StaRUG in practice: Restructuring without insolvency proceedings

When the StaRUG applies

A company is deemed to be facing imminent insolvency if it is unlikely to be able to meet its existing payment obligations when they fall due. The forecast is generally based on a period of 24 months.

Whether the tools provided by the StaRUG are appropriate depends on the nature of the crisis in question.

The framework is particularly suitable where the core business is viable but the capital or financing structure needs to be adjusted. Typical measures include extending or reducing financial liabilities, exerting influence over individual creditor groups, or restructuring collateral and priority rankings.

A prerequisite is that the key stakeholders are identified and capable of negotiating, and that no comprehensive intervention in all contractual and employment relationships is required. The added value of the StaRUG is particularly evident when a viable majority exists, but individual creditors could block an out-of-court solution.

A restructuring that requires deep intervention in operational contracts, staff, continuing obligations or a large number of small creditors is less suitable. Claims by employees, particularly those arising from employment relationships and occupational pension schemes, are difficult to structure. Nor does the StaRUG provide for the free termination of onerous contracts.

Procedure for the Restructuring Plan

The restructuring plan comprises a descriptive and a propositional section. It sets out the causes of the crisis, the reorganisation strategy, the legal relationships affected and the measures to avert the impending insolvency.

Those affected by the plan are divided into groups according to objective criteria, such as seniority, security or economic interests. Within each group, a majority of 75 per cent of the voting rights is required. In principle, the total value of claims or shareholdings is decisive, not the number of creditors.

If a group fails to achieve the required majority, its consent may be substituted subject to the conditions for a cross-group majority decision. Put simply, this requires that the members of the dissenting group are not likely to be worse off under the plan than they would be without it, that they have an appropriate share in the plan’s value, and that the required majority of the groups has given its consent.

The court may be specifically involved in relation to individual functions.

The restructuring court may conduct the vote on the plan and confirm the adopted plan. Furthermore, it may issue stabilisation orders that temporarily restrict enforcement and realisation measures. If necessary, it may also examine preliminary questions regarding the plan’s feasibility or the formation of groups.

Depending on the structure of the proceedings, a restructuring administrator is appointed or called in upon application. They oversee the process, safeguard creditors’ interests and provide the court with an independent basis for individual decisions.

The restructuring administrator does not assume any management duties. He monitors, supports or reviews the process to the extent specified by law and the court.

StaRUG, self-administration or standard insolvency proceedings?

StaRUG. The preventive restructuring framework presupposes imminent insolvency and generally takes place outside of insolvency proceedings. The managing director retains control. Interventions are specifically limited to selected restructuring claims and stakeholders. However, operational contracts and employees’ claims cannot be included at will.

Self-administration and the protective shield. These instruments are already part of the insolvency proceedings. They may be considered in cases of insolvency or over-indebtedness, or – in the case of the protective shield – subject to specific statutory eligibility criteria. The managing director continues to operate, but is subject to significantly tighter control by the administrator, the court and the rules of insolvency law. In return, more extensive reorganisation instruments are available.

Standard insolvency proceedings. In these proceedings, the power of administration and disposal is, in principle, transferred to the insolvency administrator. The proceedings are public and can have a far-reaching impact on contracts, liabilities and the operational structure. They are suitable for crises that can no longer be managed without the instruments provided by the Insolvency Code.

The decision is not a matter of image. It depends on the actual stage of the crisis and on the interventions required for a viable restructuring.

Stabilisation Order and Other Instruments

The restructuring court may, upon application, temporarily prohibit enforcement and realisation measures by certain creditors. This so-called stabilisation order creates scope for negotiations, but requires a coherent restructuring plan and ongoing solvency.

It does not constitute a general moratorium. Claims not covered by the order must continue to be met, and the order does not protect the management from a subsequent obligation to file for insolvency. If the company’s financial position deteriorates, it must immediately reassess whether the StaRUG still applies.

In the case of cross-border structures, it must be clarified at an early stage where the centre of main interests is located, which creditors and security interests abroad are affected, and on what basis under EU or national law judicial measures and the confirmed plan will be recognised. There is no automatic effect in every third-country scenario.

Early warning and preparedness by senior management

Managers of limited liability companies must continuously monitor developments that could jeopardise the company’s continued existence and take appropriate countermeasures.

An effective system combines short-term liquidity management with a robust forecast covering a period of, in principle, 24 months. Integrated planning must bring together financing maturities, covenants, significant customer and supplier risks, and the development of earnings and margins.

It is not just a matter of collecting data. Thresholds and escalation procedures must also be defined to determine when deviations are to be reported to the managing directors, the shareholders or the financing partners, and which countermeasures should be considered. Where warning signs are apparent, the analysis of the risk of insolvency must be deepened and documented in a transparent manner.

In addition to expiring credit facilities, warning signs include increasing payment terms, overdue payments, a current account facility that is consistently fully utilised, the loss of key customers or a lack of financing to cover a foreseeable liquidity shortfall.

The greatest advantage of the StaRUG is the framework for early action. However, this is lost if management only begins the restructuring process after a ground for insolvency has arisen.