Restructuring Directive now implemented in Germany

Berlin, 2021-01-28

In 2016 the European Commission presented a proposal for a "Directive of the European Parliament and the Council on preventive restructuring frameworks, second chance and measures to improve the efficiency of restructuring, insolvency and debt relief proceedings". This amended Directive 2012/30/EU" or "EU Restructuring Directive" for short, which was intended to help overcome the consequences of the 2008/2009 financial crisis. After intensive discussion in the European bodies, the directive entered into force in July 2019.

With its record-breaking accelerated implementation into national law, most recently against the backdrop of the Corona pandemic - there were less than 4 months between the first draft from the Ministry of Justice on 18 September 2020 and the entry into force of the law on 1 January 2021 - a pre-insolvency restructuring procedure has now also been implemented in Germany.

The detailed regulations can be found in the Act on the Stabilization and Restructuring Framework for Companies (StaRUG), which as Article 1 makes up the most extensive part of the Act on the Further Development of Restructuring and Insolvency Law (SanInsFoG).

The content of the reorganization procedure in the StaRUG is very similar to the German regulations on insolvency plan proceedings. Here also a (restructuring) plan must be drawn up, the content of which must follow Article 5 ff. of the StaRUG. However, some legal relationships are not amenable to being structured within the framework of such a plan. The most important example is employee claims (Article 4 StaRUG). The originally envisaged possibility of being able to dispose of existing contractual obligations arising from mutual contracts in the future, in particular those arising from continuing obligations, within the framework of the reorganization proceedings, has also been dropped.

As in the insolvency plan proceedings, the creditors in the restructuring plan are also divided into groups, Article 9 StaRUG, in each of which separate votes are then taken. However, unlike in the insolvency proceedings, the restructuring plan may be limited to those creditors who are important for the success of the restructure, Article 8 No. 2 StaRUG. The plan is accepted if it is approved by three-quarters of the vote of the respective groups, Article. 25 StaRUG. This is the same procedure as in the insolvency plan proceedings, however, groups rejecting the plan can also be outvoted here if the plan ultimately achieves a majority across all groups that meet the requirements of Article 26 StaRUG (so-called cramdown).

If the debtor conducts the proceedings without the assistance of a court, it may initially make the plan available to the creditors affected by it in text form (i.e. also sufficiently by e-mail) and set them a deadline for acceptance of at least 14 days. If the affected parties have not previously been allowed to jointly discuss the plan, this must include a notice that a discussion meeting will be held at the request of a creditor, Article 17 (3) StaRUG. Under Article 20 StaRUG, however, the debtor may also provide from the outset for a vote at a meeting of the parties affected by the plan.

If the debtor expects that individual parties affected by the plan will not participate, it will regularly make use of the option under Article 23 StaRUG to have the plan voted on in court proceedings, to assist with legal certainty.

Such proceedings must also be initiated if the debtor intends to make use of other "instruments of the stabilization and restructuring framework" (Art. 29 StaRUG). This will regularly be the case, in particular if it is intended to obtain enforcement and/or liquidation freeze through the issuance of a stabilization order under Art. 49 StaRUG.

For the creditors concerned, this means that they can no longer enforce existing claims and that they may even be provisionally prohibited from enforcing important security interests, which primarily concerns simple and extended retention of title. Under Article 55 StaRUG, if the debtor is dependent on its performance for the continuation of the business, the creditor is precluded in this case both from refusing performance and from terminating or amending the contract by invoking the debtor's default. However, in these cases, the creditors who are obliged to pay in advance are at least granted protection to a certain extent by Art. 55 (3) StaRUG. They may demand collateral or insist that performance be made only concurrently. Loans and other credit commitments that have not yet been disbursed may be terminated on the grounds of deterioration in financial circumstances.

As provided for in the EU Directive, the debtor can in principle conduct the proceedings on its own. However - and this will probably be the rule in the future, if only because of the complexity of the proceedings - a restructuring representative can be appointed by the court at the debtor's request: in a large number of constellations listed in Article 73 StaRUG, this appointment must even be made by the court ex officio. Finally, the appointment may also be made at the request of creditors if they hold more than 25% of the voting rights in a group and undertake to bear the costs.

The tasks of a mandatory restructuring representative according to Article 76 StaRUG are similar to those of the administrator in insolvency in self-administration. The optionally appointed restructuring representative, on the other hand, only has the task of supporting the parties involved in the preparation of the restructuring concept and plan, Article 79 StaRUG. The remuneration of the restructuring representative is also regulated in the StaRUG. Accordingly, he receives a fee based on the time spent, which as a rule amounts to € 350/h, and can charge up to € 200/h for the assistance of qualified employees, Article 81 StaRUG.

For proceedings of particular importance, Art. 93 StaRUG provides that the court may set up a creditors' advisory council in line with the provisions of insolvency law.

Finally, Art. 94 et seq. StaRUG contains provisions on the so-called restructuring facilitation. This is appropriate if there is a good chance of a consensual agreement with all creditors affected by the restructuring. In this case, a restructuring moderator is appointed by the court to mediate between the parties involved. The proceedings end either with the conclusion of a restructuring settlement, which is confirmed by the restructuring court at the debtor's request - Article 97 StaRUG - or there is a transition to the stabilization and restructuring framework according to Article 100 StaRUG and thus to restructuring proceedings under court direction.

In summary, creditors can be severely affected by pre-insolvency reorganization proceedings as in the case of insolvency of their contractual partner. Even if they want to support the reorganization efforts, they should keep in mind that insolvency proceedings may follow if the reorganization fails, and in that case, the risk of a later challenge of insolvency must also be kept in mind. Articles 89 and 90 StaRUG grant only very limited protection against the avoidance of legal acts in the course of the reorganization proceedings and the context of the fulfilment of the restructuring plan. In the case of transactions with the debtor during ongoing reorganization proceedings, it is therefore imperative to ensure compliance with the requirements of cash transactions within the meaning of Article 142 InsO. Often this will require the instruments set out in Article 55 StaRUG. The protection against avoidance concerning legal acts within the scope of plan fulfilment presupposes a plan that has been established by the court.

The pitfall in these matters often lies in the details. For example, refusal to provide further performance by invoking Article 55 (2) StaRUG may be accompanied by substantial claims for damages by the debtor if the creditor fails to prove that the requirements of the provision have been met. When dealing with debtors who are pursuing pre-insolvency reorganization proceedings, it is therefore essential not to save money at the wrong end, but to make sure that legal expertise is consulted.

Author: RA Lutz Paschen

PASCHEN Rechtsanwälte