With this overview, we want to provide you with a high-level overview of the StaRUG on the following main issues:

In addition to this overview of the restructuring procedure, we will report on specific details of the StaRUG in this blog, including in particular new developments regarding managing directors and their liability, also in connection with measures required for early crisis detection.

a. What is the restructuring plan?

The core of the StaRUG is the restructuring plan. The restructuring plan enables a flexible restructuring of legal relationships of a debtor , which is in the state of impending illiquidity, with its creditors (for example, through a 'haircut' of financing liabilities and the adjustment of existing loan agreements).

A 'modular system' is available from which the debtor can choose those instruments he needs in his specific restructuring situation. The rules for restructuring plans are based on those for insolvency plans and a restructuring plan can be enforced in a binding manner even against the resistance of dissenting minorities.

Accordingly, it is not a collective procedure. Rather, the plan can be limited to certain creditor groups selected according to "appropriate criteria" (§ 8 StaRUG), e.g. leaving suppliers unaffected by the proceedings and limiting the plan to financial creditors.

The StaRUG is thus intended to close the gap between the restructuring options within insolvency proceedings, on the one hand, and consensual out-of-court restructuring solutions, on the other hand and, it aims in particular to mitigate the obstruction potential of individual "hold-out creditors".

b. Which legal relationships can be rearranged by a restructuring plan?

As in the case of an insolvency plan, the restructuring plan and the measures to be implemented with it can, in principle, be structured flexibly, with the StaRUG expressly emphasising the following legal relationships as being open to a restructuring:

• liabilities of the debtor (e.g. through (partial) waiver of claims)
• collateral provided by the debtor
• Third-party collateral (against appropriate compensation) provided by companies affiliated with the debtor (e.g. through release of collateral).
• contractual "individual provisions" in multilateral legal relationships between the debtor and a plurality of creditors; this refers in particular to syndicated loan agreements (e.g. by extending maturities, amending so-called covenants or termination rights in a syndicated loan agreement), but also, under certain circumstances, bond terms and conditions (whereby in the case of the latter it must be considered in each individual case whether inclusion in a restructuring plan brings advantages compared to a (possibly parallel) restructuring of the bond under the existing provisions of the German Bond Act (Schuldverschreibungsgesetz))
• arrangements between creditors contained in these multilateral agreements or intercreditor agreements concluded in connection therewith, to which the debtor itself - as in the case of intercreditor agreements - does not even have to be a party (e.g. by amending required consent thresholds in syndicated loan agreements or adjusting intercreditor agreements)
• existing share and membership rights in the debtor (e.g. by a debt-to-equity swap).

It should be noted that, following the example of section 225a InsO, the shareholding in the debtor itself, i.e. the rights of the shareholders, can also be included in the plan. This was criticised in the discussion as an obstacle to initiation, because the shareholder would thus run the risk of losing his shareholding in the restructuring, but it follows the guiding principle of extensive freedom of structuring.

However, the following claims cannot be restructured under the StaRUG:

• Claims by employees arising from their employment relationship
• claims arising from intentional tortious acts
• Fines, administrative fines and periodic penalty payments as well as comparable penalties.

In addition, and other than it had been envisaged by the original draft of the StaRUG as proposed by the federal government, existing contractual relationships that have not yet been completely fulfilled by both contracting parties cannot be terminated through the instruments of the StaRuG.

c. How does the voting on the restructuring plan work?

For the purpose of voting on the restructuring plan, the parties to be included in the plan are divided into groups of affected parties with the same legal status.

As a rule, these are:

1. creditors with security interests
2. unsecured creditors
3. creditors whose claims would be subordinated in insolvency proceedings (e.g. creditors of a shareholder loan of a limited liability company; see section 39 (1) no. 5 InsO)
4. shareholders

Affected parties within the same group must generally be treated equally in the restructuring plan. Furthermore, the selection of the parties to be included must not be arbitrary, but must be justified by the specific restructuring concept. For example, the fact that a claim results from a government aid programme in connection with the COVID 19 pandemic does not in itself justify different treatment, which is why, in principle, claims from government aid programmes are to be treated the same as all other financial liabilities.

However: The selection is generally not arbitrary if, although exclusively, all financial creditors are included in the proceedings.

Acceptance of the restructuring plan generally requires acceptance by each group with at least 75% of the voting rights. The voting rights are based on the following criteria:

Dissenting creditor groups can, however, be outvoted if

• the affected parties are not worse off as a result of the plan than they would be without the plan,
• they receive a fair share of the economic value of the restructuring, and
• the majority of the groups have agreed to the plan (in the case of only two groups, it shall even be sufficient if only one group agrees).

The overruling of dissenting creditor groups is called "cross-class cram-down". This procedure is set-out in § 26 StaRUG.

​​​​​​d. What applies to restructuring gains from a tax perspective?

As expected, the StaRUG does not contain any provisions on the tax consequences of a restructuring, which is why § 3a German Income Tax Act (EStG) remains applicable in this respect.

The StaRUG is intended to enable out-of-court restructurings, the publicity of which in principle means that only parties involved in the proceedings will be made aware of them. For this reason, there are no formal requirements for the commencement of restructuring negotiations and the preparation of the restructuring plan. Therefore, there is also no publication of the proceedings.

Under certain circumstances, however, the debtor must notify the competent court of his restructuring plan. This is the case if he plans one of the following measures:

• Judicial preliminary examination of the plan
• Judicial voting procedure
• Confirmation of the restructuring plan by the court (which is mandatory, for example, in the case of a cross-class cram-down)
• Stabilisation orders (stay of execution and/or realisation)

In these cases, too, however, disclosure is made only to the parties involved in the proceedings, i.e. the creditors included in the proceedings.

The StaRUG restructuring procedings provide for a modular system, which allows the debtor to choose the relevant instruments that are needed in the specific case. To safeguard restructuring projects, the StaRUG provides a so-called "moratorium" as another important instrument.

At the debtor's request, the court may issue stabilisation orders prohibiting creditors from enforcing their claims by way of compulsory execution (Zwangsvollstreckung) and from realising collateral (section 49 StaRUG).

The restructuring procedure is designed as a proceeding in which the debtor retains its autonomy. In principle, therefore, the debtor’s management controls the restructuring plan procedings and retains control over its company.

However, for non-consensual restructurings, the StaRUG provides for the involvement of a restructuring officer as an independent supervising and mediation body by court order.

The restructuring court must appoint a restructuring officer (apart from exceptional cases) in particular if

• consumers, micro, small or medium-sized enterprises are involved,
• stabilisation orders are issued
• or it is foreseeable that the plan will only be enforceable against the resistance of individual parties affected by the plan (section 73 StaRUG).

The scope of the control and participation powers conferred on the restructuring officer is at the discretion of the court. In particular, the court may also entrust the restructuring commissioner with certain examination tasks as an expert.

The initiation of the proceedings by the court is dependent on the debtor paying the anticipated costs of the proceedings in advance. Unlike the court costs and the insolvency administrator's remuneration in insolvency proceedings, the costs of the restructuring proceedings are not paid in arrears from the "estate", but must be paid in advance. This puts a strain on liquidity right at the beginning of the proceedings, which, in addition to the lack of state financing of employees’ salaries, constitutes a considerable liquidity disadvantage compared to the initiation of insolvency proceedings, especially for companies with acute liquidity needs. The debtor may then have to cover the corresponding liquidity needs with bridge financing, for example from the financial creditors involved.

Irrespective of the conditions under which the involvement of a restructuring officer is mandatory, an "optional restructuring officer" (section 77 StaRUG) can also be appointed. This representative also supports the debtor and the creditors in the preparation and negotiation of the restructuring plan. An application by the debtor or by creditors holding more than 25% of the voting rights in a group is required.

The restructuring plan may also provide for new financing commitments and their collateralisation (§ 12 StaRUG), if these are necessary for the success of the restructuring.

The respective provisions of a restructuring plan and the legal acts taken to execute it until a “sustainable restructuring” shall be exempt (apart from exceptional cases) from claw-back claims pursuant to sections 129 et seq. InsO in later insolvency proceedings (section 90 (1) StaRUG). However, with respect to new financings only the disbursement and collateralisation of a loan, but not its repayment , shall be exempt from claw-back claims. The debt repayment is therefore not privileged under avoidance law in any subsequent insolvency proceedings.

However, this does not change the fact that at least the collateralisation of new financing enjoys increased protection against claw-back claims.
In addition, the following further restrictions of the claw-back privilege must be observed:

• The privilege under avoidance law should not apply to subordinated shareholder loans and their collateralisation.
• Furthermore, (external) financiers shall only be protected by the claw-back privilege against a failure of the planned restructuring concept that, contrary to expectations, leads to insolvency. If, on the other hand, the insolvency of the debtor occurs at a later point in time, independently of the restructuring project, and thus only after a "sustainable restructuring" had been achieved, the protection against claw-back claims no longer applies. This restriction corresponds to section 39 (4) sentence 2 InsO, which provides for an exception to the insolvency law subordination of shareholder loans for restructuring purposes.

In addition, other legal risks that exist in connection with restructuring financing outside of restructuring plans shall be minimised. For example, the law does not consider legal transactions undertaken with the awareness of a restructuring plan as an improper contribution to delaying insolvency (section 89 (1) StaRUG).

Independently of the restructuring plan procedings, the StaRUG provides for the possibility of appointing a restructuring moderator by court order for a period of up to three months at the debtor's request. This person shall mediate between the debtor and its creditors in an economic crisis and assist in the preparation of a (consensual) restructuring concept.

The restructuring moderation can lead to the preparation of a restructuring settlement agreement, which, if confirmed by the court, is subject to the same privileges with respect to claw-back claims as the measures of a restructuring plan.

Unlike the restructuring plan, however, the restructuring settlement does not enable enforcement against the will of obstructing creditors. The remedy of restructuring moderation is intended in particular for micro and small enterprises, for which the costs of professional external restructuring advice can create a significant financial burden.

The StaRUG's high degree of flexibility opens up considerable restructuring potential. At the same time, however, the StaRUG falls short of the conceivable restructuring possibilities insofar as the original government draft version of the StaRUG still provided for an instrument with which certain mutual contracts of the debtor could have been terminated; this instrument, which would have been of particular interest to companies with branch operations, was not included in the final version of the StaRUG as it entered into force.

German restructuring and reorganisation law is usefully supplemented by the provisions of the StaRUG. The planned restructuring framework should above all offer a solution for cases in which a (particularly balance sheet) restructuring risks failure due to the resistance of individual hold-out creditors. The law may be particularly relevant for companies with high financing liabilities (for example, also as a result of the utilisation of the KfW loans made available in connection with the COVID 19 pandemic), but also rent or tax liabilities that have been deferred as part of the COVID 19 support measures.

In contrast, there is criticism that the proceedings are highly complex and require considerable external advice. A restructuring plan proceeding therefore needs to be well prepared.

Only practice can show how broad the scope of the new laws or the advantages they confer will be compared with well-prepared self-administration insolvency proceedings. However, the StaRUG provides more nuanced solutions in German reorganisation and restructuring law; the kind of “escape” into foreign legal systems, which could be observed in the past, should thus be partially prevented. But particularly as a result of the deletion of contract termination options, the possibilities of foreign legal systems - if applicable - will have to continue to be taken into account in restructuring law considerations.