The Corporate Stabilization and Restructuring Act (StaRUG), which came into force on 01.01.2021, no longer offers any performance-based elements after the deletion of judicial contract termination.
Companies where there is a need for restructuring only with regard to balance sheet liabilities, but not with regard to the income statement, are rare exceptional cases. These can arise, for example, due to singular significant losses or bad investments.
StaRUG procedures will also be rare exceptional cases. After all, apart from the exceptions mentioned above, how can the debtor’s “ability to continue as a going concern be ensured or restored” without simultaneous restructuring measures (Section 14 (1) StaRUG)? And this even sustainably (§ 29 para. 1 StaRUG)?
HANSE Consulting and the law firm JOHLKE Niethammer have developed solutions that combine the classic performance-based restructuring with the new financial restructuring according to StaRUG for viable companies with a market authorization.
Interesting for you?
Then please contact our experts:
|HANSE Consulting||JOHLKE Niethammer|
|Dr. Thomas Zubke-von Thünen||Dr. Jens-Sören Schröder|
|Stefan Kleiner||Dr. Jörg Grau|
Event TMA January 26, 2021:
“StaRUG – Missed Opportunity vs. Cool Tool?”
The core of the Act on the Further Development of Restructuring and Insolvency Law (SanInsFoG) of December 22, 2020 (BGBl. 2020, Part I, No. 66, p. 3256 et seq.), which came into force on January 1, 2021, is the provision of a legal framework for preventive (i.e. insolvency-preventing) financial restructurings of going-concern companies (Corporate Stabilization and Restructuring Act of December 22, 2020 (BGBl. I p. 3256) – StaRUG).
Due to the “last minute” deletion of sections 51 et seq. StaRUG, which provided for termination of the contract by the restructuring court at the request of the debtor in line with section 109 of the German Insolvency Code (InsO), the preventive restructuring framework in Germany – unlike the so-called “Dutch Scheme”, for example – no longer offers any direct performance-based restructuring elements.
This is seen as a missed opportunity, and not only by the Executive Board of the Restructuring Association (TMA).
But does this mean that StaRUG has become uninteresting for restructuring, at best an exotic within the extrajudicial and judicial restructuring toolbox?
Based on initial practical cases, we disagree.
Together with the insolvency administrator and co-author of the Hamburg Commentary on Insolvency Law, Dr. Jens-Sören Schröder, and his partner Dr. Jörg Grau (both JOHLKE Niethammer), HANSE Consulting has held a series of online lectures on SanInsFoG and StaRUG. In the meantime, Dr. Jens Grau and Dr. Ulrich Pohlmann (JOHLKE Niethammer) have submitted the first StaRUG restructuring plan to the Hamburg District Court (Ref.: 61a RES 1/21). This was accepted by the creditors affected by the plan at the voting meeting on 29.03.2021.
Time, therefore, for a first interim assessment after one quarter of StaRUG.
Access and levers of the preventive restructuring framework
The prerequisite for access to the preventive restructuring framework is the threat of insolvency of the company within the meaning of Section 18 (2) sentence 2 of the German Insolvency Code (Insolvenzordnung, InsO), and the objective of the proceedings is the “sustainable elimination” of this threat in order to ensure or restore the company’s ability to continue as a going concern (Section 14 (1) in conjunction with Section 29 (1) StaRUG).
For access to StaRUG, the company’s integrated planning accounts, which are “as a rule” to be based on a 24-month period in accordance with Section 18 (2) sentence 2 InsO, must therefore show an impending insolvency. Particularly as a result of the Corona crisis, many entrepreneurs have experienced a sharp increase in uncertainties about future market and competitive developments as well as their own business performance. Even if the entrepreneurial goals continue to be optimistic, greater caution is required with regard to the planning parameters in order to take into account higher financial stress peaks resulting from greater volatility in the future. Should the planning calculations for your company on this basis come to the conclusion that your company could become imminently insolvent within the next 24 months, you would have the option of using the preventive restructuring framework for your company.
The core element of the preventive restructuring framework is the restructuring plan, which “shall be accompanied by a reasoned explanation of the prospects that the plan will eliminate the debtor’s impending insolvency and ensure or restore the debtor’s ability to continue as a going concern” (Section 14 (1) StaRUG). Just like the preparer of the business planning accounts, which are at the same time the access to and the basis of the restructuring plan (before measures), the drafter of the restructuring plan has considerable structuring options of which the preparer, but also the parties involved in the restructuring, should be aware.
These include in particular:
- The formation of groups of plan affected parties in accordance with Sec. 9 StaRUG, which is aligned with the objective of the restructuring plan and which allows a comparatively large scope for the formation of further (sub-) groups within legally defined groups – with the possible objectives of, for example, the group-internal overruling of well-secured but small piecework creditors within the group of secured creditors in accordance with Sec. 9 para. 1 No. 2 StaRUG, or cross-group overruling of, for example, unsecured creditors pursuant to Section 9 (1) No. 3 StaRUG by means of a cross-group majority decision pursuant to Section 26 StaRUG (“cross-class cram-down”).
- The valuation of the collateral issued, which, via the division into a secured and an unsecured part in the respective groups, firstly significantly influences the voting rights in the groups and secondly the restructuring contributions of the respective creditors. The possibility of including intra-group third-party collateral is also relevant here (Section 2 (4) StaRUG).
- The settlement calculation pursuant to Sec. 6 (2) StaRUG, and here in particular the use of going concern values or break-up values, the latter namely “if a sale of the company or a continuation in any other way is hopeless” (Sec. 6 (2) sentence 3 StaRUG). This assessment is of considerable importance, as significantly higher restructuring contributions in the StaRUG proceedings can be justified in a settlement calculation that assumes regular insolvency proceedings. In the case of an impending insolvency within the next 12 months, according to the experience of JOHLKE Niethammer, a transferring reorganization in insolvency proceedings is generally to be assumed as the basis of the settlement calculation – due to the obligation to file for insolvency that often arises without restructuring proceedings. If the threat of insolvency arises in more than 12 months, other possibilities of continuation are to be analyzed in more detail as the basis for the settlement calculation.
Resolving a stakeholder crisis among shareholders
Often, a consensual reorganization of the company is made at least considerably more difficult, if not impossible, by a perpetuated crisis within the circle of shareholders (family-family, father-son, mother-daughter, etc.). All subsequent crisis stages are usually constantly fueled by an existing stakeholder crisis within the circle of shareholders and are therefore difficult or even impossible to resolve.
In this respect, Section 6 (4) StaRUG sets out a whole range of possible instruments for resolving a stakeholder crisis threatening the existence of a company that is threatened with insolvency. These range from the possibility of a debt-equity swap and a capital reduction or increase to the exclusion of subscription rights and the transfer of share rights. This means that a squeeze-out of shareholders is possible, as is the transfer of all shares to a (dual-purpose) management and sales trust.
Solution Stakeholder Crisis in the Creditor Group (“Piecework Disruptor”)
This case is also well known, and not only at HANSE Consulting: the restructuring plan to be agreed upon by consensus threatens to fail because of the well-secured small creditor who refuses a deferral or prolongation necessary for a continuation progosis under insolvency law or a necessary pro rata waiver of claims already reduced due to his collateral position, because for him an insolvency in the regular proceedings would not mean a loss of claims. For all other creditors, it is understandably difficult to agree to unequal treatment resulting from different collateral positions.
Since voting rights are based on the amount in the case of restructuring claims and on their value in the case of rights to separate satisfaction ((Sec. 24 (1) Nos. 1 and 2 StaRUG), it should be possible in almost all cases to overrule well-secured smaller piece-rate creditors if the main creditors in the respective groups are unanimous.
Restructuring of excessive liabilities of a “going-concern” company
The objective of a StaRUG proceeding is “that the threatened insolvency of the debtor is eliminated by the plan and that the debtor’s ability to continue as a going concern is secured or restored” (Sec. 14 (1) StaRUG). The term “viability” is not legally defined. In order to be able to exist on the market, a company must have the right to operate on the market and generate a normal market return. This means that it must be able to generate the financial resources on an ongoing basis that are required in terms of investment in order to at least keep pace with competitors.
Now, in HANSE Consulting’s practice, there have been very few cases in which a necessary restructuring of balance sheet liabilities to eliminate an impending insolvency was not caused by a preceding and, in most cases, ongoing strategic, product, sales and/or earnings crisis. However, these crises are not resolved by the StaRUG procedure – the procedure “only” buys time for companies in these crisis stages, just like Fresh Money. If this time is not used to eliminate the crisis stages that caused the impending insolvency, the next impending insolvency is pre-programmed.
So is the StaRUG process just a missed opportunity after all?
The experts of HANSE Consulting and Johlke Niethammer are convinced: if integrated into a holistic restructuring concept, StaRUG proceedings can be a helpful and, in some cases, necessary additional instrument for pre-insolvency restructuring!
§ Section 6 (1) sentence 3 StaRUG states: “If restructuring measures are planned that cannot or should not be implemented in the formative part of the plan, they shall be highlighted separately in the formative part.
In order to ensure that financial and performance-related restructuring measures are binding at the same time, with restructuring contributions not only from the financial stakeholders, a “classic” restructuring plan must be drawn up in advance or in parallel. Its main measures for eliminating all the main causes of the crisis are negotiated with the stakeholders as usual and agreed in writing. The legal link to the StaRUG proceedings is established, for example, by including a condition precedent in the respective agreements that the restructuring court confirms the restructuring plan. In this way, financial and performance-related restructuring measures become legally binding at the same time as the restructuring plan is confirmed by the restructuring court.
- Agreements on better prices and conditions are concluded with the main suppliers, which contain the court confirmation of the restructuring plan as the only condition precedent and thus also enable the suppliers to continue supplying the company, which is then no longer threatened with insolvency;
- collective restructuring agreements are concluded with trade unions and works councils which contain court confirmation of the restructuring plan as the only condition precedent and offer employees the prospect of the “sustainability” of their jobs as a result of the parallel financial restructuring;
- rent reductions and/or early termination of rental agreements for unprofitable locations are agreed with often large landlords of chain stores or system gastronomy chains, which also make the remaining locations “future-proof” for the landlords and which contain the court confirmation of the restructuring plan as the only condition precedent.
In this way, a StaRUG restructuring plan in conjunction with the conditional agreements of the essential measures of a previously prepared or parallel restructuring plan can represent an advantageous solution for all stakeholders, which can often recoup the quite significant expenses for the preparation of the restructuring plan and restructuring plan through significantly lower losses or waivers of all stakeholders compared to a distressed M&A process or regular insolvency proceedings with transferred restructuring, if applicable.