Pre-insolvency restructuring proceedings

Overview and employment law implications

As a part of the legislative initiative regarding the further development of the restructuring and insolvency law (SanInsFoG), on 1 January 2021, the German Corporate Stabilisation and Restructuring Act (StaRUG) entered into force. This article provides an overview of the StaRUG within the insolvency law system and the new restructuring instruments that it provides for and describes the employment law implications.

The StaRUG within the insolvency system

If a restructuring-eligible company (also referred to as "debtor") – which also includes entrepreneurially operating natural persons – does not have to file for insolvency pursuant to Sections 15a, 15b InsO, but is facing imminent illiquidity (drohende Zahlungsunfähigkeit, Section 18 InsO), the debtor may, in order to prevent insolvency proceedings, initiate (pre-insolvency) restructuring proceedings in accordance with the StaRUG. These pre-insolvency restructuring proceedings are supposed to enable the company in difficulties to restructure its operations on the basis of a restructuring plan accepted by a majority of the affected creditors.

For entities with limited liability, the right to initiate pre-insolvency restructuring proceedings corresponds with the obligation to establish a mandatory pre-crisis detection and crisis management system. Entities with limited liability in that sense and meaning entail both legal persons (e.g. limited liability companies, stock corporations) as well as companies without an own legal personality (e.g. in particular limited partnerships), which have no individuals as personally liable (or general) partner (section 1 StaRUG). A classic example is the GmbH and Co. KG prevalent in Germany, i.e. a limited partnership under German law whose sole general partner is a limited. In these entities, the so-called "management executives" must continuously monitor developments that could threaten the continued existence of the legal entity.

In contrast, entrepreneurially operating individuals/natural persons (e.g. sole traders) or companies without legal personality in which at least one individual/natural person acts as personally liable (or general) partner are not obliged to establish a mandatory pre-crisis detection and crisis management system. This does, however, not mean that they cannot make use of the restructuring instruments available under the StaRUG.

The restructuring instruments of the StaRUG

Section 29 para. 2 StaRUG contains a conclusive list of the restructuring instruments provided to a company in difficulties as part of the pre-insolvency restructuring proceedings framework regulated by the StaRUG. Pursuant to the said provision, the debtor may

  • arrange for a court approval of the plan in accordance with Sections 45, 46 StaRUG,
  • arrange for a pre-audit of the restructuring plan by the court (Sections 47, 48 StaRUG),
  • apply for stabilization orders in accordance with Sections 49 ff. StaRUG, and finally
  • arrange for the restructuring plan being confirmed by the court (Sections 60 ff StaRUG). This means that the legal effects of the plan are also applicable to and against those creditors affected by the plan who have not approved it.

In case of restructuring proceedings, which have an "overall procedural character", the court may, under Section 93 para. 1 sentence 1 StaRUG, set up a so-called creditors' advisory council. Its members are supposed to supervise and support the debtor in the management of the company business and also decide on the appointment of a restructuring officer.

Instruments and measures reserved for insolvency proceedings

Some restructuring instruments available within (regular) insolvency proceedings are not available in pre-insolvency restructuring proceedings. This applies, for example, to the regulations on facilitated termination of contracts (Sections 103 ff. InsO).

At the same time, the StaRUG does not provide for an isolated right of avoidance (Anfechtung) as this is available in insolvency proceedings, pursuant to Sections 129 ff. InsO. Rather than that, by introducing Section 89 StaRUG, the legislator has provided a clarification in view of the avoidance rules under Sections 129 ff. InsO, in that, among other things, the mere knowledge of the judicial pendency of the restructuring case will, in the context of a (later) avoidance, not be considered sufficient for presuming that the debtor has acted with intent to disadvantage creditors. As a result, this protects the business partners of the company in difficulties from an avoidance of transactions that they have entered into in subsequent insolvency proceedings and thus strengthens the debtor’s ability to continue doing business.

The Restructuring Court

If the restructuring instruments under the StaRUG shall be made use of, the restructuring proceedings must be notified to the so-called restructuring court. The notification initiates the “restructuring plan procedure” and makes the "restructuring case" pending in legal terms.

In this context, it should be noted that some details as regards the notification and the initiation of pre-insolvency proceedings are at debate. That applies inter alia for the obligations, if any, of the management to prior to making a corresponding notification consult with or obtain a positive resolution from further corporate bodies, such as the supervisory board and/or the shareholders meeting or general meeting.

The competent restructuring court is generally the local court in whose district a Higher Regional Court has its seat. This leads to a higher level of concentration of StaRUG proceedings than this is the case for regular insolvency proceedings, as in ordinary insolvency proceedings, matters are dealt with by the local court in whose district a regional court has its seat as the insolvency court.

No restructuring-induced alleviations regarding employment law under the StaRUG

The StaRUG does not provide for restructuring-induced alleviations with respect to employment relationships (Section 4 para. 1 no. 2 StaRUG).

Employment law restructuring alleviations, which are available in ordinary insolvency proceedings, such as shortened notice periods or reliefs of burden of demonstration and proof in case of terminations due to operational changes upon conclusion of a reconciliation of interests with a list of names, are not available in StaRUG proceedings, but remain reserved for regular insolvency proceedings.

This means that, within the framework of StaRUG proceedings, there is no opportunity for making use of the instruments that have been developed in insolvency practice, in particular restructurings based on an acquirer concept, which can be implemented under relieved restructuring conditions.

Restructuring itself is not excluded in addition to the pursuit of pre-insolvency restructuring proceedings, but no alleviations are granted by the StaRUG.

Employment law implications

The participation rights of employee representatives are not affected by the pre-insolvency restructuring procedure (Section 92 StaRUG), so that accompanying restructuring measures, such as operational changes (Section 111 BetrVG) or mass dismissals (Section 17 KSchG) but also general staff reduction plans (cf. Section 92 BetrVG), trigger participation rights of the works council.

When involving the employee representatives, it is important to remember that the economic committee – if there is one – must be fully informed and the matter has to be discussed with the economic committee before the restructuring proceedings under the StaRUG are initiated.

Furthermore, the restructuring plan must contain information on the effects of planned restructuring measures on employment relationships as well as information on dismissals, short-time working arrangements and the modalities of informing and hearing employee representatives (Annex to Section 5 sentence 2 StaRUG). In the event of violations, there is a risk of a court’s refusal to confirm the plan (Section 63 para. 1 no. 2 StaRUG).

It is, therefore, essential for successful pre-insolvency restructuring plan proceedings to consider the employment law implications as well.

Please do not hesitate to contact us if you have any questions.

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