The Corporate Stabilisation and Restructuring Act opens up new paths for companies in crisis to restructure outside of insolvency proceedings.
A Paradigm Shift in German Restructuring Law
On 1 January 2021, the Act on the Stabilisation and Restructuring Framework for Enterprises (StaRUG) entered into force. It transposes the EU Restructuring Directive into German law and creates, for the first time, a comprehensive statutory framework for pre-insolvency restructuring.
Objective and Rationale of the StaRUG
The StaRUG enables companies that find themselves in financial difficulty but are not yet insolvent to restructure without formal insolvency proceedings. The advantage: restructuring takes place under the direction of the company itself, not under the supervision of an insolvency administrator.
Scope of Application
Who Can Use the StaRUG?
The StaRUG is in principle available to all companies that:
- Are imminently unable to pay their debts (§ 18 InsO), i.e. will foreseeably become unable to pay within 24 months
- Are not yet unable to pay their debts within the meaning of § 17 InsO
- Are not yet over-indebted within the meaning of § 19 InsO
Important: where inability to pay or over-indebtedness has already occurred, the StaRUG is no longer applicable. In such cases, there is a duty to file for insolvency.
The Key Instruments of the StaRUG
1. Restructuring Plan (§§ 5-28 StaRUG)
The centrepiece of the StaRUG is the restructuring plan. It enables the targeted restructuring of liabilities against the will of individual creditors, provided the requisite majorities are achieved.
The restructuring plan may provide for the following measures:
- Deferral, reduction or complete waiver of claims
- Conversion of debt into equity (debt-to-equity swap)
- Modification of terms of financing agreements
- Interference with security rights
2. Plan Vote
Creditors are divided into groups and vote on the plan by group. Within each group, a majority of 75 per cent of the voting rights is required. A cross-class cram-down is possible where the consent of a group is lacking.
3. Stabilisation Order (§§ 49-59 StaRUG)
The restructuring court may, upon application by the debtor, issue a stabilisation order. This may comprise:
- Enforcement moratorium: creditors are temporarily prevented from enforcing their claims
- Realisation moratorium: secured assets may not be realised
The order is limited to a maximum of three months and may be extended to a maximum of four months.
4. Restructuring Commissioner (§§ 73-83 StaRUG)
The court may appoint a restructuring commissioner who safeguards creditors' interests and oversees the restructuring process. In certain cases, appointment is mandatory, for example in the case of a stabilisation order or a cross-class cram-down.
Early Crisis Detection as a New Obligation
§ 1 StaRUG: Duties of Management
The StaRUG is also relevant outside specific restructuring cases. Pursuant to § 1 StaRUG, members of the management are obliged to continuously monitor developments that could jeopardise the continued existence of the company. Upon identification of such developments, appropriate countermeasures must be taken.
This duty of early crisis detection applies to all limited-liability companies, regardless of size. Breach of this duty may give rise to personal liability of the managers.
Comparison with Insolvency
The StaRUG supplements insolvency law but does not replace it:
- StaRUG: for companies facing imminent inability to pay. Restructuring under own management. No public proceedings.
- Debtor-in-possession insolvency (§§ 270 ff. InsO): for insolvent companies. Restructuring under supervision of a custodian. Public proceedings.
- Standard insolvency: for insolvent companies. The insolvency administrator assumes management.
Advantages of the StaRUG over Insolvency
- No publicity: the proceedings are not public, protecting business operations and customer relationships
- Own management: the management team remains in control
- Selective creditor involvement: only the creditors affected by the plan are involved
- No stigma: avoiding the term "insolvency" can be critical for the continuation of business relationships
Conclusion
The StaRUG is a powerful instrument for companies in crisis. It enables early and discreet restructuring before insolvency occurs. The prerequisite, however, is that the crisis is recognised in time and that the company is capable of being restructured. Early advice from experienced restructuring advisors is the key to success.
