StaRUG – Closing the gap

On 1 January, the “Act on the Stabilisation and Restructuring Framework for Enterprises" ("StaRUG") came into force. The Act was transposed into national law based on an EU directive serving also as a frame of reference for drafting the Act's over 100 very extensive and complex articles.

At the same time, it is remarkable how quickly the new law was implemented. In September 2020, the draft bill was presented, around four weeks later the government draft followed, on 17 December the Bundestag passed the law and on 29 December it was published in the Federal Law Gazette.

Further development of the restructuring landscape

Opinions of experts about the Act are greatly divided. While insolvency practitioners have often pointed out that the Act should be significantly amended because it is too debtor-friendly for them, pre-insolvency restructuring experts seem to be amazed by the Act.

Nonetheless: especially in view of the consequences of the Covid-19 pandemic, the German government has shown that it does not want to lose any time and wants to strengthen Germany as a restructuring location by giving the country a new tool, especially after the regulations on the temporary suspension of the obligation to file for insolvency for over-indebted companies expired (in part) on 31 December 2020 or continue to apply only in the context of the so-called November and December rescue package.

Even though the timing of the legislative process was strongly influenced by the Covid-19 pandemic, the new Act affects all companies that are in (imminent) distress or in need of restructuring. As for companies that do not have to file for insolvency, the new framework gives them an opportunity for (financial) restructuring outside of insolvency proceedings. The procedure can only be initiated upon request and the debtor also retains control of the procedure.

The gap is closed

StaRUG thus closes an often debated gap between court-supervised restructuring as part of insolvency proceedings and out-of-court restructuring. At the same time, it also puts an end to the consensual restructuring culture in Germany.

Outside of insolvency proceedings, restructuring usually required consent of all parties involved. For example, unwilling and uncooperative creditors  ("hold out") can be outvoted only in insolvency proceedings. StaRUG provides a new solution approach here by providing a framework outside of insolvency in which creditors can decide on a restructuring plan with a qualified majority of 75 per cent of the voting rights in the groups of creditors to be formed. At the same time, individual groups of creditors can be outvoted. The non-consenting minority is bound to respect the results and effects of the plan confirmed by the court.

In addition, all parties involved in a restructuring under StaRUG can achieve legal certainty – irrespective of whether individual groups were outvoted – because a restructuring plan, if confirmed by the court, becomes non-contestable. However, the modular structure of the Act also makes it possible to carry out the restructuring without the involvement of the court. 

Irrespective of the many possibilities offered by StaRUG, it should be borne in mind that it is essentially an instrument for financial restructuring. For example, restructuring under StaRUG cannot affect employee rights.

Conclusion

For the first time, Germany as a restructuring location has now in place a "partly consensual" restructuring regime outside insolvency proceedings. This closes the gap between consensual out-of-court restructuring on the one hand and insolvency proceedings on the other. The new restructuring alternatives are complex and challenging. In order to make the best possible use of the framework and to avoid any surprises as creditors and business partners, it will be necessary to become acquainted with the new regulations early on with the help of expert advisers and to take appropriate preparatory measures.

Even though the possibilities for operational restructuring are extremely limited, StaRUG means considerable progress for financial restructuring. Especially the restructuring of complex financing structures – regardless of the size of the company – may be seen as the main area of application of the new law.