StaRUG a fallen Star
April 26, 2023
As a consequence of the 2019 EU restructuring directive, new preventive restructuring frameworks have been created in almost all European Union member states. Among these, the German pre-insolvency corporate rescue toolkit – the StaRUG – has been the subject of particular debate. Recent evaluations have shown that in 2022 German courts received only 24 notifications to utilize StaRUG proceedings. A hackneyed quip, sure to be reiterated at every restructuring conference, claims that Germany has produced more literature on StaRUG than actual cases.
While that might not be far from the truth, the lack of cases may be the strongest argument in favour of the StaRUG’s efficacy. The idea that the mere existence of a legal framework allowing for debt write-downs or temporary stays outside the purview of formal insolvency proceedings would help to facilitate consensual restructurings is neither daring nor innovative. Many have long pointed out that if the proceeding can be used as a threat should stakeholders fail to reach an agreement, the StaRUG would surely have value, even that threat does not result in actual cases. Nonetheless, it is useful to consider a comparison of the StaRUG with the restructuring frameworks of Germany’s European neighbours when looking to restructure German companies in particular.
The StaRUG, the Dutch WHOA framework, and the UK restructuring plan all have similarities. They also diverge in significant ways. The UK restructuring plan, for example, boasts an advantage in its reliance on established case law and precedents, inherited from its cousin, the scheme of arrangement. Additionally, it can be carried out in a shorter timeframe, typically between eight to ten weeks from the decision to file. In contrast, both the StaRUG and WHOA frameworks are nascent, and generally operate on a timeframe of three to twelve months. As for the requisite majorities, both StaRUG and the UK restructuring plan require a 75% threshold in the affected creditor classes (subject to cross class cram down, where applicable), whereas the Dutch WHOA framework only mandates 66.7%.
In spite of these technicalities, all three frameworks demonstrate that flexibility comes at the price of complexity. This in itself may be one notable factor why Germany has not seen the rise in StaRUG cases some had expected. Examining Germany’s restructuring landscape, it is arguable that the widespread hesitancy of banks to engage in StaRUG proceedings has been another decisive constituent in its limited use. It goes without saying that the more cases that can successfully be resolved without StaRUG, the more dispensable it may appear to be – a self-fulfilling prophecy. However, this alone is not compelling evidence for the failure of StaRUG when compared to its international equivalents. It is equally valid to note that only a handful of foreign preventive restructuring proceedings have been employed at the expense of StaRUG. If StaRUG were truly an inferior construction, then we would expect to see a far greater number of cross-border cases originating in Germany that utilize the WHOA or UK restructuring plans, which so far has not been borne out.
It remains to be seen if the question of mutual recognition of restructuring proceedings between the UK and the EU will bring about any significant changes in the ‘battle of forums’. Recent market movements indicate that we will see the first judgements in this regard very soon. In the light of the automatic recognition of insolvency proceedings between EU-member states, there are already plenty of viable alternative proceedings which may highlight disadvantages of StaRUG, for example the option to terminate contracts within the WHOA. This option was scratched from the StaRUG at the eleventh hour of the legislative process. While many feared that this would encourage forum shopping in favour of neighbouring jurisdictions that do allow the termination of contracts, the number of WHOA proceedings originating from Germany is still near zero.
Arguably, one advantage of the UK restructuring plan and its cousin - the scheme of arrangement – is the significant body of case law and vast experience among specialized restructuring advisors and English courts in handling reorganizations. This makes the UK attractive in cross-border cases involving highly professionalized creditor structures that have long utilized the scheme of arrangement. Most recently, a Luxembourg based real estate developer with a strong focus on assets in Germany opted to restructure its debts by way of a UK restructuring plan instead of utilizing StaRUG. While the case has again sparked discussions about the potency of StaRUG, there are other examples one could point to, for example a German cable manufacturer from the automotive sector has recently announced its preparation of a StaRUG restructuring. These examples show that the market finds suitable constellations for both frameworks. Each restructuring is fact specific and the best jurisdiction and restructuring tool must be considered on a case-by-case basis. Therefore, the question remains whether the new European preventive restructuring regimes actually need to 'catch up' with their more established UK counterparts. It is certainly arguable that the actual utilization of the three frameworks is mostly driven by the dynamics of the restructuring market and case specific factors. It may be too early to talk of amendments to the underlying law. We must not merely evaluate the success of StaRUG (or any other framework) based on their short track record in resolving high-profile lighthouse cases. The true impact lies in whether it can help to transform the restructuring culture as a whole. Arguably the StaRUG is succeeding at this.
While that might not be far from the truth, the lack of cases may be the strongest argument in favour of the StaRUG’s efficacy. The idea that the mere existence of a legal framework allowing for debt write-downs or temporary stays outside the purview of formal insolvency proceedings would help to facilitate consensual restructurings is neither daring nor innovative. Many have long pointed out that if the proceeding can be used as a threat should stakeholders fail to reach an agreement, the StaRUG would surely have value, even that threat does not result in actual cases. Nonetheless, it is useful to consider a comparison of the StaRUG with the restructuring frameworks of Germany’s European neighbours when looking to restructure German companies in particular.
The StaRUG, the Dutch WHOA framework, and the UK restructuring plan all have similarities. They also diverge in significant ways. The UK restructuring plan, for example, boasts an advantage in its reliance on established case law and precedents, inherited from its cousin, the scheme of arrangement. Additionally, it can be carried out in a shorter timeframe, typically between eight to ten weeks from the decision to file. In contrast, both the StaRUG and WHOA frameworks are nascent, and generally operate on a timeframe of three to twelve months. As for the requisite majorities, both StaRUG and the UK restructuring plan require a 75% threshold in the affected creditor classes (subject to cross class cram down, where applicable), whereas the Dutch WHOA framework only mandates 66.7%.
In spite of these technicalities, all three frameworks demonstrate that flexibility comes at the price of complexity. This in itself may be one notable factor why Germany has not seen the rise in StaRUG cases some had expected. Examining Germany’s restructuring landscape, it is arguable that the widespread hesitancy of banks to engage in StaRUG proceedings has been another decisive constituent in its limited use. It goes without saying that the more cases that can successfully be resolved without StaRUG, the more dispensable it may appear to be – a self-fulfilling prophecy. However, this alone is not compelling evidence for the failure of StaRUG when compared to its international equivalents. It is equally valid to note that only a handful of foreign preventive restructuring proceedings have been employed at the expense of StaRUG. If StaRUG were truly an inferior construction, then we would expect to see a far greater number of cross-border cases originating in Germany that utilize the WHOA or UK restructuring plans, which so far has not been borne out.
It remains to be seen if the question of mutual recognition of restructuring proceedings between the UK and the EU will bring about any significant changes in the ‘battle of forums’. Recent market movements indicate that we will see the first judgements in this regard very soon. In the light of the automatic recognition of insolvency proceedings between EU-member states, there are already plenty of viable alternative proceedings which may highlight disadvantages of StaRUG, for example the option to terminate contracts within the WHOA. This option was scratched from the StaRUG at the eleventh hour of the legislative process. While many feared that this would encourage forum shopping in favour of neighbouring jurisdictions that do allow the termination of contracts, the number of WHOA proceedings originating from Germany is still near zero.
Arguably, one advantage of the UK restructuring plan and its cousin - the scheme of arrangement – is the significant body of case law and vast experience among specialized restructuring advisors and English courts in handling reorganizations. This makes the UK attractive in cross-border cases involving highly professionalized creditor structures that have long utilized the scheme of arrangement. Most recently, a Luxembourg based real estate developer with a strong focus on assets in Germany opted to restructure its debts by way of a UK restructuring plan instead of utilizing StaRUG. While the case has again sparked discussions about the potency of StaRUG, there are other examples one could point to, for example a German cable manufacturer from the automotive sector has recently announced its preparation of a StaRUG restructuring. These examples show that the market finds suitable constellations for both frameworks. Each restructuring is fact specific and the best jurisdiction and restructuring tool must be considered on a case-by-case basis. Therefore, the question remains whether the new European preventive restructuring regimes actually need to 'catch up' with their more established UK counterparts. It is certainly arguable that the actual utilization of the three frameworks is mostly driven by the dynamics of the restructuring market and case specific factors. It may be too early to talk of amendments to the underlying law. We must not merely evaluate the success of StaRUG (or any other framework) based on their short track record in resolving high-profile lighthouse cases. The true impact lies in whether it can help to transform the restructuring culture as a whole. Arguably the StaRUG is succeeding at this.
