I. Act for the further development of restructuring and insolvency law (SanInsFoG)

Following a fast-track legislative process, the Act for the further development of restructuring and insolvency law (Sanierungs- und Insolvenzrechtsfortentwicklungsgesetz, SanInsFoG) comes into force on 1 January 2021. Its aim is the implementation of the Restructuring Directive (Directive (EU) 2019/1023 of 20 June 2019) into national law. The implementation of the Directive will create pre-insolvency restructuring options for companies in crisis across the European Union. Until now, such procedures have only existed in individual member states, such as the UK (scheme of arrangement) and France (procedure de sauvegarde).
In Germany in particular, the implementation of the Directive represents an innovation: German insolvency law has so far lacked a legal framework for restructuring outside of insolvency proceedings. Corporate restructuring on the basis of out-of-court negotiations is possible, but if individual parties refuse to support the restructuring plan (referred to as “Holdouts”), the project fails – even if it would have benefited all parties involved.
The SanInsFoG now implements the “preventive restructuring framework” of the Directive into German law. The corresponding regulations are primarily found in a new Business Stabilization and Restructuring Act (StaRUG), but regulations of the German Insolvency Code (Insolvenzordnung, InsO) have also been changed. The proceedings under the restructuring plan mostly follow the tried and tested insolvency plan procedure, sec. 217-269 InsO, which is only accessible within insolvency proceedings.

II. Overview of the new Business Stabilization and Restructuring Act (StaRUG)

In the following we explain the most important regulatory matters of the StaRUG.

1. Stabilization and restructuring framework

The core of StaRUG is the pre-insolvency restructuring framework. Companies in the stage of imminent illiquidity that are not yet illiquid or over-indebted have the possibility to restructure themselves on the basis of a restructuring plan, independent of insolvency proceedings. The restructuring plan must be accepted by a majority and affects all creditors and shareholders involved (so-called Planbetroffene (affected parties), including those who do not agree with the plan. In principle, the company concerned will conduct the negotiations with the creditors themselves. Business operations shall also be maintained.

a) Content of the restructuring plan (sec. 5 et seq. StaRUG)

The restructuring plan consists of a descriptive and a normative part. While the descriptive part describes the restructuring concept and mainly serves informational purposes, the normative part modifies the legal position of those affected by the plan.
Liabilities of the debtor, (third-party) collateral provided by the debtor or its subsidiaries, share and membership rights in the debtor, but also multilateral contractual relationships between the debtor and creditors (e.g. syndicated loan agreements) or between creditors among themselves (e.g. inter-creditor agreements) can be “shaped” by the plan. The restructuring plan may, for example, amend the maturity and termination provisions of existing loan agreements or establish debt to equity swaps. New financing or new collateral may also be implemented this way. However, employee claims cannot be restructured by the plan.
The plan divides the affected parties into groups. Their group affiliation depends on the nature of their respective claims (secured and unsecured creditors, creditors with subordinated insolvency claims, shareholders). The affected parties must be treated equally within the same group.
At this point we would like to point out that the BMJV will publish a checklist for restructuring plans that is adapted to the needs of small and medium-sized businesses (to be found here as soon as the law comes into force).

b) Acceptance of the restructuring plan (sec. 17 et. seq. StaRUG)

Once the plan has been drawn up, the debtor may obtain the consent of the parties involved individually or hold a meeting to vote on the plan. Voting takes place in the respective creditor groups. To become effective, the plan must be accepted by each group with a majority of at least 75% of the voting rights. The voting rights depend on the amount of the claim or the value of the collateral held by the creditor.
If the 75 % majority is not reached within a group, a “cross-class cram-down” is possible: If, on the whole, the majority of the voting groups have voted in favor of the plan, the plan will still be adopted as long as the members of the dissenting group are not worse off by the plan than they would be without it and receive a fair share of the economic value of the restructuring.

2. Judicial proceedings

In addition, the StaRUG contains a number of judicial support proceedings (called “Instruments of the Stabilization and Restructuring Framework (Instrumente des Stabilisierungs- und Restrukturierungsrahmens)”, sec. 29 StaRUG), which the debtor can, but does not have to, make use of in the course of the restructuring. A judicial participation is therefore not mandatory. Furthermore, it is up to the debtor to decide whether he wants to conduct the proceedings publicly or not.
In this context, the debtor may:

• request that a vote on the plan be conducted in court proceedings instead of conducting the vote himself,
• obtain judicial confirmation of the restructuring plan, with the effect that the affected parties only have limited legal remedies and that the plan is protected from insolvency contention in the event of a subsequent insolvency,
• refer the disputed questions of law to the court for preliminary examination,
• apply for a moratorium (a ban on enforcement and realization) for a period of up to three months, so that creditors cannot enforce their claims by way of foreclosure or the realization of collateral.

For this purpose, a new court jurisdiction will be created: a local court in the district of each Higher Regional Court will have exclusive jurisdiction as a so-called “restructuring court” for all proceedings under the StaRUG (sec. 34 StaRUG).
Upon request, the court also appoints a restructuring agent to assist debtors and creditors in negotiating and drafting the restructuring plan. However, if consumers or micro, small or medium-sized enterprises are involved in the restructuring matter, if the debtor applies for a moratorium or if it is foreseeable that individual parties affected by the plan will not agree to the plan, the involvement of the restructuring agent is no longer optional but is appointed ex officio (sec. 73 et seq. StaRUG). In that case, the restructuring agent may, at the court’s discretion, also be granted various powers of examination and of participation (e.g. examinations as an expert, supervision of management, approval of certain payment transactions).
Another new feature is the restructuring moderation (sec. 94 et seq. StaRUG). For debtors who are in economic or financial difficulties but are not yet illiquid or over-indebted, the court appoints a reorganization moderator upon request to assist debtors and creditors in restructuring negotiations. A restructuring settlement that is subsequently concluded can be approved by the court and thus be protected from insolvency contention in later proceedings.

3. Management liability

Managers are now obliged to set up an early warning system and where necessary, to take crisis management measures. However, the StaRUG contains no other provisions increasing the liability of managers. While the draft bill contained increased management duties when faced with imminent illiquidity, those provisions were ultimately struck from the draft due to uncertainties regarding their compatibility with the current liability regime.
However, the new sec. 15b InsO provides a liability relief: Unlike before, managers are not liable for payments made to maintain business operations after the business becomes illiquid or over-indebted – as long as managers fulfill their obligations under insolvency law (e.g. preparation of the insolvency application or taking measures to avert insolvency). If managers comply with their obligation to file for insolvency under sec. 15a InsO, tax debts do not have to be settled upon entering illiquidity or over-indebtedness.

III. Relationship of the new regulations to the insolvency proceedings

In order to create a clear distinction between restructuring matters (imminent illiquidity) and insolvency proceedings (over-indebtedness), the SanInsFoG amends the Insolvency Code (InsO). In future, the forecast period for imminent illiquidity (sec. 18 para. 2 InsO) will be 24 months, whereas the forecast period for over-indebtedness (sec. 19 para. 2 InsO) will only be twelve months. However, an exception is made for companies affected by the COVID-19 pandemic: between 1 January 2021 and 31 December 2021, the forecast period for over-indebtedness will only be four months, if the over-indebtedness was caused by the COVID-19 pandemic. Thus, an insolvency application does not have to be filed solely because of current forecast uncertainties. Furthermore, the application period is extended from three to six weeks in the event of over-indebtedness (sec. 15a para. 1 InsO), so that over-indebtedness can still be averted under certain circumstances.
As long as a restructuring matter is pending, the obligation to file for insolvency is suspended (sec. 42 StaRUG); if a moratorium is imposed, the creditors’ right to file for insolvency is also suspended (sec. 14 InsO). However, the debtor is obliged to give immediate notice if the business becomes illiquid or over-indebted. In principle, this has the consequence of the restructuring matter being terminated and the opening of insolvency proceedings. However, the court may refrain from termination if the restructuring matter has progressed so far that the termination would not be in the interest of the creditors.

IV. Conclusion

The major advantage of the new restructuring framework is the introduction of the majority principle, as seen in the existing insolvency plan procedure, in the pre-insolvency phase: Restructurings can no longer fail due to the resistance of individual creditors and no formal insolvency must be carried out. In addition, the “mix & match” character of the judicial support proceedings enables flexible adaptation of the restructuring project to the debtor’s needs. It is to be expected that Germany will become more popular as a restructuring location in the future and that there will be less need to resort to other legal systems (“forum shopping”). However, it remains to be seen whether the complex proceedings will provide added value for small and medium-sized companies.