Hey, great that I may still experience this in my life-time! Almost ten years after my “Plädoyer für ein vorinsolvenzliches Sanierungsverfahren” (ZInsO 2011, 57, here, in German) and a good four years after my (rather rhetorical) question “Bedingt Sanierungsbereit?” (ZInsO 2016, 1778, here, in German), the has government (finally) finally presented the draft of the “Act on the Further Development of Reorganisation Law” (“Sanierungsrechtsfortentwicklungsgesetz – SanInsFoG“), which at least takes into account a large part of the reform proposals suggested in the two articles (and not only by me!). Thus, after many detours (only to mention “ESUG“, cf. here) – and driven by the European Union – the German legislator has finally warmed up to functioning mechanisms for corporate restructuring outside of insolvency. And, even if not all that glitters in the draft is gold, it is a BIG step in the right direction, as the following initial analysis shows:
1. Current legislative process
After, initially, the Federal Ministry of Justice and Consumer Protection (“Bundesministerium der Justiz und für Verbraucherschutz”, “BMJV”) had presented the long-awaited Draft Bill of the “Act on the Further Development of Reorganisation Law” (“Sanierungsrechtsfortentwicklungsgesetz – SanInsFoG”) on Saturday, 19 September 2020 (see here, in German), it took less than a month until the Federal German Government published its revised Bill – following a short sequence of expert hearings – on 14 October 2020.
The Bill essentially contains the implementation of the EU directive on the so-called “preventive restructuring framework” (see here, in German) in the form of the “Corporate Stabilisation and Restructuring Act”, in short “StaRUG”. The SanInsFoG is flanked by the “Draft Law on the Further Reduction of the Residual Debt Discharge Procedure” (also based on EU requirements), which aims to reduce the duration of the residual debt discharge procedure for natural persons to three years (see here for more details, in German) and the effects of the “Corona Consequences Mitigation Act” (see here for more details) and the corresponding amendment regulations (see here), some of which extend beyond the end of the year.
2. The “Corporate Stabilisation and Restructuring Act” – StaRUG
a) Independent law
The most important fundamental innovation is that the out-of-court reorganisation procedure is regulated by a separate law and not, as in the Netherlands (see below), by the (national) Insolvency Act. Even if this autonomy is subsequently restricted again by explicit references to the German Insolvency Act (InsO), this step nevertheless lays the foundation for the development of an autonomous restructuring and reorganisation law in Germany independent of insolvency law.
b) StaRUG: creditor- not debtor-oriented
The draft StaRUG and its explanatory memorandum do not even attempt to conceal the fact that the new restructuring procedure, although perhaps not an “insolvency procedure light”, will be a procedure “functionally identical” to the insolvency procedure (see only Ref-E SanInsFoG, p. 96). Accordingly, there is also frequent talk of “creditors” (667 times in total, but 957 times of “debtors”!), or of “safeguarding their interests” (see only Ref-E SanInsFoG, p. 95).
This emphasis on creditor protection is particularly underlined with the foreseen competence of the insolvency courts for the formal instruments of the StaRUG, such as confirmation of the plan, moratorium and appointment of a restructuring officer or restructuring moderator (cf. § 34 ff. StaRUG, see below).
c) Narrow time frame
The corresponding EU Directive aims to provide access to the preventive restructuring framework in the event of “probable insolvency”, cf. Art. 4 (1), whereby according to Recital 24 the framework should be available before a debtor becomes insolvent under national law. In contrast, the German legislator has opted for a rather narrow temporal scope. This is because, according to Section 29 StaRUG, the debtor can only make use of the (formal) instruments of the StaRUG from the point in time of the occurrence of imminent insolvency according to § 18 InsO. In the course of the reform the forecast period for this is term now legally defined as “24 months”. Thus, the scope of application of StaRUG is opened 24 months before the forecast moment of insolvency. However, it also ends – at least theoretically – twelve months before the forecast insolvency, namely with the occurrence of over-indebtedness pursuant to § 19 InsO. In the course of the reform, this period has now been limited to twelve months (see below). This means that the scope of application of StaRUG ends twelve months before the calculated occurrence of insolvency, unless StaRUG measures have already been initiated beforehand and the court refrains for certain reasons from “lifting the restructuring matter” under $ 33 (2) No. 1 StaRUG (at the discretion of the court!). With a view to the chronic delay of German managing directors to file for insolvency, one can confidently assume that these deadlines will be exhausted to the very last minute – and that the corresponding StaRUG proceedings will be initiated, at least formally, at most weeks if not days before the actual occurrence of over-indebtedness.
d) Restructuring tool kit
The core of StaRUG is the so-called “restructuring plan” according to § 7 ff. StaRUG. Not surprisingly, its structure (“Declaratory Part” / “Constructive Part“) follows the guidelines for an insolvency plan. In contrast to insolvency proceedings, however, it will be possible under § 10 StaRUG to include only certain claims in the restructuring plan. Thus, the draft takes into account the usual restructuring practice, where often only the liabilities of so-called “financial creditors”, such as banks, are restructured, while the claims of small creditors (e.g. craftsmen, suppliers) are paid in full. Furthermore, in contrast to insolvency proceedings (§ 244 InsO), the majorities required for approval of the restructuring plan are not determined by a combination of a head and sum majority (although “only” a 50% approval-rate is required there). Rather, according to § 26 in connection with § 27 StaRUG, a majority of 75% of the total amount of debt in the respective group (and acceptance by the majority of the groups) is sufficient for the approval of the restructuring plan. And: according to § 28 StaRUG, the plan may in principle also be accepted without involving the insolvency court and dissenting creditors may be outvoted. It is nevertheless foreseeable that in practice the legal “restructuring and stabilisation instruments” provided for in § 29 StaRUG will often be used to enforce the majority decisions. But the threat potential alone, which “radiates” into the sphere of out-of-court reorganisation with the imminent ability to start such proceedings, should lead to much more serious negotiations in out-of-court reorganisation than ever before.
In spite of the frequent use of the terms “reorganisation” and “restructuring” in the Draft Bill, ultimately neither the “sustainable reorganisation” of the company in the sense of case law, which has meanwhile developed accordingly, is defined as an objective, nor is a specific type of reorganisation specified at all. Thus, the term “operational turnaround” is just as rarely used as “financial restructuring”. It is true, as already explained above (cf. “Bedingt Sanierungsbereit?” (here), p. 1790, in German), that an operational turnaround cannot be fully executed within insolvency proceedings. The insolvency administrator does not have the appropriate time frame available already under competition law aspects, nor can he finance the investments normally required to remedy the strategic crisis and loss in revenues under the primacy of satisfying creditors. And even in a restructuring procedure à la StaRUG, an operational turnaround of the debtor company may be initiated, but cannot be completed there in either. Especially an out-of-court restructuring procedure following the premises of “early, fast, quiet” can only be the “stumbling block” for an operational turnaround . In this respect, the draft of StaRUG would do well to limit itself to legal and formal requirements for the procedure itself. However, because the law focuses on safeguarding the interests of creditors, it lacks a “corrective” measure in favour of entrepreneurs – who are therefore unable to argue, at least on the basis of the law, that the company needs to be “sustainably restructured”. Seen in this light, the draft perhaps keeps too many options open.
Since the structure of the restructuring and reorganisation instruments of the StaRUG is in principle designed analogous to those of the InsO, it is obvious that – just as in corresponding insolvency proceedings – foremost larger companies will be able to slip under the protection of the new procedure. For, even if the costs for the court and court-appointed restructuring officers and restructuring moderators may be more moderate compared to a (self-administered) insolvency plan procedure due to the remuneration on an hourly basis (see §§ 84 ss. StaRUG), the financial expenditure required for the preparation of such restructuring proceedings should nevertheless be considerable. Especially for smaller companies, which especially should benefit from such proceedings according to the EU Directive, the procedure might be rather unaffordable.
4. Early Warning systems
Although the draft of StaRUG does not create any early warning systems for companies – as actually required by the corresponding EU directive – it only refers succinctly to a (probably yet to be created) list on the website www.bmjv.bund.de. Nor does the draft differentiate between internal and external systems or present the requirements for the respective “generation” of early warning (see for further details “Der Blick hinter die Glaskugel“, ZInsO 2020, 1673, 1681 ff.) The draft thus falls far short regarding the actual practice of early crisis detection – especially in the face of the corona pandemic.
On the other hand, the mere constitution of a legal obligation to create a system for early crisis detection and an obligation to remedy the situation based on this (from the occurrence of imminent insolvency, as now provided for in §§ 1 – 3 StaRUG (see also Ref-E, p. 111 ff.)) cannot be overestimated. This step was overdue and is in principle very welcome.
Less welcome, though, is the fact that sanctions for corresponding breaches of duty in practice (as in the case of delay in filing for insolvency or the loss of half of the equity capital) should only be imposed retrospectively in insolvency in the context of various liability proceedings. A more preferable solution would have been to have these obligations followed up and sanctioned by the Federal Office of Justice (BAfJ), similar to the sanctioning in the context of the publication obligation for annual financial statements, cf. § 329 Abs. 4 HGB (The German Commercial Code). The so-called “procédure d’alerte” under French law, under which the president of the local commercial court can summon the management bodies of a company if signs of a crisis become apparent, could have served as a model for such a more effective instrument. This could have been usefully linked to a later jurisdiction of the Chamber of Commercial Matters of the Regional Courts (“Kammer für Handelssachen“) for the formal restructuring proceedings. These courts usually have lay judges with actual business experience.
This proposal does not overlook the factd that in practice the regular non-enforcement of sanctions for the breach of the publication obligations by the Bundesamt für Justiz has made the respective regulations look like a laughing stock. The legislator should simply – also out of its own well-understood interest with regard to tax revenues – ensure that the staffing and digital equipment of the authorities operated by the government keeps pace with their tasks.
5. (Further) reform of the German Insolvency Act
(a) Time limitation of the grounds for insolvency
In particular, it is to be welcomed that the reason for insolvency of the over-indebtedness according to § 19 InsO is maintained (see Ref-E, p. 211 f.). For a long time, I have been a supporter of abolishing this provision altogether, but it is indispensable in order to counteract the increasing “zombification” of the German economy. For “business zombies” are often characterised by the fact that they are still being granted loans by banks, but – in line with Minsky (see here) – they are already so overindebted (!) that they can no longer pay the interest for such loans from their own business profits. Therefore, the basic retention of over-indebtedness is to be welcomed.
This is particularly welcome in view of the fact that the SanInsFoG also rigorously curtails the interim proliferation of insolvency grounds. For example, in a now “legendary” ruling (see here for more details), the Frankfurt Higher Regional Court (OLG) extended the forecast period for “imminent illiquidity” – which probably also applies to the continuation prognosis under § 19 InsO – to more than four years. Even if this judgement has remained rather an isolated case, there has been uncertainty in literature and case law for years about the exact determination of the forecast period and the delimitation of the forecast periods of § 19 and § 17 InsO. The SanInsFoG now puts an end to this uncertainty by limiting the forecast period for over-indebtedness to twelve months and that for imminent insolvency under §18 InsO “generally” to 24 months.
b) Residual debt discharge
Twenty years after the introduction of the InsO – again under pressure from the EU – the period until natural persons are released from residual debt is finally being reduced from the previous seven (!) years to three years (see here for more details, in German).
The regulations for the reaction to the COVID pandemic are in principle to continue to apply until the end of the year (see here for more details), although the Ref-E SanInsFoG also provides for further COVID-specific modifications of the InsO in Art. 10 (p. 82 f.).
According to Art. 27 (1) Ref-E SanInsFoG (p. 92), the legislative package should essentially come into force on 1 January 2021. This is a very ambitious timetable, but it is necessary in view of the COVID regulations, which will then expire en masse, in order to be prepared for the “wave of insolvencies” that is repeatedly forecast.
As I said, the draft is a big step in the right direction, even if I do not share the sometimes euphoric comments of some professional colleagues (here or here, in German). After all, can the “StaRUG” fix what years of tinkering with the InsO were unable to do – save companies that could be restructured from being wound up in insolvency? In view of the “proximity” of the StaRUG to the InsO, it is doubtful whether this law provides the right “incentives” for the management of a debtor company to engage in such proceedings (more or less voluntarily). In other words, has the “worm” StaRUG been chosen here in such a way that it (at least also) tastes good to the fish (debtor company)? Or has the legislator simply – as in the case of the ESUG – done the cottau before the “guild” of insolvency administrators and in fact reduced the formal scope of application of the InsO, but instead “built” an (exclusive) new play ground for the administrators in the form of the StaRUG?
To answer these questions, it is, first, important to distinguish between different levels: On the one hand, one must concede to the legislator that he permits the “trespassing” of the constitutionally based principle “pacta sunt servanda” (contracts are to be observed) – otherwise only permitted in insolvency proceedings – in close temporal proximity to the insolvency at all. The necessary proximity to material insolvency provided for in the draft as well as the corresponding judge’s reservation can be derived from the weighing of legal considerations that is mandatory for such an intervention. On the other hand, the assignment of court proceedings to the insolvency courts was neither necessary nor is it particularly meaningful. This is where the overall mindset of the Draft Bill culminates, again focussing on creditor friendliness. And here is the crux of the matter: insolvency courts (and certainly the 9th Civil Senate of the BGH!) have not exactly attracted attention in the past for their debtor friendliness. Moreover, the selection lists for the future “restructuring officers” and “restructuring facilitators” are likely to be disproportionately populated by insolvency administrators (“known and proven”), at least in the initial phase. The mental focus of the insolvency judges and insolvency administrators on creditor protection (which is certainly correct in insolvency) is likely to be difficult to discard in “StaRUG proceedings”. Against this background, however, it is probably all the more difficult to send a company director to the insolvency court, where a well-known insolvency administrator could suddenly be made palatable to him as a “restructuring officer”… .
However, these (and other) concerns will be put on the back burner in restructuring practice and – as in the case of the ESUG – best attempts will be undertaken to use the possibilities offered by the law to achieve the best possible restructuring of companies. And in practice, the sheer existence of the StaRUG with its ability to legally overrule “hold-out-creditors” and also to involve shareholders in the reorganisation should make considerably more out-of-court reorganisation possible than has been the case so far. To stay in the picture: The fish should at least take a closer look at the worm. However, it may not have to eat it at all to get full (=remedied).
More important than the StaRUG itself is probably the time limitation of the reasons for insolvency, which has been discussed for many years and which has now been implemented with the SanInsFoG. Ome can only congratulate the legislator on this step towards greater legal certainty. There are only a few things missing now to make German turnaround & insolvency law “whole”: On the one hand, a reform of the right of rescission, which really deserves the name “reform”, is still missing in order to cut back the interim proliferation of this legal institution to a shaken level of reason. And on the other hand, perhaps a “delicate” re-evaluation of the right of appeal in the InsO, in order to reduce the omnipotence of the insolvency courts somewhat. But then, German restructuring, reorganisation and insolvency law should have reached a point where it will actually make it possible to reorganise viable companies and remove uncompetitive companies from the market effectively and efficiently. Twenty years after the entry into force of the InsO, it is about time.
Further analyses of StaRUG will follow this basic assessment, in particular in time for the readings in the Bundestag. Not that, as in the case of the ESUG, “suddenly” new features will appear in the reform package which will then “soften” the draft again towards another insolvency procedure. And, even if the StaRUG were to enter into force as it has now been presented, it will still have to assert itself against formidable foreign competition, e.g. in the form of the Dutch implementation of the corresponding EU directive.
BReg: Entwurf eines Gesetzes zur Fortentwicklung des Sanierungs- und Insolvenzrechts (in German)
Ref-E: Gesetz zur Fortentwicklung des Sanierungs- und Insolvenzrechts (Sanierungsrechtsfortentwicklungsgesetz – SanInsFoG) (in German)