I.

Management’s responsibility to establish an early crisis detection system is clarified and emphasized. Essentially, management and supervisory bodies must examine whether and to what extent the early crisis detection processes they have in place are able to monitor a 24-month forecast period in such a way that any threat of insolvency during this (prolonged) period can be detected. This, specifically, is required by law.

Accordingly, management is under obligation:

  • To monitor developments that could threaten the survival of the company (duty of early detection)
  • To take suitable countermeasures (duty to avert/deal with the crisis)
  • To swiftly inform the supervisory board, advisory board and/or other corporate bodies (duty to inform)
II.

A further attractive tool has been added for the purpose of enhancing pre-insolvency turnaround practice in Germany. For the first time, the Preventive Restructuring Framework creates a legally regulated toolset with the aid of which companies can be restructured against the will of individual creditors – and that outside of formal insolvency proceedings.

If sensible use is to be made of this new option, however, the “right” answers must first be given to the following five questions:

  1. Do you already have an exhaustive business and restructuring plan?
  2. Is the company overindebted and do its balance sheet liabilities in particular need to be restructured?
  3. Is the company threatened with insolvency in the next 24 months?
  4. Are there already any obstructions to a potential restructuring plan, or are any such obstructions to be expected?
  5. Can a solution be found using the StaRUG tools, subject to due consideration for the relevant interests/contributions of the stakeholders?
 

If the answer to all these questions is “yes”, then the Preventive Restructuring Framework can indeed open up new and highly attractive solution trajectories compared to past procedures – especially because it includes the option of overruling minority creditors (especially “obstructive” creditors) and/or groups of creditors who seek to torpedo any proposed solution.

To nevertheless secure the necessary support of a majority of the creditors, a comprehensive, transparent and robust turnaround concept will still be needed. Most of the creditors must, after all, be convinced that restructuring makes sense and has a good chance of succeeding. This interim goal can be reached by engaging in early, neutral consultation that covers all the bases so that the restructuring plan can be successfully implemented – with or without StaRUG.

What is the primary focus of StaRUG?

First and foremost,
StaRUG zooms in on the threat of insolvency in the next 24 months (based on realistic liquidity planning) as a precondition before the new law even becomes applicable.

Second,
it targets a comprehensive package of measures to sustainably ward off the threat of insolvency and restore the company’s viability. A value-focused turnaround concept thus remains central to this restructuring approach, too.

Third,
given that the restructuring plan is pivotal to the whole restructuring framework, it must be intelligently designed if turnaround is to be realized on the basis of StaRUG. A thorough, well-documented and convincing turnaround plan must therefore be complemented by careful preparation in three specific areas:

  • Identifying the objective need for action
  • Selecting the claims to be modified and splitting the entities affected by the plan into suitable groups
  • Producing a “fair” comparative calculation to clarify the likelihood of satisfaction with and without a plan.

 
 

In principle, almost all “substantive” (i.e. existing) claims are open to modification (except for interventions in the claims of employees). However, since the same does not apply for future claims, the option of terminating detrimental contractual relationships is excluded. The claims to be modified must be aligned with a comprehensive plan and split into suitable groups. This is critical especially if it is necessary to overrule any obstructive parties.

The comparative calculation should serve to maximize satisfaction for the creditors affected by the plan. Accordingly, the prospects for satisfaction should be juxtaposed with the next-best alternative scenario, always assuming that the company will continue to exist.

Core components

  • Description and analysis of the economic and legal point of departure
  • Identification of crisis phase and causes of crisis
  • Definition of specific, effective financial and operational measures to overcome the crisis
  • Groups of creditors and planned interventions in rights, claims and security
  • Medium-term business plan, including interventions in claims and rights
  • Comparative calculation with the prospects for satisfaction without a plan (the next-best alternative)
  • Statement on lasting elimination of insolvency and restoration of viability

Success factors

  • Very strong acceptance in the company and among creditors
  • Comprehensive plan for business and financial restructuring
  • Complete
    BUSINESS MODEL RATING
  • Consequent TURNAROUND-STEPS with a realistic ROADMAP
  • Professional
    STAKEHOLDER-MANAGEMENT

What we have learned so far

The new StaRUG law enriches pre-insolvency turnaround practice in Germany and enables restructuring to be pushed through against the will of “smaller”, individual creditors, even outside of formal insolvency proceedings. The tools it provides are especially well suited to the financial restructuring of liabilities, mostly with due consideration of shareholders’ contributions. Although purely financial reorganization is conceivable in principle, especially in the wake of the Covid-19 pandemic, the vast majority of cases will continue to target a comprehensive, transparent and robust turnaround plan as the basis for successful restructuring.

Setting up a professional early crisis detection system

To overcome a crisis, it is vital to identify it as early as possible and quickly initiate proactive countermeasures. Establishing a systematic early detection radar that both monitors the threat of insolvency and also actively safeguards optimal performance in the long term will do more than just mitigate management’s liability risks, however: It can also protect the company’s lasting survival. What requirements must an early crisis detection system therefore fulfil?

An early crisis detection system should ensure that the signs of any crisis involving stakeholders, strategies, products/sales, earnings and/or liquidity are recognized in good time in such a way that meaningful evaluation of the resultant risks is possible. It is thus crucial to select suitable company-specific metrics and present them in the context of a management information system. A rolling 24-month business plan that fully integrates profit and loss, the balance sheet and the cash flow statement lays the basis for this evaluation, together with the liquidity planning derived from it. Due consideration must be given to possible risks, which should ideally be modeled in best-case, base-case and stress-case scenarios.

Continuous liquidity monitoring

  • Rolling liquidity planning
  • Monitoring of general and
industry-specific parameters
(changes in payment targets, use of cash discounts etc.)

Possible signs of an imminent stakeholder crisis

  • No long-term extension of credit lines
  • Changes in suppliers’ behavior,
problems with commercial credit insurance
  • Rise in absenteeism
  • Higher employee churn rate

Monitoring of trend in profitability

  • Loss of gross profit
  • Dwindling profitability
  • Declining staff productivity
  • Decreasing equity ratio
  • Other industry-specific
and company-specific parameters

Indications of (disruptive) changes in the market and competitive environment

  • Shifts in market shares
  • Arrival of new players, withdrawal of
established competitors
  • General market developments
  • Substitution risks
  • Changes in purchasing behavior
Bottom line

The StaRUG places the emphasis on crisis prevention, early crisis detection and early action to turn things around. The quality of the early crisis detection system and of the ensuing restructuring measures – within the framework of a robust turnaround concept – is critical to master the crisis and safeguard the company’s future.

The quality of the restructuring consultant is thus equally crucial to the success of such a plan.

We would be happy to support you

  • In building an early crisis detection system that also covers liability issues
  • bIn formulating a value-focused turnaround plan
  • In mapping out and negotiating a workable financing solution.

Struktur Management Partner (SMP) has specialized in turnaround and growth management for nearly four decades and commands the respect of corporate directors, financiers and expert lawyers alike.

Having accumulated the largest wealth of experience on the market, especially in Germany’s SME segment, we guarantee pragmatic, workable turnaround and restructuring concepts every time. But we also walk our clients through every step of the way through implementation to turnaround, ensuring from the word go that each plan is pursued transparently, effectively and sustainably.

Take our word for it and get in touch. We’d love to hear from you!

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  • 1.
    place (IfUS-Study): Krisen­unternehmen bis 250 Mio. EUR Umsatz
  • 44
    successful restructurings since 2017
  • 98%
    Recommen­dation rate
  • >90%
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Your contact person for StaRUG:

Georgiy Michailov
Managing Partner
Dipl.-Volkswirt, B.M. (TSUoE)
E-Mail to Georgiy Michailov
T +49 (0)221 91 27 30 - 15

Your contact person for StaRUG:

Monika Dussen
Partner
Dipl.-Wirtschaftsingenieur
E-Mail to Monika Dussen
T +49 (0)221 91 27 30 - 68

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