When reorganising a business out of insolvency proceedings, it used to be necessary to reach some form of agreement with creditors to compromise the payment of their debts. However, this did not apply to reorganisations under English law (i.e. by way of a scheme of arrangement) which allowed forced arrangements to be entered into with the approval of a majority of creditors.

In 2019, the European Union required its Member States to implement such an out-of-court restructuring procedure into their respective national law by June 2021. In anticipation of the wave of insolvency filings expected in 2021, the German legislator reacted quickly and resolved on 17 December 2020 that an act to this effect will come into force on 1 January 2021.

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The new Act on the Stabilization and Restructuring of Enterprises [Unternehmensstabilisierungs- und Restrukturierungsgesetz – StaRUG] will allow businesses to restructure without having to undergo judicial insolvency proceedings. Such a restructuring must also be notified to a court referred to as the “Restructuring Court”, but unlike in the case of insolvency proceedings, the opening of the proceedings is not published.

To be eligible for the new procedure, a company must be at imminent risk of becoming illiquid, i.e. it must be expected to become unable within the next 24 months to meet its payment obligations when due. If the company already is illiquid and/or overindebted (for further details about illiquidity see here), it has to file for insolvency just like before and to attempt to restructure by way of insolvency proceedings, where appropriate.

When the procedure is initiated, the court may issue certain stabilisation orders (execution measures, preventing secured creditors from removing assets, etc.). If deemed necessary by the court or requested by the company or its creditors, the court may appoint a restructuring administrator [Restrukturierungsbeauftragter] to partly supervise the company and partly represent its interests. The position of that person is similar to that of a custodian [Sachwalter] in a debtor-in-possession management scenario.

However, an out-of-court restructuring can in many cases be completed without any assistance from the court.

According to the StaRUG, the company may submit a restructuring plan describing the proposed restructuring measures and demonstrating to a high level of probability that they will navigate the company through the crisis it is in. If 75% of the creditors approve of the proposed measures, the approval of the other creditors is, as a rule, replaced by the court. The advantage this has over insolvency proceedings is the same as that of a scheme of arrangement, namely that not all creditors have to participate in the plan and thus in the procedure and, consequently, not all parties contracting with the company have to share in the losses (which makes it easier to keep control of the consequences for the business model).

After fierce debate, the legislator did not include the possibility of forced termination of a contract (e.g. in the case of a long-term lease) in the Act. Since only existing (as opposed to future) claims can be settled by way of a restructuring plan (e.g. not the rent payable for the business premises in the next five years), this procedure is not suitable for companies having to effect forced termination of commercially unviable contracts before they can restructure (e.g. multiple retailers because of commercially unviable leases). Neither can this procedure be used to make staff cuts because alterations to employment contracts are not allowed under this procedure. In these cases, the known procedures provided for by the German Insolvency Code [Insolvenzordnung – InsO] (normal insolvency proceedings with reorganisation by way of transfer or insolvency plan/debtor-in-possession management (with protective shield, if applicable) and insolvency plan) are still available to restructure the company.

The Act is available here. For information about our Practice Group please click here.

Ansgar Hain, Lawyer and Insolvency Administrator
Berlin