Pictured: Peter Klaus and Richard Hawkins

Richard Hawkins and Peter Klaus of Atlantic Sela Germany discuss the implications of StaRUG and other developments for lenders in  Germany.

Editor's note: This topic and many others will be covered at SFNet’s ILC Conference in May. 

The new Company Stabilisation and Restructuring Act (StaRUG for short) entered into force on January 1, 2021. It is based on a European directive on the introduction of a pre-insolvency restructuring procedure, which was adopted in June 2019.

The intention is to facilitate early restructuring of companies and in any case before insolvency occurs. The idea is to avoid the disadvantages of insolvency - a possible loss of reputation and high costs for the affected company, disruption to trade and to safeguard employment.

At the same time, known reorganisation instruments from insolvency law are available to the company. It is possible that only certain creditor groups contribute to the restructuring of the company and not all creditors are equally affected.  The aim is to prevent individual creditors from blocking the restructuring and threatening the company with insolvency proceedings. The stabilisation and restructuring framework aims to prevent insolvency from occurring.

Because the management of companies in need of restructuring can intervene in the rights of certain groups of creditors, they are obliged to protect the interests of creditors in return. Under the StaRUG, the affected companies negotiate independently with creditors. This is likely to be supported by external consultants.

The aim is for the company to draw up a restructuring plan that describes all the measures necessary for successful restructuring. This plan comes into effect if the affected creditors agree to it with a three-quarters majority. In order to carry out such a preventive restructuring within the stabilisation and restructuring framework, however, the company must not yet be insolvent.

Further enhanced early warning systems for the companies and the financing partners will be required in order to allow them to take early restructuring measures in line with the new law. It is to be expected that this goes hand in hand with an extension of the liability of the directors.

What class of creditors will be bound by the process?

All of them can be potentially bound subject to the 75% voting rights, but it is believed that an asset-based lender (as a secured creditor) would not be in a minority voting position and would therefore only enter into an arrangement volountarily.

What level of court supervision will there be over the process?

This is structured as an out-of-court process - so as long as the company is solvent then there is no reason for the German Bankruptcy Court to be involved.

Regarding Directors Liabilities and the Suspension of Obligations to file which comes to an end at the end of April:

There is a common misunderstanding regarding the Suspension of Directors Liabilities. The law actually states that this suspension is subject to the presumption that any insolvent company would qualify for State subsidies, and whilst it is very likely that the State would and has been actively supporting companies in difficulty, it has not removed the possibility of Directors Liability completely.

We understand that the German government has provided a guarantee to the German Credit Insurance Industry since March 2020; such is the dependance of Receivables Finance on credit insurance because of the non-recourse requirements.

The German government guarantees the credit limits, but in exchange for two-thirds of the insurance premium and the credit insurance industry is less than happy about this. The guarantee is due to expire at the end of June and, importantly, this could be a trigger point for lenders and companies once the credit insurers become responsible for the risk. It is expected that limits could be reduced or withdrawn and this has the potential to cause a credit squeeze.

What should ABLs consider in respect to its German exposures?

ABLs should think about adopting an early warning system in respect of their German clients so that the opportunities arising out of StaRug can be utilised. StaRug potentialy enables lenders to avoid the complexity, expense and unpredictability of a German insolvency process, but lenders need to be alerted to any deterioration of the German borrower. This is particularly relevant in cross-border facilities; whilst the lender may be happy with the overall group position and has not adopted a more sensitive approach in respect to the German subsiduary.

Lenders should also be mindful of the expiration of the Directors Liabilities and the impact of the removal of Credit Insurance Guarantee. Germany is unlikely to be out of lockdown conditions until late summer or the fall so there is the possibility that the government will extend its help to businesses with a general election due September 26, 2021.

Please contact Tayla Mason at tmason@atlanticrms.com if you require futher information on the new law.

About the authors:

Richard Hawkins is Chairman of Atlantic Risk Management Services Limited.With over 30 years’ experience working with and for the Asset Based Lending Industry, Richard’s career history spans all aspects of Commercial Finance. He was at the forefront of developing Asset Based Lending techniques in the UK in the 1980s.

He is recognised as one of the leading experts in his field providing Advice and Strategic Support to the Industry.

Richard established Atlantic Risk Management Services Limited in 1997, the largest provider of Asset Based Lending Risk Management programmes including Diligence, Work Out, Consulting and Recoveries.

Atlantic RMS works for many of the leading Financial Institution in Europe Asia and the USA.

He has published various articles and is co-author of AssetBased Working Capital Finance (ISBN 0-85297-516-3) published by Financial World Publishing on behalf of the Chartered Institute of Bankers.

Peter Klaus began his career as a lawyer specialising in commercial and insolvency law. He subsequently took on various management positions and was member of the Board of Eurofactor GmbH from 2009-2018.

He has been teaching for many years at the private university "Quadriga" in Berlin on all aspects of receivables financing. He speaks regularly at conferences and is a commercial judge at the Federal Court of Munich I.