For the first time in Germany, debtors can use a statutory procedural framework outside formal insolvency to restructure their debt and bind dissenting creditors. The restructuring procedure has been developed against the background of the established insolvency plan procedure, with some distinct advantages such as the flexible and modular approach and the consequent implementation of the DIP principle. A shortcoming of the procedure is that its design is stuck in the traditional thinking of insolvency law, under a new friendly guise. A truly revolutionary choice to understand restructuring as a distinct tool for collective decision-making has not (yet) been taken.
The new German preventive restructuring law (Unternehmensstabilisierungs- und -restrukturierungsgesetz, StaRUG) of 2021 introduced, for the first time in Germany, a statutory procedure that debtors can use to bind dissenting parties to a restructuring plan outside a formal insolvency procedure. The restructuring procedure offers three distinct advantages for debtors when compared to the insolvency procedure: (i) control, (ii) flexibility, and (iii) reputation.
Control: The restructuring procedure is generally designed to be controlled by the debtor with light touch involvement of the court. This gives directors and possibly even the equity holders an incentive to start the restructuring procedure early and as soon as developments that could jeopardize the existence of the debtor’s business have been detected. The debtor will retain the control over the business as well as the restructuring procedure itself. In case the debtor’s directors and shareholders see a high chance for a turnaround as well as a good prospect to share in the future success of the business, this is the best possible argument to incentivize an early restructuring.
Flexibility: The restructuring procedure follows a modular approach, i.e., any restructuring instrument such as a stay, court examination of specific question, or a plan cram-down or cross-class cram-down confirmation can be selected and requested individually and combined with other restructuring instruments. The court will only order (coercive) restructuring instruments upon the debtor’s request. This gives the debtor great flexibility to adjust the procedure to the specific challenges of the restructuring case. The procedure does not require any active court involvement at all if all parties consent to the plan. The debtor also has a bargaining chip in negotiations for a consensual adoption of the plan without court involvement and cram-down confirmations because the debtor can potentially request a (cram-down) confirmation at a later point in time so that creditors know that there is no advantage in opportunistically holding out. Eventually, the debtor may select who shall be affected by a stay or by the plan.
Reputation: As insolvency is still often associated with the stigma of a failed debtor, any insolvency process can have a serious negative impact on the debtor’s relationship with its business partners, customers, and employees. Given that debtors in an already serious liquidity crisis generally do not qualify for restructuring but for insolvency, the average debtor in restructuring can be expected to be in a better financial situation and to have a higher chance to continue trading than the average debtor in insolvency. Also given the flexibility of the restructuring procedure, the procedure may only be as invasive or coercive as is necessary to reach the restructuring goal, e.g. concentrated on a financial restructuring, leaving customers and suppliers unaffected and, thus, causing less disruption to the debtor’s operative business. A favorable selection of debtors and the opportunity of target-oriented minimal-invasive restructuring measures can help debtors in restructuring to preserve and promote their reputation.
In this paper, we shall explain and analyze the key features and restructuring instruments of the German restructuring procedure in section 4, after an overview of the pre-reform situation in insolvency and restructuring in section 2 and a brief summary of the debate on the implementation of the Preventive Restructuring Directive (PRD 2019) in Germany by StaRUG in section 3. Where appropriate, we will highlight key differences to the German insolvency procedure. In section 5, we will conclude with an outlook and suggestions for further improvements to the present restructuring law.
2. Overview of domestic pre-reform restructuring and insolvency law regime in Germany
The last two decades have seen significant reforms on the path towards a restructuring-friendly law and business culture. Already the enactment of the German Insolvency Code (InsO) in 1999 was a major step towards the direction of a more rescue-oriented environment. The Insolvency Code was inspired by the US Bankruptcy Act of 1978 and thus comprised a Chapter 11-type plan process. The plan procedure intended to offer the debtor a second chance instead of being primarily a tool for the debtor’s liquidation and distribution of liquidation proceeds. In practice, however, the Insolvency Code only in part met these expectations. The reasons for the rather moderate success are manifold. German practice was used to sell viable businesses in an insolvency liquidation as a going concern. Courts and legal practitioners would thus be rather cautious to make use of the full spectrum of newly available restructuring instruments whereas creditors and business partners of a debtor were often skeptical about supporting an insolvent debtor. Directors fearing the stigma of insolvency had an incentive to avoid or to postpone insolvency procedures for as long as possible. Accordingly, many debtors only filed for an insolvency procedure at a point of time where the debtor’s course of action could not be reversed anymore (because of a lack of funds to successfully implement reorganization strategies). As a result, the much-feared stigma of insolvency often turned into a self-fulfilling prophecy.
In 2012, substantial reforms of the German Insolvency Code with a view to facilitate the restructuring of distressed companies and to promote the transformation of insolvency practice towards rescue-culture came into effect (the so called “ESUG-reforms”). The debtor in possession (DIP) option was strengthened, as well as the barriers to enter the self-administration/DIP procedure were lowered. A so-called ‘protective shield procedure’ was introduced for the debtor to prepare an insolvency plan before the insolvency-opening, the federal states were encouraged to establish centralized insolvency courts and the insolvency plan option was expanded (e.g. modification of equity claims, to allow for debt-to-equity swaps and the transfer of ownership interests). The goal of the reform was to enhance the effectiveness of early restructurings and to make it more appealing for debtors and directors to take actions for an early restructuring procedure.
Another step towards a rescue culture was made with the claw-back reforms in 2017 which were sought to increase the chances of a successful turnaround outside formal insolvency. Against the background that the German insolvency law provides for a comparatively quite broad mechanism for insolvency contesting, the powers of the insolvency administrator to reverse transactions and claw-back assets were tightened by the 2017-reform. While claw-back can certainly ensure equal and fair treatment and disincentivize fraudulent or biased transactions, powerful claw-back rights are particularly burdensome for debtors trading in an already financially difficult situation. Business partners are more reluctant to trade with a distressed debtor if they need to give due consideration to the additional risk of extensive contesting rights resulting in a claw-back of the business partner’s settled receivables. The 2017-reform, thus, was intended to avoid such negative side-effects of extensive claw-back rights for debtor’s trading in difficult times.
The efforts made by the German legislator to reform the insolvency procedure always intentionally fell short of any type of statutory procedure for an orderly restructuring outside of insolvency law. Out-of-court restructurings would always require unanimous consent in the form of a workout. This approach followed a decision of the German Federal Court of Justice in 1991 when the Court ruled that no dissenting party is under any civil law obligation to cooperate and consent to a restructuring plan, even if the restructuring plan is in the best common interest of all creditors.
Out-of-court restructurings could, thus, only be arranged as informal workouts. A rather concentrated lending structure in Germany with professional repeat players as lenders in regularly long-established lending relations with the debtor would indeed often enable such informal workouts. The increasing importance of debt instruments such as bonds, debt trading, and consequently a rather dispersed and less related creditor structure, however, would confront debtors with new challenges such as the individually rational but collectively destructive incentive of creditors to hold-out and free ride on the concessions of other creditors. The old German Bond Law (SchVG) of 1899 was not equipped for this task. Substantial amendments of payment terms by a binding majority vote were prohibited under the old SchVG until its reform in 2009. Absent such contractual provisions, the rule remained – until the introduction of the new restructuring procedure – that debt restructurings would always require individual and unanimous consent.
3. The introduction of the StaRUG as part of the implementation of the PRD 2019
The introduction of the new German restructuring law – the StaRUG – has principally been welcomed by academics and practitioners alike as a useful addition to the spectrum of restructuring and insolvency options. Especially, the mere availability of a statutory procedure outside of formal insolvency to restructure corporate debt was acclaimed by many. Already the pace of the legislative procedure, with the first draft being presented on 19 September 2020 and the law coming into force on 1 January 2021, highlights the legislator’s ambition for implementing the new tool.
Nonetheless, the specific features of the then draft restructuring law were subject to a heated debate in 2020. Criticism came from two angles: while some had hoped for a more courageous approach, others were rather skeptical as to whether the law would lay the ground for misuse and mismanagement. In line with the traditional German approach in insolvency “not to put the fox in charge of the henhouse”, the skeptical commentators advocated a stronger role for the practitioner in the field of restructuring (PIFOR), less powerful instruments for the debtor, more intense oversight, and stricter requirements to be tested before the debtor could make use of the restructuring instruments. As a result of the debate, two major changes to the draft of the restructuring law stand out:
The first major amendment was the cancellation of rules which would have established a shift of the directors’ fiduciary duties towards the creditors in the vicinity of insolvency and declared shareholder resolutions contradicting the creditor’s best interest irrelevant. This would have basically entitled directors to enter the restructuring procedure without the shareholder's consent and, thus, would have been a game-changer for the German restructuring business, because a voluntary insolvency application always (at least according to a decision of the Appellate Court of Munich) requires a qualified shareholder resolution. In fact, directors not seeking such shareholder resolution, could be held liable by the debtor’s shareholders should their ownership interest in the debtor be devalued in insolvency, which is quite likely. The same principle will probably be adopted for the restructuring procedure so that a solo run of the management to initiate the restructuring procedure without the shareholders’ support is rather unlikely.
The second major change was the cancellation of the debtor’s right to terminate executory contracts and modify debt arising from such contracts, as discussed in section 4.8. This amendment significantly reduced the attractiveness of the restructuring procedure for debtors with long-term liabilities (e.g. such as lease and supply contracts) and makes the procedure less useful for operative restructurings.
4. Main features of a StaRUG restructuring
4.1. Objective and scope of the StaRUG
The main objective of the new restructuring procedure, as stated in the explanatory memorandum to the government draft of the restructuring law, is to increase the chance for an early restructuring outside formal insolvency. This statement is rather surprising given that the restructuring law is not available for debtors, unless they also qualify for a voluntary insolvency application. To this extent, the German legislator has forgone the chance to make the restructuring procedure available for a truly early (solvent) restructuring. Yet, it is to be expected that the new restructuring route will be beneficial for debtors as well as creditors and thus provide a real alternative to the existing insolvency procedures, especially for the purpose of financial restructurings.
As to the personal scope, the restructuring procedure is available for any entrepreneur or corporate debtor having debts stemming from entrepreneurial activity, provided in each case that the debtor is expected to encounter a liquidity crisis within the next 24 months (prospective insolvency – drohende Zahlungsunfähigkeit).
As to the duration, the restructuring procedure expires six months after the initial motion unless it is extended for another six months. In practice, the timeframe mostly depends on how fast an agreement on the restructuring plan can be reached with the key players. On a practical note, a debtor who requires the protection of a stay should have concluded the procedure in under eight months, which corresponds with the maximum duration of a stay.
4.2. Criteria/test to enter the StaRUG
The German legislator decided to translate the ‘likelihood of insolvency’ threshold in Article 4(1) of PRD 2019 into the insolvency law definition of ‘imminent or prospective insolvency’ in the Insolvency Code (InsO). Pursuant to that definition, a debtor qualifies as imminently or prospectively insolvent if it is more likely than not that the debtor will not be able to cover all debts once they fall due with the available liquidity within a forecast-period of 24 months. The forecast period may be more or less than 24 months with proper case-specific justification. As a result, debtors considered to be prospectively insolvent may choose to voluntarily access the StaRUG restructuring procedure, the insolvency procedure, or to use no statutory procedure at all for a turnaround.
The access to the restructuring option is denied, however, if debtors are already unable to pay their debts as they fall due or over-indebted. Directors of such corporate debtors are obliged to file for insolvency procedure and otherwise face civil liability and criminal sanctions for a delayed filing for insolvency.
If the debtor was able to access the restructuring procedure before they become insolvent, the directors’ obligation to file for insolvency is suspended. They are, however, required to inform the court should the debtor become unable to pay their debts or should the debtor become over-indebted. In such case, the court will generally terminate the restructuring procedure unless the debtor can show that the restructuring is likely to succeed and that the restructuring procedure is in the best interest of creditors. This opens a window of opportunity for well-prepared debtors, especially in case that they have already advanced negotiations with their creditors, to initiate the StaRUG procedure even though they know internally that they might become insolvent immediately after due to stakeholder actions. This does not change the fact, however, that any debtor who initiates the restructuring procedure must present a liquidity forecast in good faith that shows that the debtor will not run out of cash within the next 12 months but will probably become illiquid sometime during the next 13 to 24 months. If this projection proves wrong later in the procedure, the case is dismissed unless the debtor is able to convince the court that a highly advanced negotiation status justifies the continuation of the restructuring procedure for the sake of all creditors.
Differently from an insolvency procedure, there is no formal opening procedure during which the court must decide based on a report submitted by a court-appointed examiner as to whether the debtor qualifies for the procedure. The debtor, however, must formally notify the court of its restructuring intent in order to apply for restructuring instruments. The formal notification by the debtor shall be submitted along certain mandatory information. Importantly, the debtor shall report about the status of negotiations and submit a draft of the restructuring plan or, absent a draft plan, at least a restructuring concept, in which the debtor elaborates on the reasons of the debtor’s (financial/economic) crisis, the restructuring goal, and measures to be taken to reach the restructuring goal. A test of the entry criteria of imminent insolvency becomes relevant only once the debtor requests the use of a restructuring instrument like of a stay or a plan confirmation.
4.3. Involved actors
The DIP principle has been strictly translated into the new restructuring procedure. The debtor’s management retains control of all business decisions, with the exception that the restructuring court can appoint a PIFOR and bestow the power upon him to approve or disapprove exceptional payments (but not to interfere with the debtor’s day-to-day business). Importantly, the debtor is the main actor of the procedure. Only the debtor is entitled to initiate the procedure, to propose a restructuring plan (thereby excluding competing plans by creditors or the PIFOR), and to ask the court to order a stay or confirm the restructuring plan in a (cross-class) cram-down decision. It follows that the right of initiative is the debtor’s prerogative. Neither the PIFOR, restructuring court, nor creditors take a proactive role in the restructuring procedure.
The PIFOR advises the debtor, monitors the restructuring procedure and assists the competent restructuring court by making reports. There are certain limited cases in which a PIFOR must always be appointed while typically the appointment of a PIFOR only happens if requested by the debtor (or creditors) and in cases in which the court decides in its own discretion that the appointment of a PIFOR is necessary to advance the procedure in all parties’ best interest.
To fulfill his duty to advise, monitor and report, the PIFOR may access the debtor’s business records, request insider information from the debtor /the debtor’s management and review the debtor’s financial situation, compliance with procedural rules, and the plan. The PIFOR may also preside over the voting procedure.
In the spirit of a true DIP procedure, the court does also not assume a proactive role. The court will answer at the debtor’s initiative and typically will rely for its decision on information provided by the debtor, unless creditors or the PIFOR bring circumstances to the court’s attention upon which the court may reject or suspend a restructuring instrument which has been requested by the debtor.
The creditors’ main right is to approve or disapprove the plan and to appeal to the restructuring court should their rights have been violated. Creditors can also influence the appointment of a PIFOR, but the debtor’s proposal for a PIFOR takes precedence over the creditors’ proposal. The most powerful tool of individual and organized creditors with a significant share of voting rights to affect the course of the restructuring procedure is, therefore, their hold-out position as a bargaining chip in negotiations with the debtor.
A key instrument of the procedure is a stay which prevents creditors from enforcing their claim or from realizing an asset pledged as collateral. A stay can be ordered by the court upon the debtor’s request and the debtor can request that the stay should apply to all or only to selected creditors. Given that every party affected by the stay needs to be informed, a stay applicable to (almost) all business parties, such as suppliers, can cause quite a turmoil and rather worsen than improve the debtor’s situation, so that absence of an automatic stay and the flexibility to target only specific creditors can be considered a strength of the restructuring procedure.
A stay will initially be ordered for up to three months with a possible one-month extension conditional upon that the debtor has presented a plan to the creditors. Once the voting has taken place and the debtor has requested a court confirmation, an extension for an additional four months is possible until the plan has been confirmed and a final judgement has been entered.
During a stay, a creditor may not withhold performance, terminate, or modify the contract, because the debtor did not perform the contract as agreed before the stay was ordered. This rule provides broader protection during the stay as the prohibition of ipso facto clauses which invalidate contractual clauses to modify or terminate a contract because of the mere fact that a debtor has entered the restructuring procedure or made use of its instruments. Petitions to open an insolvency procedure by creditors are also suspended during the stay. Given that the stay does not come with a moratorium, the debtor remains obliged to perform contracts as contractually agreed during the stay.
4.5. The plan
The restructuring plan must contain an informative part and a part in which the terms of the plan, i.e. the modifications to debt, equity, and collateral are proposed. The first part of the restructuring plan is informative and shall enable the affected parties to make an informed decision and evaluate as to whether the plan is in their best interest. For this purpose, the plan needs to describe the reasons for the debtor’s current situation and describe how the plan shall help to overcome the debtor’s financial crisis. A key component of the informative part is the comparative calculation, in which it shall be presented how the parties would stand with and without the plan’s confirmation. The calculation based on an alternative liquidation scenario requires special justification. In a case decided by the District Court Dresden, the debtor, for instance, could show that there was no investor available to acquire the debtor’s business and that there was no prospect to continue the business in an insolvency procedure because the debtor was highly dependent on public clients who were not allowed to place an order with an insolvent debtor for regulatory reasons. The alternative no-plan scenario, thus, was the liquidation of the debtor’s assets.
In the second part, the plan defines how the rights of (secured) creditors and equity holders shall be modified. Debt claims may be postponed, reduced, or swapped into equity. Equity claims may be cancelled or diluted, with or without compensation. Secured creditors may have to give up or exchange their collateral. The plan would, moreover, define the conditions of new financing.
To this extent, the restructuring plan equals the insolvency plan, however, with two important differences. First, the restructuring plan may involve the modification of non-payment terms of multi-party agreements, such as bond contracts. Different from an insolvency plan, for which all debt claims are considered due and payable and are therefore subject to ratable satisfaction, this is not necessarily the case in a restructuring plan. The contractual relation between a debtor and bond creditors might very well be continued, especially in case of only minor adjustments to the bond contract. The restructuring plan may not even entail a haircut for the bond creditors but require the suspension of negative covenants which would otherwise prohibit transactions essential for the restructuring; for instance, a distressed M&A with a change-of-control or the assumption of new (senior) debt. With the suspension or modification of non-payment terms, the debtor can avoid default under the bond contract and possibly the acceleration of debt repayment obligations and a subsequent cross-default under other debt contracts.
Second, the debtor has quite some flexibility to select the parties affected by the plan and may even treat creditors with an equal rank in insolvency differently, conditional upon that the debtor can show reasonable (economic) grounds for this decision. The right of the debtor to treat creditors of equal rank differently follows naturally from the right to select the parties affected by the plan. Given that the debtor in principle has the right to exclude trade creditors based on the argument that their inclusion would harm the business, the debtor is effectively entitled to treat the claims of trade creditors more favorably if needed.
Like the insolvency plan, a restructuring plan is not an instrument to restructure the debt of a corporate group as a whole. It cannot work as a group restructuring plan across group entities. But the new German law enables both the restructuring and the insolvency plan to carry a single point of entry for the financial restructuring of the group. The plan of one debtor/legal entity as part of a corporate group is now able to modify the principal loan or bonds agreement and encumbered rights in down, -side, or up-stream collateral of affiliated companies with their consent and conditional upon adequate compensation to affected creditors in order to disentangle intercompany relations. This enables the debtor and affiliated companies to either restructure the group’s financing or to prepare the business for a fresh start without intercompany obligation, e.g. for a sale of only the debtor's business.
Any performance or debt modification pursuant to a court-sanctioned restructuring plan is protected against any claw-back based on bad faith in a possible future insolvency. This safe harbor is meant to incentivize parties to support a reasonable plan offer made by a debtor in distress. As the distress is disclosed in a restructuring, the insolvency administrator in potential later insolvency procedure could avoid transactions made with this knowledge pursuant to Sec. 133 InsO, including plan-related transactions, for a period of four (to ten) years. The much needed claw-back privilege comes, however, with significant exceptions. Importantly, if a plan determines the transfer of (almost) all of the debtor's assets, the claw-back protection will typically not apply unless the adequate compensation of parties not affected by the plan is guaranteed, i.e., that they are not left behind. To incentivize new financing, which is often vital for a successful restructuring and therefore in the best interest of all creditors, it is necessary to extend such privilege to new financing, as it is explicitly required by Article 17(1) PRD 2019.
4.6. Adoption and confirmation of the plan
All parties directly affected by the plan are entitled to vote on the plan for its adoption. Voting takes place in classes of rights as constructed by the debtor. A plan is adopted by a class if parties in this class representing at least 75% of the nominal debt or equity value accepted the plan. No headcount majority is required.
In case all classes have accepted the plan by the required majority, the court may confirm the plan over the dissent of individual creditors and shareholders in a class, provided that the plan meets all legal requirements. The restructuring court will review as to whether the debtor is still imminent insolvent, as to whether the debtor has complied with the rules governing the plan regarding content, procedure, and adoption, and as to whether the plan does not obviously lack prospect of success. In case of new financing, the court will also review the soundness of the underlying restructuring concept, i.e., the measures taken to reach the restructuring goal as defined by the debtor and thus the prospect that new financing can be repaid. Facts which should raise doubts about the restructuring concept will only be considered as far as such facts are positively known to the court. Otherwise, the court will rely on the information provided by the debtor. Upon the objection of dissenting parties, the court also considers whether the plan sees those worse off than they would be in the next best alternative scenario (best-interest-test). In case of a complex restructuring, it is very likely that the court will appoint a PIFOR in its own discretion to assist the court in providing an informed opinion on the restructuring plan. In case of a cross-class cram-down, a PIFOR will be appointed to comment on the restructuring plan.
If the plan is not adopted by all classes, the debtor can request a cross-class cram-down confirmation, which requires a more intense court review. The court will also assess as to whether the dissenting class as a whole receives a fair share in the value distributed under the plan (plan value). For this purpose, the court will apply a non-discrimination test and a (relaxed) absolute priority rule. This requires the equal treatment of the dissenting class with consenting classes of equally ranking rights in an insolvency liquidation and that classes of lower ranking rights, especially shareholders, shall not receive any value unless the specific needs of the restructuring case justify the discrimination or deviation under the plan. Differently and more flexible than in an insolvency plan, creditor classes of equal rank may thus be treated differently if there is a justifying economic reason.
These deviations contain some important new exceptions to the traditional absolute priority rule: shareholders of the debtor may participate in the distribution of plan value, i.e. retain ownership in the going-concern business of the debtor, without further justification or contribution if the plan entails only minor adjustments to the creditors’ rights (e.g. postponement of repayment for up to 18 months). This possibility provides an incentive for early restructurings which should often require less harsh measures than late restructurings. Further, a sole shareholder or a shareholder class may also retain value (their shares) if the shareholder’s continued engagement is essential for the going concern of the debtor, e.g. because of the shareholder’s input as manager, key person, or creative mind. To bind such individually important shareholders, their participation in the plan value will be conditional upon their commitment to the debtor for as long as required to reach the restructuring goal but for a maximum period of five years.
4.7. Possibilities for a debt-for-equity swap
One possibility to restructure debt and distribute the company's value to creditors is a debt-for-equity swap. Such a debt-for-equity swap requires the individual consent of the relevant creditors to become shareholders of the company. In practice, this is a significant obstacle because many creditors, such as banks or trade creditors, have no interest in accepting shares, especially in private companies.
The only relevant objection to a plan proposing a debt-for-equity swap is that the plan is not in the best interest of existing creditors or shareholders, for which they must prove that an alternative scenario outside a formal restructuring would have promised higher value for them.
While the debt-for-equity swap is a helpful tool to restructure the debtor’s liabilities without draining the company of cash, it may also be used for loan-to-own strategies by investors who have bought debt, possibly in a distressed situation, with the ultimate intention to acquire the company. For shareholders, this constitutes a threat to their ownership of the company – a threat, however, which is mitigated by the fact that directors run the risk of personal liability should they initiate the restructuring procedure without the shareholders’ approval.
An alternative to the debt-for-equity swap is the direct transfer of shares to a third party under the plan, i.e. to a new outside investor. The advantage of this option is that the debtor’s equity can be offered to a strategic investor who can extract the most value from the debtor’s business. Practical experience from the ESUG-reform, which introduced the option to modify rights in equity with an insolvency plan, showed that a share transfer is more frequently used than a debt-for-equity swap.
4.8. Executory contracts
While the most recent draft of the new restructuring law contained the debtor’s right to terminate executory contracts, this right was removed last minute from the restructuring procedure by the legislator. Consequently, the debtor is left with no other choice than to perform executory contracts, i.e. only the already outstanding obligations of the debtor for which the counter-party's consideration has already been provided are subject to modification. Future (mutual) obligations, however, remain unaffected by the restructuring procedure. The termination right or the debtor’s choice to perform economically favorable contracts and terminate unfavorable contracts is key to many insolvency laws and an important instrument in German insolvency law. The availability of such an instrument in the restructuring procedure has been criticized by politicians, lobbyists, and academics alike. It was argued that a termination right outside formal insolvency would contradict the principle pacta sunt servanda and that it could potentially cause a chain-reaction of financial distress, e.g. the landlord’s distress following the tenant’s distress. Both arguments are not compelling:
The principle pacta sunt servanda is certainly affected if contracts can be terminated and future (mutual) obligations can be suspended in a statutory procedure but the same is true in a (cross-class) cram-down for past obligations. The expectation of a dissenting lender that the loan will be repaid in full when it is due is similarly disappointed in a restructuring as the expectation of a landlord that the full contractual period for the lease will be honored should the tenant make use of a restructuring instrument to terminate the contract or to choose non-performance. From an economic perspective, the only difference is that a lender (or similarly the landlord, supplier etc. with past/outstanding claims) has already sunk their investments in advance while the counterparty of an executory contract has not yet provided their own corresponding consideration. Whether this should be considered as a good argument to reject the termination right seems rather questionable given that the counterparties of executory contracts have at least the advantage that they can try to offer their performance to the market, e.g. the landlord can still look for another tenant. Should the new lease agreement offer less value, the landlord could claim damages from the debtor subject to modification by the plan.
While it is debatable under what requirements the debtor should be entitled to choose non-performance of a contract, the cancellation of the termination right has burdened the German restructuring procedure with a distinct disadvantage to the German insolvency procedure and the Dutch restructuring procedure (Wet homologatie onderhands akkoord, WHOA). The later does not only offer a termination right but also a low entry barrier for foreign debtors, thus setting an incentive for forum shopping. The latest draft version of the German restructuring law required the restructuring court to review the economic question as to whether the termination of the contract is appropriate to benefit the restructuring concept, i.e., the restructuring plan and further measures to be taken to reach the restructuring goal. This approach is flawed since insolvency courts in Germany would typically not deal with such kind of questions and because the question what is appropriate to benefit the restructuring concept is primarily determined by the restructuring concept itself. Put differently, if the financial creditors take a huge haircut, the debtor might be able to pay the full rent of an uneconomic lease. If the burden of restructuring is shared equally by financial creditors and the counterparties of executory contracts, the termination of uneconomic contracts and the modification of damage claims which arise from such contracts is always appropriate. This leads to the fundamental question as to whether a termination or modification of debts arising from executory contracts should be permitted: how shall the burden of restructuring be distributed?
Eventually, the risk of a chain-reaction should claims arising from executory contracts be subject to modification is similarly not convincing. Debtors entitled to enter the restructuring procedure are similarly entitled to voluntarily enter into the insolvency procedure. Should non-performance of executory contracts be required, the insolvency procedure offers this opportunity. As initially discussed, insolvency might not be the best value-preserving option if compared to a restructuring. The cancellation of the termination right, thus, rather incentivizes debtors who are reluctant to make use of the insolvency option to delay an early restructuring and likely enter insolvency at a later point in time with an even less satisfactory quota for the counterparty of the executory contract. The potential chain-reaction is not avoided, it is just delayed.
One of the authors has suggested in a parliamentary hearing to make future obligations of the debtor subject to a modification under the restructuring plan. The counterparties of the debtor in an executory contract would vote in a distinct class on the plan and potentially be crammed-down (in a cross-class cram-down). They could reject the plan and claim to be worse-off than in a no-plan scenario or discriminated in the burden sharing under the plan compared to other classes. If bound by the plan, they would still be entitled to terminate their contract and, thus, not be bound to offer their performance for the debtor’s consideration for the reduced/modified price as defined by the plan, which in turn incentivizes the debtor to offer market terms in the plan. This proposal borrows from the practice of the UK company voluntary arrangements as it has been used by debtors in the retail sector who have suffered severely under the retail crisis in UK’s city centers due to changing shopping habits and the shift towards online shopping.
4.9. Jurisdiction for and recognition of court decisions in Europe
Starting from 17 July 2022, German debtors can request a public restructuring procedure. Differently from a private (or confidential) procedure, the public procedure is publicly announced so that also parties which might not yet be affected by the procedure will have an opportunity to learn about them. Only the public procedure was added to Annex A of the European Insolvency Regulation 2015 (EIR 2015), so that the COMI principle applies according to Article 3(1) EIR 2015, and German restructuring law according to Article 7 EIR 2015, and recognition within the EU follows from Articles 19 et seq, and in particular Article 32 EIR 2015 for court confirmed restructuring plans and court-ordered stays.
The matter of international jurisdiction and cross-border recognition for private restructuring procedures within the EU remains unclear. The same is true for all types of (private and public) restructuring procedures in relation to third countries. While the German courts will probably accept international jurisdiction for such restructuring procedures if the debtor's COMI is in Germany, the question of the applicable law and of recognition across Europe and in third states is uncertain.
For contracts governed by German law, it is likely that the modification of the debt claim arising from such contract in the course of a StaRUG procedure should be recognized across the EU also under the Rome I Regulation. For contracts governed by foreign law, neither German nor EU law provides specific answers the question of the law applicable to a modification and whether modifications in a German restructuring plan will be recognized in foreign (EU and third country) countries. As things currently stand, it is particularly uncertain that restructuring plans adopted and confirmed in private restructuring procedure would receive recognition in fellow EU Member States pursuant to the Brussel Ibis Regulation due to its Article 1(2)(b).
The German restructuring law is surprisingly silent when it comes to matters of international jurisdiction and recognition. Therefore, debtors with debt contracts in significant volume governed by foreign law of other EU jurisdictions are currently best advised to request a public procedure considering that absent recognition under the EIR 2015, they will have to cope with substantial legal uncertainty, i.e. they might have to deal with lawsuits and enforcement for full repayment.
Still, the use of a public procedure to overcome cross-border uncertainties has relevant limitations too. First, a public procedure requires the debtor’s COMI to be found in Germany. Second, the framework of the EIR 2015 envisions the ability to limit the effects of main procedure by initiating secondary procedures. Third, the EIR 2015 contains a number of mandatory provisions, e.g. for the filing of claims or the hotchpotch rule in Article 23 EIR 2015, that are not easy to apply in restructuring procedures.
5. Outlook and conclusion: focus points for domestic practice
The PRD 2019 gave the EU Member States ample flexibility for implementing the restructuring procedure. A cautious or traditional approach would have meant high barriers, little powers for debtors, and strict oversight and control by restructuring courts and a PIFOR. A rescue- and debtor-friendly approach would have meant the exact opposite. Some national lawmakers were surprisingly courageous. The Netherlands, for example, which have not had an effective plan procedure before, made a bold move with the Dutch restructuring procedure offering flexible restructuring plan options with a comparatively low entry barrier for foreign debtors. The German implementation of the PRD 2019, especially the first drafts, were similarly a surprisingly fresh breeze of a new restructuring-friendly culture. Yet, the enacted German restructuring law is significantly more cautious. It is, nonetheless, fair to say that the positive attitude towards debtors as leading actors of their own reorganisation and restructuring, worthy to be given a second chance, is also signalled by the new restructuring law. It is the first time that there exists a guaranty for debtors to remain in possession of their business and achieve a restructuring outside formal insolvency with the support of the majority of their creditors though without unanimous consent.
The practice test of the German restructuring procedure in large scale is still outstanding. Since the restructuring procedures’ enactment, insolvency business has been rather quiet in Germany. Insolvency case numbers declined during the COVID-19 pandemic by 15.5 per cent in 2020 compared to 2019. With the onset of the COVID-19 pandemic, the German government has rolled out massive support programs and government-co-sponsored loans have been readily available. Thus, many debtors might already be over-indebted on the balance-sheet but with sufficient cash to cover expenses for at least the next 12 if not 24 months, whereas those debtors entering insolvency are often already deeply troubled, so not exactly the candidates for a restructuring procedure. The German restructuring procedure has received much credit upfront so far and proven successful in a handful of financial restructurings. The coming months and years to come will tell as to whether such credit is deserved.
While the introduction of the German restructuring procedure was certainly a big step forward and a valuable addition to the German restructuring toolbox, there are some areas for reform that could significantly increase the attractiveness of the restructuring procedure, also in cross-border institutional competition. Three areas for reform we like to point out are the entry test, the treatment of executory contracts, and the internationality of the restructuring procedure.
First and foremost, the entry test for the restructuring procedure is the same as for voluntary insolvency procedures. The self-proclaimed goal set by the legislator to encourage early restructurings outside formal insolvency would suggest that an earlier entry is possible. While it is understandable that modifications to debt and equity claims without the parties’ individual consent should be well justified, procedural rules such as a qualified majority vote, equal treatment and best-interest tests can assure that only well justified modifications are possible. Comparable to the solvent UK scheme of arrangements, the German restructuring procedure could allow for cram-down confirmations in a restructuring plan for solvent debtors. Proof of the debtor’s imminent insolvency could be required for more invasive cross-class cram-down confirmations. Because the German restructuring procedure follows a modular approach anyhow, it would be a step towards more flexibility and accessibility should different instruments be made available under different requirements.
Second, the cancellation of the termination right without an alternative, such as the option to modify future claims, makes the procedure significantly less attractive if not useless for debtors with constantly arising liabilities from unprofitable contracts. As discussed in section 4.8, the arguments against the cancellation of the termination right are not convincing at all, especially considering that a debtor can currently enter the insolvency procedure voluntarily and choose as DIP to perform or not perform executory contracts which are exempt from any modification in the restructuring procedure. Thus, it would be most sensible for a truly competitive restructuring procedure to re-install an option allowing for the modification of future claims.
Third, the German restructuring law is determined by a very national perspective. In the interest of legal certainty and institutional competition, the future restructuring law should allocate jurisdiction to German restructuring courts based on a sufficient connection test in private procedures and establish rules on the applicable law and the recognition of foreign procedures, which are not part of Annex A of the EIR 2015. For the time being, cross-border effects of German restructuring procedures are guaranteed only for plans modifying German law governed debt and for public restructuring procedures. The effects of private procedures in other countries depend on the choice of law and cross-border recognition rules applicable.
With a few but substantial amendments, the German restructuring law stands in a great position to offer a revolutionary restructuring procedure which can be understood as a collective decision-making mechanism. In particular, the availability of an inter-class cram-down mechanism accessible for debtors with a sufficient connection to Germany without an entry test, such as the likelihood of insolvency, would demonstrate that restructuring is not just a light-touch insolvency procedure but a unique tool for collective-decision making designed to preserve and increase value in the common best interest of all parties affected.
 The closing date of this paper is 30 May 2022.
 A non-official English translation of the statute can be accessed here (from p. 179): https://www.schultze-braun.de/fileadmin/de/Fachbuecher/Insolvenzjahrbuecher/Insolvenzjahrbuch_2021/Insolvency_and_Restructuring_2021_rz.pdf?_=1618475256 (last viewed 30 May 2022).
 See section 4.2.
 See section 2, D. Ehmke & A. Wolf, ‘From Bankruptcy and Insolvency, from Restructuring to Resolvency’, manuscript, forthcoming 2022; B. de Bruyn & D. Ehmke, ‘StaRUG & InsO: Sanierungswerkzeuge des Restrukturierungs- und Insolvenzverfahrens‘, NZG, 2019, p. 661-672, section 6.
 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency), O.J. L 172/18.
 See D. Ehmke & A. Wolf, above note 4.
 See F. Jacoby, S. Madaus, D. Sack, H. Schmidt & C. Thole, ‘Evaluierung – Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen (ESUG) vom 7. Dezember 2011’, BT-Drs. 19/4880, available at https://dserver.bundestag.de/btd/19/048/1904880.pdf (last viewed 30 May 2022) for a legal and practical evaluation of the ESUG-reforms, commissioned by the German government, and presented by the research group on 30 April 2018.
 Federal Court of Justice, decision of 12 December 1991 – IX ZR 178/91 = NJW 1992, p. 967-971.
 See D. Skeel, ‘An Evolutionary Theory of Corporate Law and Corporate Bankruptcy’, Vanderbilt Law Review 1998, 51, p. 1325-1398 on the impact of dispersed versus concentrated lending and ownership structures.
 See D. Ehmke, ‘Bond Debt Governance’, Nomos: Baden-Baden, 2019, p. 279-294.
 OLG München, decision of 21 March 2013 – 23 U 3344/12 = NZI 2013, p. 542-546.
 For a comparison of restructuring and insolvency procedure in Germany see B. de Bruyn & D. Ehmke, above note 4.
 See section 4.2.
 Sec. 31 para. 4 no. 4 StaRUG. For a practical example of a restructuring procedure concluded in approximately two months, see G. Bernau, H. Beyer, N. Raiß & M. Hofmann, ‘Früh, schnell und fast geräuschlos’, INDat Report, 2021, Vol. 09, p. 10-25.
 Sec. 18 InsO.
 Sec. 17 InsO. As defined in case law, a debtor is considered unable to pay their debts if the debtor cannot pay over 90% of liabilities falling due within a period of three weeks with the liquidity available during that period.
 A debtor is over-indebted if (i) the liabilities exceed the assets and if (ii) it is more likely than not that the debtor will experience a liquidity shortage within the next 12 months pursuant to Sec. 19 InsO. The statutory definition of 12 versus 24 months was introduced with the same reform as the restructuring procedure and relates to a proposal by M. Brinkmann, ‘Die Antragspflicht bei Überschuldung – ein notwendiges Korrelat der beschränkten Haftung’ in: W. Ebke, C. Seagon & A. Piekenbrock (eds), Überschuldung: Quo Vadis, Nomos: Baden-Baden, 2020, p. 67-78.
 See especially Sec. 15a and 15b InsO.
 Sec. 42 StaRUG.
 Sec. 33 para 2 no 1 StaRUG. Cf. District Court of Dresden, decision of 07.06.2021 – 574 RES 2/21 = NZI 2021, 893.
 Sec. 31 StaRUG.
 See Sec. 51 para 1 no 3 StaRUG (for a stay) and Sec. 63 para 1 no 1 StaRUG (for a plan confirmation).
 Sec. 76 para 2 no 3 StaRUG.
 The court may also order that any payments to the debtor shall be collected by the PIFOR, see Sec. 76 para 2 no 2 lit. b. StaRUG.
 Sec 76 para 2 no 2 lit. a, para 4 StaRUG.
 Sec. 76, 77 para 2, 79 StaRUG.
 See Sec. 17 et seq StaRUG for the voting procedure.
 Sec. 74 para 2 sent 3, 77, 93 para 2 StaRUG.
 See Sec. 74 para 2 sent 2 StaRUG.
 Sec. 49 para 1 no 1 StaRUG.
 Sec. 49 para 1 no 2 StaRUG.
 Sec. 50, 51 StaRUG.
 Sec. 52, 53 StaRUG.
 Sec. 53 para 1 StaRUG. The counterparty, however, may demand adequate protection should they be obliged to provide their performance in advance to the debtor according to Sec. 53 para 3 StaRUG.
 Sec. 44 StaRUG.
 Sec. 58 StaRUG.
 Sec. 6 para 1 StaRUG.
 Sec. 6 para 2 StaRUG.
 District Court of Dresden, decision of 07.06.2021 – 574 RES 2/21 = NZI 2021, 893. See also District Court of Hamburg, decision of 12 April 2021 – 61a RES 1/21 = NZI 2021, 544.
 Sec. 7 para 1 StaRUG.
 Sec. 12 StaRUG.
 Cf. District Court of Cologne, decision of 3 March 2021 – 83 RES 1/21 = NZI 2021, 433 on the amendment of a syndicated loan agreement and a restructuring agreement.
 Sec. 41 para 1 InsO.
 Sec. 9, 28 para 1 StaRUG with the corresponding explanation in the explanatory memorandum of the government draft of SanInsFoG/StaRUG.
 See Sec. 2 para 4 StaRUG and Sec. 217 para. 2 InsO in connection to Sec. 15 Stock Corporation Law (AktG).
 See Sec. 90 para 2 StaRUG.
 Absent an explicit rule claw-back protection of new financing in the German restructuring law, German courts should be expected to apply such privilege under the existing rules in conformity with the PRD 2019. See S. Madaus, ‘Die begrenzte Insolvenzfestigkeit des Restrukturierungsplans, der Planleistungen sowie unterstützender Rechtshandlungen während der Restrukturierungssache`, NZI-Beilage, 2021, p. 35-37.
 See Sec. 24, 25 StaRUG.
 See Sec. 63 para 1 StaRUG.
 See Sec. 63 para 2 StaRUG.
 See Sec. 64 para 1 StaRUG. Cf. Higher Regional Court of Dresden, decision of 1 July 2021 – 5 T 363/21 = ZIP 2021, 2596 (appeal against District Court of Dresden, decision of 7 June 2021 – 574 RES 2/21).
 Sec. 73 para 3 no 2 StaRUG.
 Sec. 73 para 2 StaRUG.
 See Sec. 27 para 1 no 3 and para 2 no 2 StaRUG.
 See Sec. 27 para 1 no 2 StaRUG. Under this provision, the plan does not provide for any value if rights retained or value received is adequately compensated under the plan (“new money / value exception”).
 See Sec. 28 StaRUG.
 See Sec. 28 para 1 StaRUG and District Court of Hamburg, decision of 12 April 2021 – 61a RES 1/21 = NZI 2021, 544.
 See Sec. 28 para 2 no 2 StaRUG.
 See Sec. 28 para 2 no 1 StaRUG.
 Sec. 2 para 3, Sec. 7 para 4 StaRUG.
 See section 3.
 See F. Jacoby, S. Madaus, D. Sack, H. Schmidt & C. Thole, above note 7, Zweiter Teil, C II. Tab. 16.
 Sec. 3 para 2 StaRUG.
 See Sec. 103 et seq InsO.
 See, for instance, the statement of the German Federal Council to proposed German restructuring law pointing out that, that the debtor’s termination right would (i) constitute a fundamental violation of the principle pacta sunt servanda, (ii) cause significant economic damage, and (iii) overwhelm restructuring courts which would have to decide on complex economic issues: Bundesrat Drucksache 619/20 at no. 3 and 13., available at
 See M. Hofmann, ‘Vertragsbeendigung nach §§ 49 ff. StaRUG-E – praktisches Sanierungstool oder untaugliches Ungetüm?‘, NZI, 2019, p. 871–874.
 See S. Madaus, ‘Stellungnahme zum Regierungsentwurf eines Gesetzes zur Fortentwicklung des Sanierungs- und Insolvenzrechts (SanInsFoG) sowie zum diesbezüglichen Antrag der Fraktion der FDP’, Deutscher Bundestag – Anhörung des Ausschusses für Recht und Verbraucherschutz, 12 November 2020, section 3 c).
 Regulation (EU) 2015/838 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast), O.J. L 141/19.
 Sec. 35 StaRUG determines jurisdiction of regional restructuring courts within (!) Germany (venue) based on the COMI principle. It is argued that Sec. 35 StaRUG should be applied in analogy to determine jurisdiction in private procedures also to determine international jurisdiction based on the COMI principle.
 See for private procedure e.g. C. Schlöder, J. Parzinger & L. Knebel, ‘Der Restrukturierungsplan nach dem StaRUG im Lichte grenzüberschreitender Restrukturierungen – praxistaugliches Anerkennungsregime oder ein Fall für die obersten Gerichte?`, ZIP, 2021, p. 1041-1051, 1043 et seq on the applicability of the Brussel I Regulation (EU) No 1215/2012 on jurisdiction and the recognition and enforcement of judgements in civil and commercial matters. See also Thole, ‘Vertrauliche Restrukturierungsverfahren: Internationale Zuständigkeit, anwendbares Recht und Anerkennung‘, ZIP, 2021, p. 2153-2162, 2154 et seq.
 See D. Skauradszun, ‘Restrukturierungsverfahren und das Internationale Privatrecht’ NZI 2021, p. 568-572, 570 et seq on recognition under the Rom-I regulation (EC) No 593/2008 on the law applicable to contractual obligations (Rome I).
 See D. Skauradszun, idem, 571 et seq. argues in favour of German restructuring law to apply in analogy to Sec. 335 et seq InsO.
 See e.g. C. Thole, above note 70, 2154.
 See D. Ehmke, J. Gant, G-J. Boon, L. Langkjaer & E. Ghio, ‘The European Union preventive restructuring framework’, International Insolvency Review, 2019, Vol. 28, Issue 2, p. 1–26.
 Press release No. 161 by on 31 March 2021 by German statistical Bureau, available at https://www.destatis.de/DE/Presse/Pressemitteilungen/2021/03/PD21_161_52411.html (last viewed 30 May 2022).
 See for successful examples the following practice report by G. Bernau et al., above note 14 (bond and ‘Schuldschein’ restructuring). See also the case heard by the District Court of Hamburg, decision of 12 April 2021 – 61a RES 1/21 = NZI 2021, 544 (shareholder loan restructuring) and the case decided by the District Court of Dresden, decision of 07.06.2021 – 574 RES 2/21 = NZI 2021, 893 (financial restructuring of a smaller group entity).
 See S. Madaus, above note 67, section 3 d).