October 07, 2020

Pre-insolvency restructuring proceedings offer new opportunities for the preventive restructuring of companies

The preventive reorganization of enterprises over a procedure out of court has been discussed for a long time. On September 19, 2020, the Federal Ministry of Justice and Consumer Protection published a draft bill for the further development of the reorganization and insolvency law. Among other things, it implements the EU Directive 2019/1023, the so-called Restructuring Directive. The concrete implementation shall be realized through the Corporate Stabilization and Restructuring Act (Unternehmensstabilisierungs- und -restrukturierungsgesetz [StaRUG]). Since October 14, 2020, the government draft of a law for the further development of the reorganization and insolvency law has also been available, which in the main points corresponds to the draft bill. At this point we summarize for you the essential contents of the StaRUG for preventive reorganization or out-of-court restructuring. Please note that this is only a draft law so far. Changes to the draft law may still result in the legislative procedure.

Preventive restructuring is a procedure only for companies with imminent illequidity

The restructuring process is open to companies that are imminent insolvent. As a rule, imminent insolvency is deemed if the illequidity threatens to occur within a forecast horizon of 2 years. If the company is faced an impending insolvency, the management must protect the interests of the creditors, which can be done by initiating a restructuring process.

Core element of the restructuring process: The restructuring plan

The core element of the preventive reorganization will be the so-called restructuring plan. This is similar to the insolvency plan already known from the Insolvency Code and represents an agreement between the company and its creditors. The restructuring plan regulates which payments are to be made on the simple claims (so-called restructuring claims). It is not mandatory to include all creditors in the restructuring plan. Employee and pension claims cannot be included in the restructuring. The affected creditors are divided into different groups. For example, creditors with security interests are assigned to a uniform group. Within each group, the creditors must be treated equally. The restructuring plan shall be accompanied by a financial statement and an explanatory statement that the company will be restructured upon completion of the proceedings. The restructuring plan is deemed to be agreed if three quarters of the voting rights in each group are attributable to the acceptance of the plan. The voting rights depend on the amount of the claim. The approval of a group is dispensable under certain circumstances, in particular if the restructuring plan does not lead the group into a worse position. In order to protect creditors and management, payments made under the restructuring plan are generally not subject to challenge and do not give rise to liability.

Restructuring court does not need to be used

The restructuring process provides for the involvement of a court only to a limited extent. Rather, the company concerned decides itself in the preventive restructuring process to seek the necessary assistance of a restructuring court in order to help the intended restructuring to succeed. Restructuring courts are centrally responsible local courts. These courts can 

  • perform the plan reconciliation, 
  • confirm a plan in court, 
  • check central questions in advance, 
  • decide on the termination of certain contractual relationships 
  • and restrict individual actions of creditors. 

Notification to the restructuring court replaces the insolvency application

In this way, some reorganization instruments already known from the Insolvency Code can be applied in the restructuring process. The restructuring plan only has to be notified to the court. The company is obliged to notify the restructuring court if insolvency or overindebtedness occurs during the proceedings. If the management fails to notify the court, it is liable to prosecution. The notification thus replaces the filing for insolvency in the ongoing restructuring process. The notification can lead to the cancellation of the restructuring proceedings. The same applies to certain breaches of duty by the company or its directors. Individual decisions of the restructuring court can be subject to judicial review with the right of immediate appeal. A creditor may not rely on the implementation of the restructuring process to terminate a contract, to refuse performance or to take similar action. 

Restructuring officer does not necessarily have to be appointed

As required by the underlying guideline, a restructuring officer supervising the reorganization does not necessarily have to be appointed. The restructuring court has to appoint a restructuring officer only to the extent that the company makes use of judicial assistance or if creditors' rights are infringed. Finally, a so-called restructuring moderation can also be used. The company applies for the appointment of a restructuring moderator. The company must not be obviously insolvent or overindebted. A reorganization settlement concluded via the reorganization moderation can be confirmed in court, unless the underlying reorganization concept is not conclusive or has no prospect of success. It is a consensual procedure in which - unlike the restructuring plan - no measures can be implemented against the will of the creditors and which can be transferred to judicial restructuring proceedings if necessary. 

Conclusion: Modular restructuring concept for an out-of-court restructuring

In summary, it can be said that the StaRUG enables the affected companies by way of preventive reorganization to use the measures required to achieve reorganization success in a modular way. The interventions in the process to be controlled by the company itself are limited to the necessary minimum and increase in intensity in the way that creditors' rights are interfered with. In this way, the proven instruments of the Insolvency Code can be combined with the advantages of out-of-court proceedings (no "stigma" of insolvency proceedings). It should be noted, however, that these instruments are only available to those companies that recognize the looming crisis in good time. 

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