The differences as well as advantages and disadvantagesn
With the approval of the further development of restructuring and insolvency law, the Act on the Stabilization– and Restructuring Framework for Businesses (StaRUG for short) entered into force, among other things. The StaRUG is a statutory restructuring procedure intended to enable corporate restructuring outside of insolvency. In particular, it is meant to give entrepreneurs the opportunity to structure the restructuring of their company on their own responsibility and cost-effectively.
Under both the ESUG and the StaRUG, companies present a restructuring plan to their creditors. Neither procedure requires the creditors to agree unanimously, which means in concrete terms that dissenting creditors can be outvoted and bound against their will. However, the procedures differ in some respects, which entail advantages and disadvantages.
Here is an overview:
A. Differences between StaRUG and ESUG
- Scope of application
The StaRUG comes into play earlier than the ESUG. It applies when there is impending illiquidity. This is assumed if the company is likely not to have sufficient creditworthiness within the next 24 months. However, illiquidity or over-indebtedness, and thus insolvency, must not yet have occurred, as otherwise the restructuring must be carried out under the ESUG. The StaRUG is expressly intended to avoid insolvency.
2. Creditor participation
Unlike the ESUG, the StaRUG allows only selected creditors to be included. In ESUG proceedings, the debtor company must submit a proposal to all creditors and include them in the vote. In return, approval of the restructuring plan under the StaRUG requires a majority of 75 percent of all creditors included, whereas in ESUG proceedings a simple majority of the creditors voting is sufficient.
3.Intervention in ongoing contracts
Unlike under the ESUG, the StaRUG does not permit any intervention in employees’ rights. Moreover, unlike in ESUG proceedings, early termination of continuing obligations such as leases is not possible. This is only possible in insolvency proceedings.
B. Advantages of the StaRUG
The StaRUG offers the advantage of restructuring the company outside of insolvency. Entrepreneurs are given more flexibility, as they can manage the restructuring themselves. In addition, the StaRUG is not part of the Insolvency Code (InsO), so the company need not fear an insolvency stigma among customers, suppliers, and employees. Furthermore, there is no duty to file for insolvency while a restructuring under the StaRUG is underway, because the over-indebtedness required for an insolvency filing is then absent.
C. Disadvantages of the StaRUG
A disadvantage is that employment contracts and pension commitments cannot be interfered with under the StaRUG. The StaRUG is therefore not suitable for companies whose restructuring approach relies primarily on personnel measures. Furthermore, insolvency benefits (Insolvenzgeld) cannot be used to temporarily reduce personnel costs. Contracts with third parties can likewise only be terminated under the ESUG. Cost savings are therefore only possible in agreement with the creditors.
D.Conclusion
The StaRUG is an effective means of enabling companies facing impending illiquidity to restructure on their own responsibility. However, impending illiquidity must be recognized early in order to have any choice between the ESUG and the StaRUG at all. Accordingly, the ESUG is to be applied if illiquidity has already occurred, if restructuring is only possible through savings in personnel costs or interventions in ongoing contractual relationships, or if an agreement with the creditors is not in sight.
