Draft bill of the Stabilization and Restructuring Framework

Germany’s planned Stabilization and Restructuring Framework (Stabilisierungs- und Restrukturierungsrahmen) is essentially an independent, out-of-court tool to implement a restructuring process by means of a restructuring plan in order to avert insolvency proceedings. The debtor and supporting creditors can rely on certain procedural assistance in order to implement and enforce a restructuring plan with their majority despite resistance on the part of individual stakeholders. The instruments provided are designed as options which the parties involved can make use of as freely as possible. The draft law allows involved parties to remain “in charge” of the restructuring process.

Expected effects in practice

The law is expected to take effect on 1 January 2021, thus dovetailing with the expiration of the suspension to file for insolvency due to over-indebtedness. In particular, due to the existing Covid-19 effects, we expect to see a considerable uptick in pre-insolvency restructuring proceedings in the short term. The measure will doubtless be popular since firstly, it allows for implementation of restructuring goals contrary to the interests of opposed parties outside of the insolvency proceedings. Secondly, restructuring operations outside of insolvency proceedings allows the company to save on costs and preserve its reputation. Moreover, legal advisors who have thus far only provided support services will now play a decisive role as well in the operational restructuring of companies. Specifically, the change in the law will make it possible to provide exclusive advice to corporate groups on group restructuring, paving the way for new perspectives and opportunities to influence the restructuring process and its design.

Background & purpose

The EU Directive 2019/1023, which included measures pertaining to preventive restructuring, foresees the further development and completion of the national laws on restructuring and insolvency. There is an acute need to adapt since the current legal code does not provide a procedural basis for the implementation and execution of pre-insolvency restructuring. Often, consensual out-of-court restructuring procedures fail simply because the individual parties involved, often well-secured, are not willing to make concessions in the interest of the pursued restructuring scheme, even though a majority would be willing to do so. In addition to contributing to a negative reputation, restructuring through insolvency proceedings has the disadvantage of incurring high procedural costs and legal as well as economic effects on corporate groups, contractual partners and employees. As a result, overcoming resistance to out-of-court restructuring is a costly business.

The German Stabilization and Restructuring Framework is intended to close the gap between consensual out-of-court restructuring and insolvency proceedings which run up costs and damage the company’s reputation. Particularly in light of economic challenges in the course of the Covid-19 pandemic, there is a considerable need for further, more flexible restructuring instruments. The “preventive restructuring framework” aims at combining advantages (in terms of costs and efficiency) of individual out-of-court restructuring with enforcement, reduction of shareholder nuisance value, collateral realization actions and reorganization options which have proven effective in restructuring proceedings (especially in insolvency plan proceedings in case of Debtor-in-Possession). This modular-based provision of procedural assistance enables the debtor and supporting creditors to access the “restructuring toolbox” in accordance with their needs while maintaining full flexibility during the process, ideally without affecting business operations.

In contrast to the insolvency proceedings, the debtor will be free to choose which creditors it wishes to contribute for restructuring purposes and therefore include in the proceedings. Any restructuring assistance claims are not made public. Control and supervisory mechanisms are less pronounced and are essentially based on the scope of the project and the extent of the creditor involvement and their need for protection. In return, the draft law requires management and supervisory bodies to take the interests of creditors into account. However, claims of employees, in particular those pertaining to company pension schemes, are excluded from the restructuring process.

Key points

A prerequisite for taking advantage of the Stabilization and Restructuring Framework is that the company is facing imminent illiquidity (drohende Zahlungsunfähigkeit), pursuant to Sec. 18 of the German Insolvency Code (Insolvenzordnung, “InsO”). The procedure is not permitted if the company is already insolvent (see illiquidity, Zahlungsunfähigkeit, Sec. 17 InsO, or over-indebtedness, Überschuldung, Sec. 19 InsO). The restructuring plan is based on the provisions of the insolvency plan with regard to its content, division into classes and the requirements for plan confirmation. As a result, essentially all design options in the plan are on the table which otherwise could only be available to the company in the course of insolvency proceedings.

A further central element is self-organization and personal responsibility of those involved. To a great extent, the parties are individually responsible for organizing how the process of creating and coordinating the plan should proceed. If they choose to avail themselves of procedural assistance, the only requirement is to report the need for restructuring to the responsible restructuring court: no formal opening of proceedings is required.

Essential procedural assistance includes:

• Confirmation of a restructuring plan accepted by the plan participants with the required majorities, resulting in the effects of the plan becoming effective for and against the plan participants who did not agree to the plan (Sec. 64 ff. Stabilization and Restructuring Framework, StaRUG);
• Preliminary examination of the restructuring plan and the planned coordination process with the aim of obtaining court advice on issues relevant to a later confirmation of the plan (Sec. 47 f. StaRUG);
• Termination of mutual contracts which have not yet been completely fulfilled (Sec. 49 ff. StaRUG);
• Ordering of freezes on enforcement and realization for the purpose of averting measures by individual creditors which could impede or frustrate the planned restructuring solution (stabilization orders pursuant to Sec. 53 et seq. StaRUG); and
• The possibility of coordinating the restructuring plan in court proceedings (Sec. 45 f. StaRUG).

The draft is supported by an adjustment of the insolvency law which, among other things, requires company managers and supervisory bodies to first and foremost take into account the interests of creditors, which override the interests and instructions of shareholders the moment the company faces imminent illiquidity (drohende Zahlungsunfähigkeit). Failure to take these interests into account will result primarily in liability on the part of the legal entity and subsequently in personal liability as well on the part of company managers and supervisory bodies.

Our consulting services

We advise creditors, companies and other parties to proceedings on all questions of insolvency law and out-of-court restructuring. We are extensively involved in the discussion on the draft bill and exchange views with all relevant market participants and the German ministry on the legislative initiative. We are convinced that the planned pre-insolvency restructuring measure actually has the potential to have a long-term positive impact on restructuring practice. Thanks to our many years of expertise in restructuring on an individual level as well as in corporate groups within and outside of insolvency proceedings, we support the consistent strengthening of a pre-insolvency restructuring consultation. We see an essential added value for our clients in the opportunity to exclusively advise and guide them through the restructuring process, while also drawing on knowledge from our broad network in the restructuring and insolvency consulting industry.