On 1 January 2021, the StaRUG, which goes back to an EU directive, came into force and wants to provide a `second chance for businesses. The abbreviation stands for 'Unternehmensstabilisierungs- und –restrukturierungsgesetz' ('Corporate Stabilisation and Restructuring Act').
With this overview, we want to provide you with a high-level overview of the StaRUG on the following main issues:
- An overview of the most important aspects of the restructuring plan
- Are the proceedings public?
- Ordering a "moratorium"
- Who controls the restructuring process and when is a restructuring officer appointed?
- Are new financings protected against claw-back claims?
- What is restructuring moderation?
- Initial assessment of the StaRUG
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.
1. An overview of the most important aspects of 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.
Practice note by Dr. Schümann-Kleber:
While the original draft of the StaRUG initially only provided for the inclusion of third-party collateral provided by subsidiaries ("upstream collateral"), the final version of the StaRUG also covers third-party collateral provided by shareholders ("downstream collateral") or sister companies ("cross-stream collateral") of the debtor. This extension makes much sense, as downstream and cross-stream collateral are also typically part of group financings.
If intra-group third-party collateral is included in the restructuring plan, the value of the third-party collateral must be compensated accordingly. The provision is therefore to be understood - and rightly so - primarily as a measure to avoid disruptive potential and subsequent insolvencies by ensuring that the realisation of third-party collateral is coordinated within the framework of the restructuring concept in accordance with the model that section 166 InsO provides for insolvency proceedings. However, it also creates the possibility of flexibly structuring new financings by making third-party collateral that is released under the plan available to new financing creditors.
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:
- creditors with security interests
- unsecured creditors
- 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)
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:
|Secured creditors||Value of collateral|
|Unsecured creditors||Amount of claim|
|Shareholders||Nominal share of the debtor's subscribed capital or assets|
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.
Practice Note by Dr. Schümann-Kleber:
Through a clever plan architecture, cram-down decisions will also become possible against majorities in restructuring plan proceedings if only two groups are (allowed to be) formed. Then the consent of one group is sufficient to outvote the creditors in the rejecting group.
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.
Practice note by Prof. Dr. Hölzle:
The restructuring procedure will therefore also have to be regularly supported by obtaining a binding tax ruling. In this tax ruling, the tax office states how it will treat the restructuring profit for tax purposes.
Obtaining a binding tax ruling usually takes a long time. In the case of complex restructurings, the time required to process the tax ruling will exceed the time available to implement a restructuring plan procedure. Therefore, timely and comprehensive preparation of the restructuring process is essential.
The necessary timeframe, also taking into account expected processing times at the tax authorities, determines the managing director's standard of care and must be taken into account when selecting the "right" restructuring instrument (consensual restructuring, restructuring plan or insolvency in self-administration?).
2. Are the proceedings public?
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.
What applies with regard to the obligation to file for insolvency in restructuring proceedings?
Notifying the competent restructuring court of the restructuring plan, , has the advantage that insolvency filing obligations are suspended while the restructuring matter is pending (section 42 (1) StaRUG). However, the debtor must notify the court of any illiquidity or over-indebtedness occurring during the proceedings, and failure to do so is punishable at criminal law. The court then lifts the restructuring proceedings
- unless the restructuring project has already been implemented to such an extent that the opening of insolvency proceedings would obviously not be in the interest of the creditors, or
- the illiquidity and/or over-indebtedness results from the termination or maturity of a claim after notification of the restructuring case to the court and the success of the restructuring plan is more likely than not.
3. Ordering a "moratorium"
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).
For how long can the moratorium be ordered?
The moratorium may be ordered for a period of up to three months. The duration of the court order may be extended by a further month under certain circumstances if a restructuring plan offer is submitted. After the application for court confirmation of the restructuring plan, a further extension is possible for up to eight months from the initial order.
To whom does the moratorium apply?
In principle, the stabilisation order can be ordered with effect vis-à-vis all creditors (with the exception of creditors whose claims cannot be rearranged by a restructuring plan (e.g. employees), cf. 1.b. above) or it can be limited to individual creditors or creditor groups (section 44 (2) StaRUG).
Practice note by Prof. Dr. Hölzle:
In practice, it will therefore have to be carefully considered whether it is appropriate and conducive to the restructuring to impose a moratorium to trade creditors in particular. This is because their inclusion will regularly result in the cancellation of credit lines by trade credit insurers, or at least in their freezing, which would significantly increase the liquidity needs of the debtor company due to the significant reduction of payment targets or even a switch to advance payment. The resulting need for working capital would then have to be provided again by financiers, because there are no countervailing liquidity advantages, such as the state financing of employees’ salaries for up to three months prior to an opening of insolvency proceedings that would apply in insolvency.
Can creditors file for insolvency during the moratorium?
No. During the moratorium, the right of creditors of the debtor to file for insolvency is suspended (section 58 StaRUG).
Practice note by Prof. Dr. Hölzle:
Upon the issuance of a moratorium order that prevents secured creditors from realising their security, the debtor is obliged to separate or pay out proceeds from secured assets (section 54 (2) StaRUG). This applies to the collection of claims assigned by way of security and the sale or processing of movable property in which security interests exist. Deviating agreements with the secured creditors are possible. This means that the management or the restructuring officer will be required to conclude "utilisation agreements" with the collateral holders, if possible, in order not to have to separate collateral proceeds.
Sections 49 (1) no. 2, 54 StaRUG refer in this respect to section 21 (2) no. 5 InsO. According to the related case law on the inapplicability of the realisation stop to current assets (BGH v. 24.01.2019 - IX ZR 110/17), in preliminary insolvency proceedings the preliminary insolvency administrator must ensure that the collateral basis (storage security transfers, other collateral in inventories, landlord's liens) is not reduced by further access to the collateral assets. Section 54 (2) StaRUG takes up this logic.
4. Who controls the restructuring process and when is a restructuring officer appointed?
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.
Examination of impending illiquidity or the adequacy of compensation for the release of intra-group third-party collateral.
Practice note by Dr. Holzmann:
The fully autonomous implementation of the procedure will, in our expectation, remain theory. While merely consensual restructurings are already possible without the StaRUG, the advantage of the StaRUG procedure lies particularly in the possibility of ordering a moratorium and overruling certain dissenting stakeholders. However, the use of these possibilities will inevitably lead to the appointment of a restructuring officer, who will be provided with extensive (monitoring and auditing) tasks and powers, if only because the restructuring courts will regularly not have the capacity to examine the relevant questions comprehensively within the time frame provided for by the law.
Practice note by Dr Schümann-Kleber:
According to the StaRUG, the restructuring officer shall be remunerated on the basis of appropriate hourly rates, the amount of which is to be determined by the restructuring court, taking into account the complexity of the restructuring situation and the qualification of the restructuring officer. As a rule, the remuneration shall amount to up to EUR 350 per hour for the restructuring officer himself and up to EUR 200 per hour for qualified employees. In view of the extensive tasks of the restructuring officer on the one hand (e.g. assessing claims and collateral) and his liability to the affected parties as provided for in section 75 (4) StaRUG on the other hand, these hourly rates fall well short of normal market remuneration, at least in larger restructurings. It is therefore expected that in larger and more complex restructuring cases the practice will make use of the deviating remuneration (which permits higher hourly rates or compensation calculated on the basis of the value of the claims included in the restructuring plan or the company's assets) provided for in the law (section 83 StaRUG) for special cases.
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.
5. Are new financings protected against claw-back claims?
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).
6. What is restructuring moderation?
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.
7. Initial assessment of the StaRUG
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.
Prof. Dr. habil. Gerrit Hölzle
Author of this article
Prof. Dr. Hölzle is the head of our Insolvency Law Service Line and has been an expert in both academia and practice for many years. He has attracted nationwide attention by assuming board functions in major self-administration proceedings (Senvion GmbH, KSM Castings Group GmbH, Bonita GmbH, Auto Wichert GmbH, KTG Energie AG) and is considered one of the leading experts on complex insolvency plan structures.
Dr. Kirsten Schümann-Kleber
Author of this article
Dr. Kirsten Schümann-Kleber is a partner in the financing/financial restructuring practice area in the Berlin office of our firm. Her work focuses on advising various stakeholders in the crisis or insolvency of their subsidiaries or (potential) contractual partners. She is also regularly involved in complex financing and refinancing transactions. The vast majority of the cases Dr. Kirsten Schümann-Kleber advises on have cross-border implications.
Dr. Manuel Holzmann
Author of this article
Dr. Manuel Holzmann is a lawyer in our Berlin office. He specialises in restructuring and insolvency law advice to companies and their stakeholders in crisis and insolvency situations. He also focuses on corporate law/M&A and advising on complex financing transactions.