Early detection of crises
According to Section 1 StaRUG, the management is obliged to continuously monitor early warning signs of crises. If any risks are discovered then the appropriate countermeasures have to be taken. Furthermore, the management is obliged to report on the situation to the bodies overseeing the company, namely, the supervisory board, the annual general meeting or the shareholders’ meeting.
In order to become aware of risks in good time, it is possible to set up so-called early warning systems for the purpose of getting early indications of crises. Early warnings can appear in various forms, for example, when external third parties - such as tax consultants, auditors or social security agencies - point out potentially negative developments. Moreover, within the company, different indicators – for example, in the form of earnings or liquidity metrics – could already provide specific evidence of an incipient crisis.
Please note: See also the previous key report on out-of-court restructuring.
Advisor obligations to warn
The Federal government has also laid down obligations for tax consultants, auditors and lawyers within the framework of the new legislation. Here, under Section 102 StaRUG, the above-mentioned professional groups, in the course of preparing annual financial statements for a client, also have to check for the presence of possible grounds for insolvency. If there are indications that grounds for insolvency may exist then the advisors are obliged to notify their clients, irrespective of their legal form, of these indications.
Instruments for corporate restructuring
In terms of the instruments for corporate restructuring, it is possible to make a distinction between, firstly, those based on previous restructuring plans prepared in accordance with the guidelines of the standard issued by the Institute of Public Auditors in Germany (Institut der Wirtschaftsprüfer, IDW) - Requirements for the Drafting of Restructuring Plans (Anforderungen an die Erstellung von Sanierungskonzepten) - (IDW S6) and, secondly, the additional instruments that resulted from the Act for the Development of Restructuring and Insolvency Law (Gesetz zur Fortentwicklung des Sanierungs- und Insolvenzrechts, SanInsFoG).
(1) An IDW S6 restructuring plan is, in practice, frequently a rather complex one. Its preparation involves, first of all, excluding factual insolvency. In order to be able to ensure this the following key elements are examined:
- object of the contract
- scope of work
- causes of the crisis
- progress in the stage of the crisis
- corporate mission statement
- measures to avert the risk of insolvency
- business planning
The consideration of the ability to continue as a going-concern fulfils stage 1 of the plan. Stage 2 involves an examination of how the company wants to achieve the ability to continue as a going-concern. To this end, the competitiveness as well as the profitability are analysed and evaluated. If the outlook is positive then the restructuring ability will be assessed as being high and the second stage of the plan will also be deemed to have been fulfilled. Otherwise, there will still be the previous option to open insolvency proceedings with the aim of the collective, non-discriminatory satisfaction of creditors.
(2) The expansion of the instruments that resulted from SanInsFoG includes the following options, in particular:
- restructuring moderation
- stabilisation and restructuring framework
Here, the aim of restructuring moderation is the conclusion of a restructuring settlement agreement with the creditors that is confirmed by the competent restructuring court. The condition for such a settlement agreement is the debtor’s ability to restructure. Unlike insolvency proceedings, these here involve a non-public procedure.
The newly introduced stabilisation and restructuring framework provides companies with the possibility of a restructuring without court proceedings. However, the management bears the responsibility for the restructuring here. A restructuring plan has to be drawn up that has to be confirmed by at least 75% of the creditors.
Conclusion: With the coming into force of StaRUG, the government has opened up new ways for companies to restructure and reorganise. Furthermore, a greater obligation has been imposed on advisors who are significantly involved in the preparation of the annual financial statements to notify their clients, at an early stage, if there are indications that grounds for insolvency may exist and to point out the associated obligations to the management. All in all, the new rules mean that the procedures can be processed in a less bureaucratic way and, thus, faster.