International Aspects of the New German Restructuring Framework (StaRUG)

International Aspects of the New German Restructuring Framework (StaRUG)

April 8, 2021, Covington Alert

The German Act on the Stabilization and Restructuring Framework for Companies (StaRUG), implementing the EU Restructuring Directive[1], came into force on 1 January 2021. The StaRUG provides for a new pre-insolvency restructuring procedure that enables companies to restructure their liabilities based on a qualified creditor majority, i.e. with the possibility to overrule objections from dissenting minorities.

Last-minute changes during the final stages of the legislative procedure resulted in the restructuring toolkit provided by the StaRUG being cut back compared to previous drafts, e.g., the debtor’s option to terminate mutual contracts was removed entirely. As a result, there are now concerns over whether the new law fully addresses the restructuring  sector’s needs and its capability to compete effectively with other more flexible European restructuring schemes, such as those in the UK and the Netherlands.

In addition to these possible shortcomings, further uncertainties arise with respect to the new law’s application in the context of cross-border situations, i.e. to companies (i) which are situated abroad (e.g., in an EU-member state or in a non-EU country), (ii) with foreign intra-group third-party security, and/or (iii) which are party to foreign law governed contracts.

1. Limited application of the StaRUG to foreign debtors

Under the StaRUG, German courts assume local jurisdiction over companies having either their registered seat or their center of main interest (“COMI”) in the respective court district.  However, the StaRUG lacks any further specific provisions on international jurisdiction. Therefore, a minimum “connection”, such as required by the UK or Dutch schemes, is not sufficient and foreign companies can only make use of the StaRUG procedure if their COMI is already located in Germany or after they have made a respective COMI-shift.

2. Intra-group third-party security granted by foreign companies

The new restructuring regime under the StaRUG raises the possibility for intra-group third-party security and guarantees to be compromised as part of the restructuring process. In practice, this tool is of significant importance for a successful financial restructuring of group companies as their finance structure typically contain comprehensive upstream, cross- and down-stream security and guarantees.

However, with regard to third-party intra-group security/guarantees granted by a foreign company, questions remain over how restructuring measures taken in a German restructuring procedure will be recognized in the other foreign country.

a) Once the “public” StaRUG restructuring procedure has been added to Annex A of the European Insolvency Regulation[2], any encroachments in security/guarantees granted by foreign companies should, based on the EU Insolvency Regulation’s core principle of priority, be recognized within all EU member states, even if those foreign companies would not be subject to the main insolvency proceedings within Germany.

However, the StaRUG provisions on publicity of the proceedings will not become legally effective until 17 July 2022, and therefore recognition under the European Insolvency Regulation will not be available until then. Furthermore, Art. 8 of the European Insolvency Regulation, which provides that creditors’ security in rem located in another member state remains unaffected, could prevent the recognition of an encroachment in security in rem[3].

b) In case of a “non-public” StaRUG procedure, it is less clear how recognition could be achieved. Recognition within the EU under the European Jurisdiction and Enforcement Regulation (Brussels Ia Regulation)[4] will presumably not be applicable because the Brussels Ia Regulation expressly excludes bankruptcy and analogues proceedings. Therefore, recognition - within or outside the EU - could only be possible under the applicable international insolvency or civil procedure law of the respective foreign state as well as, in the case of EU foreign companies, under the EU Rome I Regulation[5].

3. Foreign law governed claims / Brexit implications

In general, the respective debt restructuring measures available under the StaRUG also cover claims subject to foreign law.

However, in the event the respective creditor is resident outside Germany, the same recognition considerations as outlined under point 2 above apply regarding the restructuring of the foreign law claims. Moreover, in cases where  the debt agreements are governed by English law, even more complex recognition issues will now arise due to Brexit.

Under the recently upheld ‘Rule in Gibbs’[6], recognition of the substantive compromise under insolvency/restructuring proceedings principally depends on the governing law of the compromised debt. 

English courts cannot recognize or give effect to a foreign insolvency-related judgment under common law principles unless the party against whom the order was made is subject to the relevant foreign proceedings.

Consequently, a separate UK scheme of arrangement would need to be initiated in order to compromise English law governed claims. Alternatively, English law governed agreements of a German borrower should contain a clause pursuant to which the stakeholders agree to submit themselves to the jurisdiction of the German courts in case of a StaRUG restructuring.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Corporate practice.

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