Restructuring a company with the StaRUG - Tips for GmbHs & Companies

• Definition and purpose of the StaRUG
• Who can use the StaRUG?
• Advantages of the StaRUG procedure
• Innovations through the StaRUG
• Requirements for restructuring the company without insolvency
• Objectives and benefits of the StaRUG
• Central elements of the StaRUG
• These are the instruments of the stabilisation and restructuring framework
• Procedure of the restructuring procedure according to StaRUG

Definition and purpose of the StaRUG

The Corporate Stabilization and Restructuring Act (StaRUG) enables companies to take restructuring measures early and outside of insolvency proceedings in order to avoid insolvency.

Restructuring procedures under StaRUG – Who can use them?

The restructuring process is intended for companies that are still solvent but could become insolvent within the next two years. This situation is called impending insolvency. As long as the company is still solvent but is facing insolvency, it can use the process to take early countermeasures.

Reasons for impending insolvency can be:

• Revenues collapse, sales decline
• High costs and rising expenses
• Lack of liquidity (lack of reserves, payment terms too long)
• Banks no longer grant loans and other aid has been exhausted
• Over-indebtedness and high liabilities (long-term high credit burdens)
• Lack of adaptation to changing market situation
• Legal problems with financial consequences
  

Since when has the Corporate Stabilization and Restructuring Act (StaRUG) existed?

The StaRUG has been in force since 1 January 2021.

The StaRUG procedure (pursuant to Sections 2 et seq. StaRUG) represents the option of restructuring without insolvency and can be described as a legal framework for restructuring without insolvency. The restructuring is carried out based on a restructuring plan approved by a majority of creditors.

Restructuring a company is a complex matter and requires early planning. A restructuring plan can stabilize the company financially without insolvency proceedings, long before the threat of insolvency occurs.

In the following article, you will learn about the most important framework conditions and the ideal procedure if you want to restructure on the basis of the StaRUG.

Note to avoid problems: Filing for insolvency is mandatory in the following cases:

Legal entities (e.g., limited liability companies, stock corporations) and comparable companies (e.g., limited liability companies & limited partnerships) must file for insolvency immediately if they are unable to pay or are over-indebted. In the case of impending insolvency, there is a right to file , but no obligation.

A timely application for insolvency can avoid liability risks for managing directors and keep restructuring options open.

Three reasons that may require the opening of insolvency proceedings:

1. Over-indebtedness: Within 12 months, a financing gap arises and assets are not sufficient to cover liabilities.
2. Imminent insolvency: The company is currently liquid, but a financing gap will arise within 24 months.
3. Insolvency: The company can no longer pay outstanding invoices.

>> Further information on corporate insolvency and countermeasures  

Advantages of the StaRUG procedure:

Early intervention: Companies can act as soon as insolvency is imminent and do not have to wait for an acute crisis.

Avoiding insolvency: Preventive measures ensure that business operations are maintained and jobs can be secured.

Differences to traditional insolvency proceedings:

Discretion: The StaRUG procedure can be carried out largely without public announcement, which protects the company's reputation.

Corporate management:
The management usually remains in office and retains control over the company.

Innovations through the StaRUG

The StaRUG gives companies the choice of which creditors to include in the restructuring plan. At the same time, it provides tools to facilitate planning and implementation.

The StaRUG is particularly suitable for financial restructuring, e.g. through a debt restructuring.

It also obliges management of all legal forms to identify crises at an early stage and to initiate countermeasures in a timely manner.

Requirements for restructuring the company without insolvency

The StaRUG procedure is aimed at companies that are at risk of insolvency and thus facing bankruptcy. This means that the company is still solvent. It must be neither insolvent nor over-indebted within the meaning of the Insolvency Code (InsO).

If the company is already insolvent or over-indebted, insolvency proceedings remain the only option. Therefore, it is important to act early to take advantage of all restructuring options.

The forecast period for impending insolvency is two years. This means that a company is considered impending insolvency if it is expected to become insolvent within the next two years.

Objectives and benefits of the StaRUG

The objective of the StaRUG is to permanently eliminate impending insolvency (Section 29 StaRUG). In contrast, insolvency aims to achieve the best possible satisfaction of creditors (Section 1 InsO).

The StaRUG provides tools that enable companies to restructure outside of insolvency proceedings. It closes the gap between free restructuring before insolvency and restructuring within the framework of court-ordered insolvency proceedings.

Central elements of the StaRUG

• Preventive restructuring framework:
  The StaRUG provides companies in crisis with a preventive restructuring framework. Previously, only out-of-court restructuring or restructuring through insolvency proceedings were available. The preventive restructuring framework is used before insolvency occurs.
• Restructuring plan:
  The restructuring plan is similar in structure to the insolvency plan. It consists of a descriptive and a constructive part.
• Judicial support:
  If the plan is to be confirmed by the court, the court will examine whether the plan is impending insolvency. The court can enforce the plan even against the will of a minority opposing it. Without impending insolvency, the only option is an out-of-court settlement without being bound by the plan.
• Restructuring moderator and restructuring officer:
  The restructuring moderator mediates between the company and its creditors to reach a restructuring agreement. The restructuring officer oversees the process, safeguards the interests of all parties involved, and supports the preparation of the plan. They also act as the contact person for the court.

These are the instruments of the stabilisation and restructuring framework:

Companies can resort to various procedural aids, the so-called instruments of the stabilization and restructuring framework (Section 29 of the StaRUG). These offer the debtor considerable freedom of decision, reflecting the basic idea of ​​the StaRUG: Unlike in insolvency proceedings, control remains largely with the debtor.

Before the creditors vote on the restructuring plan, the company tries to convince them of its restructuring concept and makes adjustments if necessary.

During this negotiation phase, the debtor can access the instruments of the StaRUG to secure his chances of restructuring.
In particular, he can:

• obtain a court stabilisation order to suspend enforcement and realisation for certain or all creditors if this is necessary for the success of the restructuring,
• by judicial confirmation, make the restructuring plan binding even for creditors who have not consented.
• These instruments can be applied for when the project is notified or during the preparation of the plan.

The StaRUG offers the following restructuring instruments, which can be applied for individually and independently of one another:

• Judicial plan approval (§§ 45 ff.),
• Preliminary examination of relevant questions regarding the confirmability of the plan (§§ 47 ff.),
• Stabilisation order (enforcement and disposal bans, §§ 49 ff.) for a maximum of three to four months,
• Confirmation of the restructuring plan (§§ 60 ff.), especially in the case of out-of-court plan approval.

Procedure of the restructuring procedure according to StaRUG

First quick overview of the process according to StaRUG:

Restructuring review: Examine the chances of success and inform the advisory board or supervisory board.
Restructuring plan: Preparation of a plan that describes the necessary measures to restructure the company.
Creditors' vote: The plan is submitted to creditors for a vote; approval by 75% of the voting rights is required.
Court approval: If the vote is successful, the plan can be approved by the court, making it binding for all parties involved.

The restructuring process under the StaRUG comprises several steps, ranging from early crisis detection to judicial confirmation of the restructuring plan. Through early and well-planned measures, a company can increase its chances of successful restructuring and avoid insolvency or excessive indebtedness.

Restructuring review

First, it is examined whether the restructuring can be successful. The sooner a company acts, the greater the chances of a successful restructuring. If a crisis is foreseeable, management must take action and inform the advisory board or supervisory board. The StaRUG applies if the company is imminently insolvent, i.e., if insolvency is likely within the next 24 months. However, if the company is already insolvent or over-indebted, insolvency proceedings remain the only option.

Selection of creditors to be included

Unlike insolvency, the restructuring plan only affects certain creditor groups. The company can decide for itself which creditors and, if applicable, shareholders are included. For example, financial creditors can be included but suppliers can be excluded.

Notification to the restructuring court

If the company has opted for the StaRUG procedure, it must notify the restructuring court of its intentions. From this point on, the obligation to file for insolvency is suspended. Documents such as a draft restructuring plan or a concept and details of the planned approach must be submitted with the notification.

Preparation of the restructuring plan

The restructuring plan is similar to an insolvency plan, but can be limited to specific groups of creditors. It is not a collective procedure, but rather focuses on groups selected according to appropriate criteria. The plan can also change the rights of shareholders, for example, through capital reductions or the exclusion of existing shareholders.

Plan offer

Before a vote on the plan is taken, a plan offer must be sent to those affected, regardless of whether the vote is conducted out of court or in court. The plan offer contains the complete plan, information on the legal implications, and an overview of past and expected costs.

Plan approval

The plan approval can be conducted out of court or in court. A court-sponsored plan approval offers the advantage of avoiding disputes over the proper procedure. Out-of-court approval carries the risk that the court may refuse to approve the plan.

Majorities for the plan acceptance

A 75% majority of the voting rights in each creditor group is required for adoption of the plan. Secured creditors vote according to the value of their collateral, unsecured creditors according to the amount of their claims. Shareholders vote according to their share of the subscribed capital.

Confirmation or rejection of the restructuring plan

The court may reject the plan if the company is not imminently insolvent, if procedural errors exist, or if the creditors' claims cannot be met. In the case of out-of-court resolution, the parties affected by the plan must be heard before the court makes a decision. The plan is usually confirmed within six months of notification of the restructuring plan.

You can view the latest legal changes to the StaRUG here:
https://www.buzer.de/gesetz/14367/l.htm