Restructuring and Insolvency

Restructuring and insolvency in Germany: an overview

Restructuring and insolvency law in Germany offers a sequence of tools that become available, and mandatory, as a company's financial position deteriorates. While the company is solvent, management can negotiate an out-of-court workout with lenders, suppliers and shareholders. Once illiquidity is imminent, the debtor can use the preventive restructuring framework of the Corporate Stabilisation and Restructuring Act (Unternehmensstabilisierungs- und -restrukturierungsgesetz, StaRUG) to bind dissenting creditors by majority vote. And when the company is illiquid or over-indebted, its directors must file for insolvency under the Insolvency Code (Insolvenzordnung, InsO), which offers self-administration, protective shield proceedings and insolvency plans as routes to a restructuring rather than liquidation.

The timing of each step is driven by legal tests. Illiquidity (§ 17 InsO) means that the debtor cannot pay its debts as they fall due. Imminent illiquidity (§ 18 InsO) means that the debtor is likely to be unable to pay its existing debts when due, normally assessed over a forecast period of 24 months. Over-indebtedness (§ 19 InsO) exists where the debtor's assets no longer cover its liabilities, unless continuation of the business over the next twelve months is predominantly likely. These tests determine which tools are available and when the directors' duty to file is triggered.

This pillar page is written for managing directors, CFOs, shareholders, lenders, investors and suppliers. It explains the tools, the directors' duties and the opportunities for investors, and links to our detailed pages on the StaRUG restructuring framework, insolvency proceedings and self-administration, distressed M&A and investing and directors' duties in a crisis.

The German approach to restructuring and insolvency has moved over the last decade from a liquidation-oriented system towards a rescue culture. Self-administration, protective shield proceedings, the StaRUG and the EU Restructuring Directive behind it all aim to preserve viable businesses and the jobs attached to them, while protecting creditors against abuse.

The tests that drive restructuring and insolvency

In practice, illiquidity is distinguished from a temporary payment stoppage by looking at the gap between liquid funds and debts due, and at whether the gap can be closed within a short period. Case law of the Federal Court of Justice has developed guidelines for this assessment, and a liquidity status and a rolling liquidity plan are the standard tools for documenting it. The over-indebtedness test combines a balance sheet at liquidation values with a forecast: if continuing the business over the next twelve months is predominantly likely, there is no over-indebtedness even where the balance sheet shows a deficit. Shareholder loans with a qualified subordination agreement are not counted as liabilities.

Because the tests are forward-looking, management must plan. A company that is not yet illiquid but cannot finance its business plan over the next two years is imminently illiquid and should consider its options before the window for a preventive restructuring closes. Once illiquidity or over-indebtedness occurs, the StaRUG is no longer the main route, and the directors' filing duties begin to run.

Choosing the route

The choice between the tools of restructuring and insolvency law depends on the company's liquidity runway, the nature of its problems (financial or operational), the number and type of creditors, and the attitude of shareholders and key stakeholders. The table below gives a simplified comparison.

Out-of-court restructuring and the StaRUG

Most restructurings in Germany are still agreed out of court. A workout typically involves a standstill with lenders, an independent restructuring opinion (often prepared to the IDW S 6 standard used by German accountants), new money, covenant resets, maturity extensions, debt write-downs or debt-to-equity swaps, and contributions from shareholders. Its weakness is the need for unanimity: any creditor whose rights are affected must agree, which gives holdouts considerable leverage.

The StaRUG, in force since 1 January 2021, addresses this problem. A debtor facing imminent illiquidity can propose a restructuring plan that amends the rights of affected creditors and, in some cases, shareholders. Creditors vote in groups, and the plan is accepted by a group if creditors holding at least three quarters of the voting rights in that group agree (§ 25(1) StaRUG).

A cross-class cram-down allows a plan to be confirmed against dissenting groups if they are not worse off than without the plan and receive an appropriate share of the value distributed, and if a majority of groups agree (§ 26 StaRUG). The restructuring court can order a stabilisation measure suspending enforcement for up to three months (§ 53(1) StaRUG). Proceedings are not public unless the debtor requests public notification (§ 84(1) StaRUG).

Restructuring opinions, new money and stakeholders

Lenders and investors in German restructurings usually require an independent restructuring opinion confirming that the company is capable of being restructured and that the planned measures will restore its long-term viability. Such opinions also protect lenders against the risk that new money or new security is later challenged as an attempt to delay insolvency to the detriment of other creditors. New money is often granted priority by contract and secured on unencumbered assets; in insolvency, loans granted by a preliminary administrator or a debtor in preliminary self-administration with court authorisation rank as preferred estate liabilities.

Restructuring and insolvency processes involve many stakeholders besides lenders. Suppliers often hold retention of title and extended retention of title over goods and receivables, which gives them a strong position. Credit insurers react to rating changes and can cut supplier limits, accelerating a liquidity crisis. Employees and works councils must be consulted on operational changes. Pension liabilities are protected by the Pension Security Association (PSVaG), which becomes a significant creditor in insolvency. Tax authorities and social security agencies hold claims that management must treat with particular care, because unpaid wage tax and employees' social security contributions can create personal liability and criminal exposure for directors.

The StaRUG has proved particularly useful for financial restructurings with a limited number of financial creditors, such as syndicated loans and bonds, and for implementing debt-to-equity swaps over the objection of shareholders. Employee claims and pension claims cannot be compromised under a StaRUG plan, which limits its use for operational restructurings. Our page on the StaRUG restructuring framework explains the procedure in detail.

Insolvency proceedings and self-administration

An insolvency filing does not necessarily mean liquidation. In regular proceedings, the court appoints a preliminary insolvency administrator who secures the assets; on opening, the administrator takes over management and either sells the business as a going concern, restructures it through an insolvency plan or liquidates it. In self-administration (Eigenverwaltung), management remains in office under the supervision of a court-appointed custodian (Sachwalter), which allows a restructuring led by the existing management with specialist support. The debtor must submit self-administration planning including a six-month financial plan and a restructuring concept (§ 270a InsO).

Protective shield proceedings (Schutzschirmverfahren) are a variant of self-administration for debtors that are imminently illiquid or over-indebted but not yet illiquid. The debtor must submit a certificate from an experienced restructuring expert confirming this and that the restructuring is not obviously futile; the court then sets a period of at most three months for the submission of an insolvency plan (§ 270d(1) InsO) and can prohibit enforcement measures.

The debtor may propose the custodian. Insolvency plans are adopted by creditors voting in groups, with a majority by number and by value in each group (§ 244(1) InsO), and can also be crammed down on dissenting groups under conditions similar to those of the StaRUG.

Insolvency proceedings offer tools not available out of court: insolvency money paid by the Federal Employment Agency covers employees' wages for up to three months before opening, which gives liquidity for a restructuring; the administrator can terminate onerous contracts and reduce the workforce under simplified rules; and transactions that prejudiced creditors can be avoided. See our page on insolvency proceedings and self-administration.

Creditors' committees and group insolvencies

Creditors exercise influence through the creditors' committee. In larger cases, the court must appoint a preliminary creditors' committee if the debtor met at least two of three criteria in the previous financial year: a balance sheet total of at least EUR 6 million, revenue of at least EUR 12 million, or an annual average of at least 50 employees (§ 22a(1) InsO). The committee has a say in the selection of the administrator or custodian and in key decisions such as the sale of the business.

German group insolvency rules allow coordination of proceedings for several group companies, including a group venue and a coordination procedure. Cross-border cases within the EU are governed by the European Insolvency Regulation, which allocates main proceedings to the member state where the debtor has its centre of main interests and ensures recognition of German proceedings throughout the EU.

Distressed M&A and investing

Crises create opportunities for investors. Before insolvency, investors can buy businesses from distressed sellers, acquire debt at a discount to influence a restructuring (loan-to-own), or provide rescue financing. In insolvency, the administrator or the debtor in self-administration usually sells the business in an asset deal, which allows the buyer to acquire the assets free of most liabilities. Purchases from an insolvency administrator are generally protected against avoidance claims, and the statutory liability of a business acquirer for the seller's debts does not apply in the same way as outside insolvency.

Employees remain a key issue: § 613a BGB applies to asset deals in insolvency, so employees of the transferred business pass to the buyer, although case law limits the buyer's liability for claims that arose before opening. Restructuring of the workforce is often carried out before the transfer, for example through a transfer company. Pre-insolvency sales carry avoidance and liability risks for the buyer if the price is too low or the seller's creditors are prejudiced. Our page on distressed M&A and investing explains the routes and risks, including the market for non-performing loans regulated by the Secondary Credit Market Act.

Investors with a longer horizon often enter through the capital structure rather than by buying the business. Acquiring loans or bonds at a discount gives a seat at the negotiating table and, through a debt-to-equity swap in a StaRUG plan or an insolvency plan, a route to ownership. This strategy requires careful analysis of the documentation (transfer restrictions, voting thresholds, intercreditor terms), the likely plan groups and the valuation that will be used to test the "no creditor worse off" requirement. Rescue financing, provided as new money with priority and security, is another entry point that can combine attractive returns with influence over the process.

Timing is crucial for distressed buyers. The best opportunities often arise at the point where a company has exhausted its own options but before value has been destroyed by a prolonged crisis. Buyers who can commit quickly, accept limited due diligence and deal with the administrator's standard terms have an advantage in insolvency sales, which are typically run on short timetables.

Directors' duties and liability in a crisis

A crisis changes the duties of managing directors and board members. Under § 1 StaRUG, the members of the management body of a legal entity must continuously monitor developments that could endanger the company's existence, take appropriate countermeasures and report to the supervisory bodies. When the company becomes illiquid or over-indebted, they must file for insolvency without culpable delay, at the latest three weeks after illiquidity and six weeks after over-indebtedness (§ 15a(1) InsO). Failing to file, or filing late, is a criminal offence punishable by imprisonment of up to three years or a fine (§ 15a(4) InsO), and negligent violations are also punishable.

Once the company is illiquid or over-indebted, directors may no longer make payments for it, except payments compatible with the care of a prudent and conscientious manager (§ 15b(1) InsO); prohibited payments must be reimbursed personally. Claims become time-barred after five years, or ten years for listed companies. D&O insurance is therefore crucial, but cover for § 15b claims is a frequent point of dispute. Our page on directors' duties in a crisis explains the duties and how to document decisions.

Shareholders face their own issues in restructuring and insolvency situations. Under a StaRUG plan or an insolvency plan, their shares can be diluted or transferred to creditors, for example in a debt-to-equity swap, if the plan provides for it and the required majorities or cram-down conditions are met. Shareholders who have granted loans to the company see them subordinated, and payments to them in the period before the filing are at risk of avoidance. Early engagement with lenders, often combined with a fresh equity contribution, is usually the best way for shareholders to preserve value.

• Maintain a rolling 13-week liquidity plan and a 24-month financial forecast in any crisis.
• Document the going-concern forecast and the assessment of illiquidity at regular intervals.
• Take restructuring advice early, before the filing deadlines start to run.
• Inform the supervisory board and shareholders and record the decisions taken.

How TRW & Co helps

We advise companies, directors, shareholders, lenders, investors and suppliers on restructuring and insolvency in Germany. For companies and their boards we assess insolvency triggers, document going-concern forecasts and decisions, negotiate standstills and workouts, prepare StaRUG plans, self-administration and protective shield proceedings, and draft insolvency plans. For lenders and investors we advise on security, enforcement, debt trading, rescue financing and loan-to-own strategies, and we act for buyers in distressed M&A, including purchases from insolvency administrators. We work alongside financial advisers and restructuring experts and coordinate with employment, tax and finance specialists. To discuss a situation, please contact us as early as possible.