring plan and restructuring and stabilisation tools), and
- Rehabilitation mediation.
Pursuant to section 1 StaRUG, the managers of legal entities and companies without legal personality within the meaning of section 15a (1) sentence 3 and (2) InsO are now expressly obligated to continuously keep track of developments that may jeopardise the continued existence of the company. This presupposes the establishment of “early warning systems”, which can take different forms depending on the business’s size, industry, and structure, as well as legal form.
Once the restructuring court has been notified of the restructuring project, section 32 (1) StaRUG requires management to carry out the restructuring case with the “due care of a prudent and conscientious reorganisation manager” and to refrain from taking measures that jeopardise the restructuring objective. It must also protect the interests of all creditors in doing so. Unlike in the government bill, the obligation to protect the interests of creditors applies only when the restructuring case is pending, and not generally from the time imminent illiquidity occurs. Compensation claims for breach of duty can be asserted only by the company itself, and not by the individual creditors.
In return, one burden on managers is removed: Payments made in the ordinary course of business, particularly payments that are necessary for maintaining business activities, now attract no liability in accordance with section 15b InsO despite the presence of overindebtedness. The new section 15b InsO relocates all provisions relating to managers’ liability for payments following occurrence of insolvency (such as section 64 of the Act Concerning Limited Liability Companies (GmbHG), section 92 (2) of the Stock Corporation Act (AktG) and section 130a of the Commercial Code (HGB)) to the Insolvency Code.
As a general rule, no court involvement is required for the drafting and agreement of a restructuring plan. Only if “tools of the stabilisation and restructuring framework” are used does the restructuring court need to be notified and to take action as follows (section 31 StaRUG):
- the conducting of court-supervised plan voting proceedings (court-supervised plan voting),
- the confirmation by the court of a restructuring plan (plan confirmation),
- the preliminary review by the court of issues of significance for the confirmation of the restructuring plan (preliminary review), and
- the ordering by the court of arrangements to restrict measures of individual enforcement of rights (stabilisation).
Access to the stabilisation and restructuring framework created by the StaRUG is to be limited to cases of imminent illiquidity only (section 18 InsO), i.e. where the debtor is not yet obligated to apply for commencement of insolvency proceedings due to illiquidity (section 17 InsO) or overindebtedness (section 19 InsO).
Pursuant to section 31 (1) StaRUG, use of the tools of the stabilisation and restructuring framework is conditioned on notice of the restructuring project being given to the competent restructuring court. Pursuant to section 31 (2) StaRUG, this notice is to be accompanied by the following documents:
- the draft of a restructuring plan or at least a restructuring concept,
- a description of the status of negotiations with creditors affected, and
- a description of the arrangements put in place by the debtor in order to ensure its ability to meet its obligations under the StaRUG.
The restructuring case becomes pending with the notice (section 31 (3) StaRUG).
The restructuring court may terminate the restructuring case ex officio (see section 33 StaRUG) if, e.g. the debtor files an application for commencement of insolvency proceedings or insolvency proceedings are commenced in respect of the debtor’s assets or if circumstances become known indicating that the notified restructuring project has no prospects for implementation. The restructuring court may also terminate the restructuring case if the debtor has seriously breached its obligations during the restructuring procedure (see section 32 StaRUG).
The principal tool provided by the StaRUG for eliminating imminent illiquidity and facilitating viable recovery and restructuring of the debtor concerned is the restructuring plan (section 2 et seq. StaRUG). The requirements are essentially the same as those for an insolvency plan. This relates, in particular, to the structure of the plan (division into a declaratory and a constructive part).
Therefore, the restructuring plan can be tailored specifically to the needs of the given situation. In particular, selection and inclusion can be limited to specific groups of creditors in accordance with appropriate criteria (section 8 StaRUG) in order to prevent rehabilitation efforts from being obstructed by “hold-outs”.
In terms of substantive requirements too (modification of legal relationships and method of plan voting), the restructuring plan largely follows the familiar arrangements for an insolvency plan.
The legal relationships that are capable of being modified are restructuring claims (section 2 (1) No. 1 StaRUG) and entitlements to separate satisfaction (section 2 (1) No. 2 StaRUG). To this extent, the concepts are comparable to “insolvency claims” (section 38 InsO) and “rights to separate satisfaction” (section 49 et seq. InsO), but here apply outside of insolvency proceedings.
In addition, the restructuring plan may also address ancillary contractual provisions, as well as share or membership rights. Accordingly, it is also possible to arrange for a debt-for-equity swap, where creditor claims are converted into share rights, and to take all other capital measures permitted by company law. In contrast to the government bill, section 7 (4) StaRUG does not permit conversions to take place against the will of the affected creditors.
An important new feature is the ability to include intra-group collateral in the restructuring plan. Where group structures are involved, this can help to prevent affiliated undertakings from becoming insolvent merely because they provided a guarantee for the debtor’s obligations (see section 2 (4) StaRUG). The final version of the Act further expands the scope for this considerably. While in the bill this possibility only applied to subsidiaries, the StaRUG as adopted has expanded it to include all affiliated enterprises within the meaning of section 15 of the Stock Corporation Act. The intention here is to facilitate the restructuring of corporate groups. The legislator takes the view that the interests of creditors are also adequately protected in this scenario, as appropriate compensation for the creditors
is required in such cases.
According to the wording of the Act, expressly excluded in this regard is financial collateral within the meaning of section 1 (17) of the Banking Act (Kreditwesengesetz, KWG) and collateral that was provided to the operator of a system pursuant to section 1 (16) KWG for the purpose of securing its claims arising from the system or to the central bank of a Member State of the European Union or to the European Central Bank (entitlements to separate satisfaction).
However, there may be no alteration of claims of employees, claims based on the commission of an intentional tort, and claims under section 39 (1) No. 3 InsO (fines, administrative fines, etc.). See section 4 StaRUG.
As stated above, the structure and content of the restructuring plan are essentially the same as those of an insolvency plan, with one fundamental difference.
The restructuring plan must first define the creditors affected by the plan, known as the “parties affected by the plan” (section 8 StaRUG). Whereas an insolvency plan must take into consideration all insolvency creditors, the debtor in the case of restructuring can decide which creditors it would like to include, or not include, in the restructuring plan. Although the selection of the parties affected by the plan must not be arbitrary but instead must be made in accordance with appropriate criteria, there is extensive discretion and leeway here. For instance, pursuant to section 8 No. 2 StaRUG, it is permissible for a restructuring plan to modify only financial liabilities and the collateral provided to secure them or to leave the claims of minor creditors unaffected, in particular those of consumers and micro, small and medium-sized enterprises.
The declaratory part must include a comparative analysis showing the effects of the restructuring plan on the prospects for satisfaction of the parties affected by the plan (section 68 (2) sentence 2 StaRUG). If the plan provides for continued operation of the business, it is to be assumed that the business will continue to operate when ascertaining the prospects for satisfaction without a plan. The foregoing does not apply only if sale of the business or its continuation in some other manner has no prospect of success.
If the restructuring plan provides for altering the third-party collateral granted by affiliated undertakings, the relationships of those affiliated undertakings must be described, and the effects of the plan on those enterprises must be included (section 6 (3) StaRUG).
In addition, pursuant to section 14 StaRUG, the restructuring plan is to be accompanied by a substantiated declaration concerning the prospects for eliminating the debtor’s imminent illiquidity through the plan and for ensuring or restoring the debtor’s viability (similar to the concept of “reorganisation capability” in insolvency law). To demonstrate this, the plan is also to be accompanied by a liquidity plan for the period of the restructuring procedure.
Finally, pursuant to section 12 StaRUG, the restructuring plan may describe new financing for the restructuring and thus protect it against later avoidance. This also applies to the provision of collateral for new financing.
The restructuring plan is presented to the parties affected by the plan as a “plan offer” (section 17 (1) StaRUG).
For the purpose of voting on the plan, the creditors included in the plan and other parties are classified into groups of affected parties with the same legal status – as is the case with an insolvency plan. As a rule, affected parties in the same group are to be treated equally. Pursuant to section 9 StaRUG, in carrying out the classification into groups, a distinction is to be made between
- the holders of entitlements to separate satisfaction (secured creditors),
- the holders of claims that, in the case of commencement of insolvency proceedings, would have to be asserted as non-subordinated insolvency claims, together with interest and penalties for late payment incurred thereon (basic restructuring creditors),
- the holders of claims that would have to be filed as subordinated insolvency claims pursuant to section 39 (1) No. 4 or 5 or (2) InsO if insolvency proceedings were commenced (subordinated restructuring creditors); a group must be formed for each ranking category,
- the holders of share or membership rights, and
- (where relevant) creditors under intra-group third-party collateral.
The decision to accept the offer is then made at a “meeting of the parties affected by the plan” (section 20 StaRUG), which, in accordance with the legislative design, may also be held without the involvement of the (restructuring) court, including by electronic means (see section 20 StaRUG). However, the debtor may also put the restructuring plan to a vote in court proceedings, which then are to be conducted in accordance with sections 45 and 46 StaRUG in conjunction with sections 24 to 28 StaRUG and sections 239 to 242 InsO.
As a rule, acceptance of the restructuring plan requires that each group approve it with a minimum of 75% of the voting rights (section 25 (1) StaRUG). Voting rights are determined, in the case of restructuring claims, based on their amount, in the case of entitlements to separate satisfaction and intra-group third-party collateral, based on their value, and, in the case of share or membership rights, based on the share of the subscribed capital or the debtor’s assets (section 24 StaRUG).
If the majority required by section 25 StaRUG is not achieved in a group, under section 26 (1) StaRUG the approval of that group is nevertheless deemed to have been granted (known as a “cross-class cram-down”) if
- the members of that group are likely to be in no worse a position as a result of the restructuring plan than they would be in without a plan,
- the members of that group participate to a reasonable extent in the economic value accruing to the parties affected by the plan on the basis of the plan (plan value), and
- the majority of the voting groups approved the plan with the required majorities.
It is noteworthy that in cases in which only two groups have been formed, the approval of one group is sufficient to overrule the other group (section 26 (1) No. 3 StaRUG). However, the foregoing does not apply if the approving group is composed solely of shareholders or subordinated restructuring creditors.
A further important departure from the government bill concerns the relationships to one another of groups of creditors affected by a restructuring plan. The bill previously allowed groups of creditors of equal rank to be treated unequally if there was good reason to do so. Now, section 28 (1) StaRUG provides that this would not be appropriate if the group of creditors which voted against the restructuring plan account for more than half of the voting rights of creditors of the same rank as it. If more than half of affected restructuring claims in that ranking category across all the groups are in the group that rejected the restructuring plan, less favourable treatment in comparison with the other groups of creditors of the same ranking category is not possible.
On application by the debtor, the court will confirm by court order the restructuring plan accepted by the parties affected by the plan (section 60 (1) sentence 1 StaRUG). If voting takes place with the involvement of the court at a court-supervised discussion and voting meeting (section 45 StaRUG), the application may also be lodged at the discussion and voting meeting. Pursuant to section 63 StaRUG, confirmation of the restructuring plan is to be refused ex officio if the debtor is not facing imminent illiquidity (No. 1); the provisions concerning the procedural handling of the restructuring plan and the acceptance of the plan by the parties affected by the plan have not been observed in a material respect and the debtor cannot remedy the defect or does not do so within a reasonable period of time set by the restructuring court (No. 2); or the claims that are assigned to the parties affected by the plan in the constructive part of the plan and the claims of the other creditors who are unaffected by the plan clearly cannot be satisfied (No. 3). If the restructuring plan provides for new financing, confirmation is to be refused if the restructuring concept underlying the plan lacks coherence or if circumstances are known indicating that the concept is not based on actual conditions or shows no prospect of success (section 63 (2) StaRUG).
Every party affected by the plan has the right of immediate appeal against the order confirming the restructuring plan. The debtor has the right of immediate appeal if confirmation of the restructuring plan is refused (section 66 (1) StaRUG).
Another measure available to the debtor in the modular toolkit system is application with the restructuring court for what is known as a “stabilisation order”, i.e.
- prohibiting or temporarily suspending compulsory enforcement measures against the debtor (enforcement prohibition) and
- prohibiting creditors from enforcing rights in moveable assets that could be claimed as rights to separate satisfaction or to segregation in the event of commencement of insolvency proceedings and directing that such assets may be used for the continued operation of the debtor’s business insofar as they are of substantial importance for this purpose (realisation prohibition).
The application is to be accompanied by, inter alia, an updated draft of the restructuring plan and a financial plan covering a period of six months that shows that the debtor is able to meet its financial obligations and the financing sources through which this is to be ensured during this period.
Pursuant to section 51 (1) StaRUG, the court is to issue a stabilisation order if the restructuring strategy submitted by the debtor is complete and coherent and no circumstances are known indicating that the application is based on inaccurate facts (No. 1), the restructuring no longer has any prospect of success (No. 2), the debtor is not yet facing imminent illiquidity (No. 3), or the order applied for is not necessary (No. 4).
If there are substantial payment arrears under employment relationships, pension commitments, or tax liabilities, a stabilisation order may be issued only if, despite these circumstances, it may be expected that the debtor is willing and able to align its management with the interests of all creditors. The foregoing also applies if enforcement or realisation prohibitions or interim protective orders pursuant to section 21 (2) sentence 2, No. 3 or 5 InsO were ordered during the last three years prior to the lodging of the application (section 51 (2) StaRUG).
A stabilisation order may be issued for a maximum duration of up to three months (maximum order duration) (section 53 StaRUG). However, it may be extended to up to eight months if and as long as an accepted restructuring plan has not yet been confirmed (section 53 (3) StaRUG).
While the realisation prohibition is in effect, creditors affected by it are to be paid the interest due and compensation for the loss of value resulting from use (section 54 (1) StaRUG). Proceeds from the realisation of current assets encumbered by entitlements to separate satisfaction are to be paid out to the parties entitled to them or held in safekeeping for each of them distinctly, other than where the debtor reaches a different understanding with the parties entitled to the proceeds (section 54 (1) StaRUG).
After a pertinent stabilisation order has been issued, important contract partners of the debtor may not, solely by virtue of the performance owed to them, refuse to provide their performance or terminate the contract (section 55 StaRUG). However, if the contract partner is obligated to perform in advance, it has the right to make its performance contingent on the posting of security or on the debtor providing its performance concurrently (section 55 (3) sentence 1 StaRUG). However, a lender may terminate the contract for an undisbursed loan (section 55 (3) sentence 2 StaRUG). Pursuant to section 56 StaRUG, a stabilisation order does not affect financial collateral pursuant to section 1 (17) KWG, settlement systems pursuant to section 1 (16) KWG, or close-out netting pursuant to section 104 (3) and (4) InsO.
Moreover, proceedings concerning the commencement of insolvency proceedings that were initiated on application of a creditor are suspended for the duration of the order (section 58 StaRUG).
If circumstances subsequently become known that would have prevented the stabilisation order from being issued, the restructuring court may terminate it (section 59 StaRUG) and in addition grant a period of at most three weeks for transition to insolvency proceedings (section 59 (3) StaRUG). If the stabilisation order was obtained on the basis of incorrect information, the manager is obligated to compensate the loss that the affected creditors suffer as a result of it, unless he or she was not at fault (section 57 StaRUG).
As a rule, the procedure for restructuring under the StaRUG is managed by the debtor itself without the involvement of an overseer appointed by the court (e.g. a supervisor in self-administration proceedings) or an asset manager (e.g. a preliminary insolvency administrator). Therefore, it maintains full control of its business during the entire procedure.
Thus, appointment of a restructuring practitioner should only be necessary in exceptional cases (see below), or on application by the debtor or at least 25% of the restructuring creditors in a restructuring group who are prepared to assume the costs (section 77 (1) StaRUG). In certain cases, however, the StaRUG also provides for, the appointment by the court of a restructuring practitioner where necessary.
Pursuant to section 73 StaRUG, the appointment is to be made ex officio in the following cases:
- where there is an alteration of the rights of consumers or of micro, small or medium-sized enterprises (section 80 (1) No. 1),
- where a stabilisation order is issued with respect to all or essentially all creditors (section 80 (1) No. 2),
- to the extent that the restructuring plan provides for monitoring fulfilment of the claims to which the creditors are entitled (section 72 StaRUG) (section 80 (1) No. 3), and
- to the extent that the restructuring plan will be able to be achieved only through a cross-class cram-down (see above remarks) (section 80 (2)).
In addition, the court may appoint a restructuring practitioner in order to perform investigations as an expert, particularly concerning the requirements for confirmation of the restructuring plan in sections 63 and 64 StaRUG or concerning the reasonableness of compensation in the event of alteration of intra-group third-party collateral or a limitation of the liability of general partners (section 73 (3) StaRUG).
The individual appointed as the restructuring practitioner is to be a tax advisor, auditor, lawyer or other comparably qualified natural person experienced in restructuring and insolvency matters, chosen from among all those persons willing to undertake the office, who is suitable in respect of the individual case and is independent of the creditors and the debtor.
Sections 74 (2) and 78 (2) StaRUG provide the debtor and eligible creditors with the right to make proposals as to the person of the practitioner. The restructuring court may deviate from these proposals only if the proposed person is clearly unsuitable or the debtor opposes. The deviation is to be substantiated (sections 74 (2) and 78 (2) StaRUG).
The restructuring practitioner is remunerated on the basis of reasonable hourly rates, which depend on the size of the business, the nature and extent of the debtor’s economic difficulties and the qualifications of the restructuring practitioner and the qualified employees, and time budgets which must be specified (section 81 StaRUG). In the standard case, the remuneration for the personal work of the restructuring practitioner should amount to not more than EUR 350 per hour and for the work of the qualified employees not more than EUR 200 per hour. In special cases, higher rates or other calculation bases (value of the claims included in the restructuring plan or value of the business assets) may be fixed (see section 83 StaRUG).
According to the intent of the legislators, the restructuring procedure under the StaRUG is to take place out of court as far as possible and be limited to the group of persons involved in it. Therefore, the procedure is published only in exceptional cases.
In particular, the commencement of rehabilitation and restructuring negotiations and the drafting of a restructuring plan may (initially) occur without notifying the restructuring court.
However, if the debtor intends to have a court preliminarily review the restructuring plan, conduct the voting procedure, or confirm the plan (which is necessary e.g. in the case of a cross-class cram-down), it must notify the competent restructuring court about the restructuring project.
This is also the case where the debtor intends to apply for the ordering of stabilisation measures under sections 49 et seq. StaRUG.
If the debtor has notified the competent restructuring court about the initiation of a restructuring procedure, the obligation to apply for commencement of insolvency proceedings under section 15a InsO and section 42 of the Civil Code (Bürgerliches Gesetzbuch) is suspended while the restructuring case is pending. However, the debtor must notify the restructuring court without undue delay of the occurrence of illiquidity (section 17 InsO) or overindebtedness (section 19 InsO) while the matter is pending (section 42 (1) sentence 2 StaRUG). Failure to do so is punishable. The restructuring court will then terminate the restructuring case ex officio (section 33 (2) No. 1 StaRUG). The court may refrain from termination if, in view of the progress made in the restructuring case, the commencement of insolvency proceedings would manifestly not be in the interest of the creditors or if material insolvency resulted from terminating or calling due a claim that is subject to modification by the notified restructuring plan, provided that successful implementation of the plan is highly likely.
Until termination of the restructuring case, the manager who gave notice of illiquidity or overindebtedness is not liable for payments made in the ordinary course of business, particularly payments that are necessary for continuing normal business activities and for implementing the notified restructuring project (section 89 (3) sentence 1 StaRUG). However, the foregoing does not apply to payments that may be withheld until the restructuring court’s forthcoming decision without jeopardising the continuation of the restructuring project.
One of the main advantages of the restructuring procedure under the StaRUG with respect to out-of-court recovery in the current statutory environment is that legal acts undertaken in implementation of the restructuring plan are privileged in terms of the law of avoidance.
Pursuant to section 90 (1) StaRUG, the arrangements in a restructuring plan that has been confirmed with final and binding effect and legal acts that are undertaken in implementation of such a plan may as a rule not be avoided until viable recovery is achieved, unless confirmation was based on incorrect or incomplete information provided by the debtor and the other party was aware of this.
In particular, new financing provided by outside third parties in connection with the restructuring procedure and the provision of collateral for such financing (both of which may also be the subject of a restructuring plan, see section 12 StaRUG) are privileged by this arrangement, in any case until viable recovery is achieved.
However, transactions in connection with unconfirmed restructuring plans, i.e. those that were ultimately not implemented successfully, are not privileged.
Also not privileged are claims with the ranking specified in section 39 (1) No. 5 InsO or security which may be avoided under section 135 InsO.
In addition to the restructuring plan procedure, the StaRUG also provides for the ability to appoint a rehabilitation mediator to liaise between the debtor and the creditors.
According to the explanatory memorandum accompanying the StaRUG, rehabilitation mediation is envisaged primarily for micro and small enterprises that lack the resources to pay the costs of outside professional rehabilitation advice.
Rehabilitation mediation can result in the drafting of a rehabilitation settlement which, if confirmed by the court, enjoys the same privileges under the law of avoidance as a restructuring plan.
However, in contrast to a restructuring plan, a rehabilitation settlement cannot be enforced against the will of creditors opposed to it.
The StaRUG for the first time creates a separate legal framework for business recovery outside of formal insolvency proceedings. It thus closes the current gap between out-of-court recovery and reorganisation through formal insolvency proceedings, and it improves the options for successful recovery and restructuring outside of formal insolvency proceedings. Particularly in light of the fact that other legal systems already have comparable restructuring frameworks (e.g. the English “scheme of arrangement”), this contributes to a marked improvement of the business recovery climate at the economic hub of the Federal Republic of Germany and thus prevent a flight to foreign legal systems.
However, a number of important recovery tools, such as alterations to current contracts, that are available in other EU jurisdictions (e.g. the Netherlands) were also eliminated in the course of the legislative process. To what extent this will contribute to a flight by undertakings seeking protection in other jurisdictions remains to be seen.
The essay is available for download here.