StaRUG is the abbreviation of Germany’s new Law of Stabilization and Restructuring Framework for Enterprises, which implements the EU’s Preventive Restructuring Frameworks Directive. Managers, shareholders and stakeholders keen to get to grips with both the country’s new law and this tool will quickly discover additional restructuring options for effective turnaround management. Yet at the same time, management is now under stricter obligations to detect crises at an early stage. The question is therefore: What use is the Preventive Restructuring Framework mean in practice?
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:
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:
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.
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:
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.
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.
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
Possible signs of an imminent stakeholder crisis
Monitoring of trend in profitability
Indications of (disruptive) changes in the market and competitive environment
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
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!
Georgiy Michailov
Managing Partner
Dipl.-Volkswirt, B.M. (TSUoE)
E-Mail to Georgiy Michailov
T +49 (0)221 91 27 30 - 15
Monika Dussen
Partner
Dipl.-Wirtschaftsingenieur
E-Mail to Monika Dussen
T +49 (0)221 91 27 30 - 68
