Restructuring Without Insolvency: What is it about?
As of January 2021, the new restructuring framework provides companies with extended financial restructuring instruments outside of insolvency.
The German Act on the Stabilization and Restructuring Framework for Companies (StaRUG) is regulated in the German Act on the Further Development of Restructuring and Insolvency Law (SanInsFoG). This is due to an EU directive that stipulates a procedure for pre-insolvency restructuring throughout Europe. The StaRUG is intended to provide all entrepreneurs, including those who have encountered economic difficulties caused by Covid, with new instruments to help them get through a crisis more successfully.
The Act constitutes a crucial step towards the introduction of a reorganization procedure prior to insolvency in German law. It is intended to throw a bridge between consensual restructuring and insolvency.
It is the aim of the new StaRUG procedure to enable entrepreneurs to restructure their business without having to go through insolvency proceedings. The law has been effective since January 1, 2021.
The law is intended to avoid the disadvantages of insolvency, such as a potential reputational loss, high costs and restrictions on the management’s freedom of choice. At the same time, the company is to have access to selected restructuring instruments from insolvency law. It will be possible, among other things, to intervene in the rights of certain creditor groups outside of ordinary insolvency, self-administration or protective shield proceedings. In this way it can be prevented, for example, that individual creditors block the reorganization of the company. The management is to be able to negotiate independently with creditors and to summarize this within the framework of a restructuring plan. The plan itself includes all the necessary measures for a successful restructuring of the company and is submitted to the creditors for approval. The process is supported by the possibility of enforcement blocks. These can be used to prevent actions by individual creditors from impairing the success of the reorganization.
For Which Company is the New Restructuring Process Intended?
The restructuring process is directed at all companies facing the threat of insolvency. This means that insolvency is imminent, but the company is still solvent. The forecast period for imminent insolvency is two years. This means that a company is threatened with insolvency if it is expected to become insolvent within the next two years.
Reasons for imminent insolvency could be:
- the crisis continues
- no new customers can be won
- orders are not received
- sales collapse
- payments are not received
- costs rise continuously
- banks no longer grant loans, etc.
The precondition for restructuring is that the prospect of reorganization is positive. Until now, companies were able to file for insolvency and restructure via the insolvency proceedings in such cases.
Differences from Previous Insolvency Proceedings
With the new law, it is possible to implement restructuring measures outside of an insolvency and even against the will of individual creditors. Preconditions are:
- The restructuring takes place without insolvency application.
- The entrepreneur notifies the district court of the restructuring project.
- The court appoints a restructuring officer to assist the entrepreneur.
- The entrepreneur elaborates an overall settlement together with the creditors, the so-called restructuring plan, which must be accepted by the majority of the creditors.
- The aim is the reorganization of the business.
Course of the Procedure
First, in addition to the threat of insolvency, it is crucial to prepare the restructuring process thoroughly. Expert advice is required here. The preparation includes:
- a robust financial plan for at least 24 months
- an overview of the appropriate resources for restructuring
- classification of creditor groups
- if necessary, selection or proposal of a restructuring officer
It is vital that the entrepreneur involves his creditors. The goal is a restructuring concept, or a restructuring plan, that is accepted by 75 percent of the creditors.
The entrepreneur notifies the court of the StaRUG proceedings and thus initiates the proceedings. In addition to the restructuring concept, he or she submits confirmation that the company is in a state of imminent insolvency.
What is important in the restructuring process?
In the restructuring process, the following elements are key:
- The entrepreneur himself continues to run his business. He remains in the Driver’s Seat.
- The majority of creditor votes is enough for the restructuring plan to be accepted. This majority can outvote individual creditors. It is sufficient if a majority of 75 percent is achieved in each creditor group. Individual groups can also be outvoted if the majority of the groups agrees to the plan.
- The groups have to be formed based on appropriate criteria. Claims of employees, including company pension schemes, are not included.
- The debtor can apply for protection against foreclosure to the restructuring court. This means that creditors cannot block a promising restructuring by taking arbitrary measures.
Duties of the Restructuring Officer
The restructuring officer has the following duties:
- He or she monitors the procedure.
- He or she assists medium, small or micro entrepreneurs or consumers when their demands in the restructuring plan are voted on.
- He or she may, upon the order of the court, examine the enterprise’s economic situation and supervise the payment transactions during the restructuring procedure.
Formation of Creditor Groups
The formation of creditor groups is a vital task in the restructuring process. It is possible for a company to limit itself to certain creditor groups from the beginning – for example, financial creditors such as banks or suppliers – based on appropriate criteria. In addition, it may decide to leave certain creditors out. This can make sense, for example, if it is likely that creditors who have supplied the goods subject to reservation of ownership will reclaim the goods if they become aware of the impending insolvency.
Furthermore, the following elements are necessary:
- a robust financial plan,
- ongoing communication with the creditors, and
- resilient planning as to which means are appropriate for restructuring.
Costs of the Procedure?
Court costs of between EUR 250 and EUR 1500 will be payable. If a legal counsel is called in, he or she is to charge a maximum of EUR 350 per hour. Additionally, there are court fees for his or her appointment and supervision of EUR 500.
It is necessary to prepare thoroughly for a successful restructuring procedure.
In the near future, there will not only be a great number of restructuring proceedings, but also insolvencies. This presents debtors and creditors with major challenges.
For all entrepreneurs, it is recommended to implement a strong risk management, both in the form of an early warning system and a crisis management, in order to explore restructuring opportunities.
For creditors, it is crucial to establish a risk management system to monitor:
- Credit assessment of existing and new customers,
- Receivables management in the company and
- Ongoing audit of invoice receipts and establish check and dunning system.
Here, Legal Tech can also help, for example, software programs for accounting and dunning.
We are happy to help with all of these matters.
You can also find more advice on this and other corporate law topics on my Youtube channel “Recht hat er!”.