StaRUG Restructuring Framework

What StaRUG restructuring offers

StaRUG restructuring allows a company that is facing imminent illiquidity to restructure its liabilities outside insolvency proceedings, binding dissenting creditors by majority vote. The Corporate Stabilisation and Restructuring Act (Unternehmensstabilisierungs- und -restrukturierungsgesetz, StaRUG), in force since 1 January 2021, implements the EU Restructuring Directive. It gives debtors a modular toolkit: a restructuring plan that can amend creditors' claims, collateral and, if needed, shareholders' rights; votes in creditor groups with a 75% majority requirement; a cross-class cram-down; court-ordered stabilisation measures suspending enforcement; and court confirmation that makes the plan binding on all affected parties.

Unlike insolvency proceedings, a StaRUG case affects only the creditors the debtor chooses to include in the plan. Suppliers, customers and employees can be left untouched, management stays in control, and the proceedings are not published unless the debtor applies for publication (§ 84(1) StaRUG). These features make the StaRUG particularly suited to financial restructurings: maturity extensions, haircuts and debt-to-equity swaps for syndicated loans, Schuldschein loans and bonds, often combined with new money and a change of ownership.

Since its introduction, the framework has been used both by large groups with complex capital structures and by mid-sized companies seeking to restructure bank debt, and the restructuring courts have developed a body of decisions on group formation, valuation and cram-down.

This page explains the early-warning duty that applies to every company, the conditions of access, plan design and group formation, voting and cram-down, the court's role and the stabilisation order, and the limits of the framework. It is written for managing directors, CFOs, lenders, bondholders, shareholders and investors. For the insolvency alternative, see insolvency proceedings and self-administration.

The early-warning duty under § 1 StaRUG

The StaRUG applies to all companies, not only those that use its tools. Under § 1(1) StaRUG, the members of the management body of a legal entity must continuously monitor developments that could endanger the entity's continued existence. If they identify such developments, they must take appropriate countermeasures and report to the bodies responsible for supervising management without delay. Where the measures fall within the competence of other bodies, such as the shareholders' meeting, the managers must involve them.

In practice, this means that every German company needs a crisis early-warning system appropriate to its size and risk profile: liquidity planning covering at least the coming months, an integrated financial forecast covering the next 24 months (the forecast period for imminent illiquidity under § 18(2) InsO), monitoring of covenants and key performance indicators, and a reporting line to the supervisory board or the shareholders. Directors who neglect this duty risk personal liability under the general rules on directors' duties, and the absence of a forecast makes it impossible to prove later that the company was not yet illiquid or over-indebted. See our page on directors' duties in a crisis.

Access to StaRUG restructuring

The instruments of the framework are available to a debtor that is imminently illiquid within the meaning of § 18(2) InsO, that is, a debtor likely to be unable to pay its existing debts when they fall due, normally assessed over 24 months (§ 29(1) StaRUG). A debtor that is already illiquid or over-indebted cannot start StaRUG restructuring proceedings; it must file for insolvency. Over-indebtedness that arises during a pending case does not automatically end the case, but the debtor must notify the court (§ 42(1) StaRUG), and the court can terminate the case if the restructuring is no longer feasible.

To use the court-based instruments, the debtor files a notification of the restructuring project with the competent restructuring court (§ 31(1) StaRUG), attaching a draft plan or a description of the restructuring concept and an account of the state of negotiations. While the case is pending, the duty to file for insolvency under § 15a InsO is suspended; instead, the managers must notify the restructuring court without culpable delay if illiquidity or over-indebtedness occurs (§ 42(1) StaRUG). The debtor must conduct the case with the care of a prudent and conscientious restructuring manager and protect the interests of the creditors as a whole (§ 32(1) StaRUG).

Designing the restructuring plan

A restructuring plan can amend claims against the debtor (restructuring claims) and rights in the debtor's assets that would give a right to separate satisfaction in insolvency, such as security interests (§ 2(1) StaRUG). If the debtor is a company, the plan can also amend shareholders' rights, for example through a capital reduction and increase with exclusion of subscription rights, or a transfer of shares to creditors in a debt-to-equity swap (§ 2(3) StaRUG). The plan can also restructure upstream guarantees and other security granted by group companies for the debtor's liabilities, against appropriate compensation (§ 2(4) StaRUG), which is important in group financings.

Some claims are excluded and cannot be amended: employees' claims arising from the employment relationship, including occupational pension rights, claims from intentional torts and fines (§ 4 StaRUG). The debtor selects the affected parties according to objective criteria; a plan that leaves out parties must be justified by a sound reason, such as the distinction between financial creditors and trade creditors.

Groups

Affected parties with different legal positions must be placed in different groups (§ 9(1) StaRUG): at least secured creditors, unsecured creditors, subordinated creditors and shareholders, where they are affected. Within these categories, further groups may be formed according to economic interests, for example separating lenders from bondholders or small creditors from large ones. Group formation is strategic, because the cram-down requires a majority of voting groups to accept the plan. Courts examine whether groups have been formed appropriately and not manipulated to engineer a majority.

Plan content

The plan consists of a descriptive part, explaining the basis and effects of the plan, the debtor's situation and the restructuring concept, and a constructive part setting out how the legal position of the affected parties will change. It must include a comparison showing how the affected parties would fare without the plan, usually by reference to the most likely alternative scenario, which is often an insolvency. This comparison is the benchmark for the "no creditor worse off" test and for objections by dissenting creditors.

Typical plan measures

Financial restructurings under the StaRUG commonly combine several measures: an extension of maturities and an amendment of financial covenants; a partial waiver of principal or interest; the conversion of part of the debt into equity or into a subordinated instrument; the provision of new money with priority and new security; and the release of guarantees and security granted by group companies in exchange for compensation.

The plan can also contain the corporate resolutions needed to implement these measures, such as a capital reduction and capital increase, which then take effect with confirmation of the plan without separate shareholder resolutions. This integration of corporate measures is one of the main advantages of StaRUG restructuring over a purely contractual workout, because it removes the shareholders' veto.

New financing provided under a confirmed plan enjoys a degree of protection against later avoidance if the restructuring fails, subject to the conditions of § 90 StaRUG. Lenders providing new money should nevertheless check that the restructuring concept is sound, because this protection is not unlimited.

Voting and cross-class cram-down

The plan can be put to a vote out of court, through an offer to the affected parties with an acceptance period of at least 14 days (§ 19 StaRUG) or at a meeting of affected parties (§ 20 StaRUG), or in court proceedings at a hearing convened by the restructuring court (§ 45 StaRUG).

Court-based voting offers greater legal certainty, as disputes about voting rights can be resolved by the court before the plan is confirmed. Within each group, the plan is accepted if those agreeing hold at least three quarters of the voting rights in the group (§ 25(1) StaRUG); voting rights are calculated by the amount of claims or, for shareholders, their share in capital.

If a group does not reach the required majority, its consent is deemed given if three conditions are met (§ 26(1) StaRUG): the members of the group are likely not to be worse off under the plan than without it; they participate appropriately in the economic value that the plan distributes to the affected parties; and a majority of the voting groups has accepted the plan with the required majorities. Where only two groups were formed, the consent of the other group suffices. The consenting groups may not consist solely of shareholders or subordinated creditors.

Appropriate participation is governed by the absolute priority rule (§ 27 StaRUG): no creditor may receive more than the full amount of its claim, and no junior creditor or shareholder may receive value unless the dissenting group is fully satisfied, subject to limited exceptions, for example where shareholders' continued participation is necessary because of their indispensable contribution to the business. Dissenting individual creditors can additionally object that they are worse off than without the plan (§ 64 StaRUG), which is the main route for minority protection.

The court, stabilisation and confirmation

StaRUG restructuring is supervised by restructuring courts established at certain local courts. The court can, on the debtor's application, order a stabilisation measure suspending enforcement or the realisation of collateral where this is necessary to preserve the prospects of the restructuring (§ 49 StaRUG). The order can be made for up to three months (§ 53(1) StaRUG), and further orders are possible only within this maximum period unless specific conditions are met, such as a plan having been offered to creditors. Contractual termination rights that are triggered merely by the restructuring case or the use of its instruments are ineffective (§ 44 StaRUG).

A restructuring practitioner can be appointed by the court on its own motion in specified cases, for example where the rights of consumers or small and medium-sized enterprises are affected, where a stabilisation order is to affect substantially all creditors, or where a cram-down is likely to be needed (§ 73 StaRUG). The debtor or creditors can also ask for an optional practitioner to facilitate negotiations (§ 77 StaRUG). On application by the debtor, the court confirms the accepted plan (§ 60 StaRUG) after checking the procedural requirements, the group formation, the majorities and objections. Once confirmation is final, the plan's effects apply to all affected parties, including those who voted against it.

• Prepare the notification, draft plan and valuation before approaching the court.
• Engage the largest creditors early to secure group majorities.
• Assess whether a stabilisation order is needed and which creditors it should cover.
• Plan the corporate measures (capital reduction, increase, share transfer) as part of the plan.

Limits and alternatives to StaRUG restructuring

StaRUG restructuring is not a cure-all. It cannot be used once the debtor is illiquid; it cannot amend employee and pension claims; it contains no power to terminate onerous contracts; and it offers no equivalent to the insolvency money paid to employees in insolvency proceedings. Operational restructurings that require headcount reductions, plant closures or the termination of long-term contracts are therefore often better implemented in self-administration or protective shield proceedings, combined with an insolvency plan.

The framework also carries risks for the debtor. Failure of a StaRUG case can damage relationships with suppliers and credit insurers and accelerate an insolvency. Plans that are seen as unfair can lead to drawn-out challenges. For bond restructurings, the majority mechanisms of the Bond Act (SchVG) remain an alternative or a complement. Lenders and investors should note that the StaRUG has made German restructurings more predictable and created new opportunities for loan-to-own strategies; see our page on distressed M&A and investing. Our insights on cross-class cram-down and StaRUG case law look at specific questions.

How TRW & Co helps

We advise debtors, directors, lenders, bondholders, shareholders and investors on StaRUG restructuring. For companies we assess whether the framework is available and suitable, design restructuring plans and group formation, prepare the notification and court applications, organise voting and handle confirmation proceedings, working with financial advisers and valuers. For creditors and investors we analyse proposed plans, negotiate terms, advise on objections and minority protection, and structure debt-to-equity swaps and new money. We also help management set up early-warning systems under § 1 StaRUG. To discuss a restructuring, please contact us.