Update Restructuring 1/2021
Landmark changes to German restructuring law: New law on preventive restructuring framework (StaRUG) allows preinsolvency balance sheet restructuring
As of 1 January 2021, a new German law (known by its abbreviation StaRUG) affords debtors with COMI in Germany with a statutory regime for a non-consensual pre-insolvency balance sheet restructuring. This is a novelty: German restructuring law previously provided no tool allowing a debtor to impose a debt-restructuring concept agreed with the vast majority of its creditors upon a dissenting minority of creditors; minority creditor hold-outs forced debtors to commence formal insolvency proceedings unless they were willing and able to resort to cumbersome English law schemes of arrangements sanctioned by the High Court of Justice in London. While StaRUG now remedies this situation for mere balance sheet restructurings, the German legislator shied away from providing debtors with the tools for an operational restructuring.
(i) introduces thekey features of the new preventive restructuring framework under StaRUG,
(ii) highlights its strengths and the restructuring-situations, for which StaRUG will be suitable,
(iii) addresses its weaknesses and the restructuring-situations, in which StaRUG will be less suitable, and
(iv) identifies caveats for shareholders, creditors and new money lenders in relation to restructuring proceedings under StaRUG.
StaRUG has become effective on 1 January 2021 as part of the SanInsFoG of 22 December 2020
On 1 January 2021, the Act for the Further Development of the Restructuring and Insolvency law (Sanierungs- und
Insolvenzrechtsfortentwicklungsgesetz, SanInsFoG) of 22 December 2020 entered into effect.
SanInsFoG combines three important legislative projects into one legislative act:
StaRUG implements EU Directive 2019/1023 on preventive restructuring frameworks into German law
- Introduction of a new preventive and pre-insolvency restructuring scheme by way of the Act for a stabilization and restructuring framework for businesses (Gesetz über den Stabilisierungs und Restrukturierungsrahmen für Unternehmen, Unternehmensstabilisierungs- und –restrukturierungsgesetz – StaRUG), implementing the EU Directive 2019/1023 on preventive restructuring frameworks. The StaRUG is the center-piece of the San-InsFoG. We had provided an initial overview of the draft bill in our newsletter of 23 September 2020 and will comment in this newsletter on the StaRUG as it has become effective.
Amendments to the German Insolvency Code (InsO) renovate regime of self-administration and protective shield proceedings
- Renovation of the German insolvency law regimes of self-administration (Eigenverwaltung) and protective shield proceedings (Schutzschirmverfahren) by way of amendment of the German Insolvency Code (InsO). We will provide further detail, and our view as to the practical implications to be expected from this reform, in a separate newsletter (to be published shortly).
Amendment to CovInsAG (the German COVID-19 emergency law of 27 March 2020) for new temporary relief measures
- New short-term temporary relief measuresfor German debtors struggling to recover from the effects of the COVID-19 pandemic (by way of amendment to the COVID-19 emergency legislation COVInsAG of 27 March 2020) and include suspension of duty to file for insolvency until 31 January 2021, easier access to protective shield and self-administration proceedings and a prognosis period for the over-indebtedness test abbreviated from 12 to 4 months – please see our newsletter of 4 January 2021for more detail.
StaRUG’s key features
1. StaRUG’s key features. How does the preventive restructuring framework work?
StaRUG introduces a new instrument to remedy a company’s crisis early-stage and outside of formal insolvency proceedings:
Pre-insolvency debt-reduction by way of restructuring plan; similarity to insolvency plan
1.1 Key instrument: restructuring plan majority-approved by creditors
The key instrument of the EU-wide harmonization of restructuring regimes required by EU Directive 2019/1023 is the reduction of the debtor’s debt by way of a restructuring plan (Restrukturierungsplan).
In its German version, the restructuring plan largely resembles the insolvency plan (Insolvenzplan) in formal insolvency proceedings. The following particularities are noteworthy:
(i) Debtor selects creditor groups to participate in restructuring by way of restructuring plan. To take account of its pre-insolvency nature, a restructuring plan does not have to (and for practical reasons should not) include all of the debtor’s creditors; the debtor is largely free to select the creditors whose claims it intends to restructure in order to prevent its insolvency and secure its viability.
(ii) Restructuring plan can include and restructure
- claims of creditors (due, undue or contingent),
- security interests provided by the debtor,
Restructuring can include claims against third party security providers (if affiliated to debtor) and debtor’s personally liable general partner
- security interests provided by third party affiliates, i.e. creditors’ claims against third parties affiliated with the debtor (e.g. under guarantees or assumptions of liability joint and several with the debtor) and creditors’ security interests in assets provided by such affiliates, provided in each case that the secured parties receive adequate compensation for any reduction or concession regarding such intra-group third-party collateral,
Shareholders’ interest in the debtor can be cancelled or transferred to creditors / investor
- shareholders’ equity interests in the debtor and claims under shareholders’ loans, which can be cancelled or transferred to the creditors or an investor.
Employees’ wages and pension benefits cannot be restructured
(iii) Restructuring plan must not include employees’ wages and pension benefits. Employees’ claims for wages and rights to pension benefits are excluded from restructuring under StaRUG to account for its pre-insolvency nature.
Restructuring by means of deferral, reduction, debt-equity swap, amendment of terms of agreements (e.g. financial covenants) including inter-creditor arrangements, new financing and collateral arrangements
(iv) Restructuring measures available. Creditors’ claims can be subjected to deferral, reduction, waiver, debt-equity-swap (only with individual creditor’s consent), amendments to ancillary terms of claims (e.g. financial covenants, events of default, ranking), in relation to syndicated financings this applies even to the terms of inter-creditor agreements. Creditors’ security interests can be released or changed in their respective rank. In addition, the restructuring plan can provide for a decrease or increase of the debtor’s registered capital and can approve the debtor entering into new loan and collateral arrangements to finance the restructuring.
No termination of executory contracts (e.g. leases)
(v) Restructuring plan cannot terminate executory contracts. Executory contracts (gegenseitige Verträge) can only be restructured to the extent the creditor has fulfilled his part of the contracts and can require fulfilment from the debtor. Thus, the debtor cannot restructure the unfulfilled “future” part of an executory contract, such as the terms regarding the outstanding term of a lease-contract. Initially, the draft bill of StaRUG afforded the debtor with exactly this ability to terminate executory contracts when the other party refused to cooperate to amend the contract for the future. The aim was to allow the debtor to (threaten to) terminate long-term contracts such as leases, which could also be terminated in the alternative scenario of insolvency proceedings. This would have increased the debtor’s bargaining power to request their amendment. The final draft of StaRUG deleted this termination of contracts tool in response to widespread criticism: The debtor should not be afforded an easy exit from cumbersome contracts before its insolvency and without assuring that the burden of such a restructuring is born by all stakeholders concerned, as would be the case in subsequent insolvency proceedings.
Debtor sets record-date for restructuring when submitting restructuring proposal to creditors, restructuring plan will be binding upon all successors-in-title
(vi) Record-date concept allows debtor to restructure claims, which are likely to be traded during the StaRUG proceedings. According to StaRUG the claims, security interests and shares selected by the debtor will be subject to the restructuring plan as established and held by their respective creditors/shareholders at the point in time when the debtor submits the restructuring plan to the parties concerned (creditors and shareholders) or to the court, if the debtor opts to have the court organize a hearing for discussion and voting by the parties concerned. If a creditor or a shareholder disposes of his claims or shares after that point in time, the claims or shares he has disposed of will nevertheless continue to be subject to the restructuring plan and the plan will, if adopted by the creditors and approved by the court, be binding upon the acquirer of the claims or shares. This effective day-concept of the StaRUG proceeding allows the debtor to include also those claims (or shares) in the restructuring, which are likely to be traded during the process, such as bonds or Schuldscheine.
Restructuring plan requires approval of 75%-majority in each group of creditors (and shareholders, if included)
(vii) Restructuring plan requires approval by 75%-majority of creditors in each group of creditors (and shareholders, where shareholders are included). Creditors’ vote is determined in accordance with their respective claim amounts and collateral values, absentees are deemed dissenting. Thus, to secure creditors’ adoption of the plan the debtor is well advised to minimize absences by communicating with the creditors and motivating them to participate in the vote. The debtor determines whether voting takes place in creditors’ meeting or outside of such a meeting. Each creditor can require a meeting in which the debtor explains and discusses the restructuring plan and potential amendment requests from creditors.
(viii) Cross-class cram-down. Restructuring plan becomes effective even against the rejection by individual votinggroups, if (i) it is approved by the majority of groups, (ii) does not put the rejecting groups in a worse position than they would be in without the plan, and (iii) attributes the rejecting groups an appropriate share in the value that is created by the restructuring plan and distributed to those affected by it.
(ix) Restructuring plan becomes effective by court confirmation. Restructuring plan becomes effective upon confirmation by the court, also vis-à-vis dissenting creditors and – if the conditions of the cross-class cram-down are met - creditors of a dissenting group. Legal remedies filed against the plan’s confirmation generally have no suspensive effect.
Limited protection of court-confirmed restructuring measures and their implementation in debtor’s subsequent insolvency
(x) Court’s confirmation of restructuring plan exempts restructuring measures (including new money loans) from claw-back until debtor is sustainably restructured. StaRUG exempts the measures of a restructuring plan and the acts taken for their implementation from claw-back (Insolvenzanfechtung), limited, however, to the period ending with the debtor’s sustainable restructuring (nachhaltiger Sanierung), which should coincide with the full implementation of all measures provided by the restructuring plan. In practical terms, this means that the lender of a new money loan provided for under the restructuring plan will be exempted from claw-back regarding the granting of the collateral securing the new loan. On the other hand, the debtor’s subsequent amortization payments on the loan will not be exemp-ted from claw-back in a future insolvency. Thus, the lender will have to continuously monitor the debtor’s solvency and viability just as any other lender would in relation to the debtor’s debt service. Unfortunately, StaRUG does not expressly protect new financing from subsequently being held voidable under the German law concept of lender’s liability (Haftung wegen Beihilfe zur Insolvenzverschleppung) for providing restructuring-financing without adequately ensuring the viability of the underlying restructuring concept. In this respect, StaRUG inadequately implements the EU Directive’s task to adequately protect interim financing provided during the negotiation-phase of the plan and new financing provided under the confirmed plan from subsequently being voided or held unenforceable. New lenders are, therefore, well advised to require that the debtor’s restructuring concept complies with the requirements of the German Supreme Court in relation to lenders assisting a debtor in its out-of-court restructuring attempt by way of prolongations and new money loans.
Lenders should require restructuring concept and opinion compliant with requirements of German Supreme Court / IDW S6 when prolonging existing loans or extending new loans under the plan
In practice, lenders should require the debtor to submit a fully-fledged restructuring concept supported by an expert’s opinion that the restructuring plan is reasonably likely to result in a successful restructuring.
Limited protection of court-confirmed restructuring measures and their implementation in debtor’s subsequent insolvency
(xi) StaRUG does not afford priority to new financing. EU Directive 2019/1023 allows member states to afford new financings provided under a restructuring plan priority over existing unsecured financings in a future insolvency of the debtor. However, StaRUG does not adopt such protection for future financings (provided under a plan) nor for interim financings (provided in order to bridge the time to adopt the plan).
1.2 Requirement for access to StaRUG – impending illiquidity
Access to a restructuring plan under StaRUG requires that the debtor is not insolvent, but threatened by illiquidity (drohende Zahlungsunfähigkeit), and is able to restore its viability (Bestandsfähigkeit) by means of the restructuring plan. When the debtor submits the proposal of the restructuring plan to the creditors, it must also submit a reasoned statement on the prospect of preventing the debtor’s insolvency and restore its viability. Should the debtor become insolvent during the StaRUG proceeding, it must inform the court and the proceeding will usually be converted into an insolvency proceeding, possibly in self-administration.