Short introduction to StaRUG

StaRUG, the German Act on the Stabilization and Restructuring Framework for Companies, is a legal mechanism that enables German companies to undergo financial restructuring and stabilization without entering formal insolvency proceedings, akin to the UK's pre-pack administration. It offers a flexible and efficient alternative to traditional insolvency, facilitating debtor-in-possession management, and aiming to preserve the company's core operations while addressing financial distress.

The StaRUG provides several instruments for companies to address financial distress and facilitate restructuring. Some of the key instruments include:

Stabilization Measures: These are temporary measures aimed at preventing insolvency and stabilizing the company's financial situation, such as a moratorium on enforcement actions by creditors, suspension of interest payments, or the temporary prohibition of termination rights for contracts.

Restructuring Plan: Companies can prepare a restructuring plan outlining the measures they intend to implement to overcome financial difficulties. This plan may include operational, financial, or legal measures, such as asset sales, debt rescheduling, or equity restructuring.

Debtor-in-possession (DIP) management: StaRUG allows the debtor company to retain control of its assets and operations during the restructuring process. This DIP management approach aims to facilitate a swift and efficient resolution while maintaining continuity in the business operations.

Cross-class cram-down: StaRUG enables the cramming down of dissenting creditor classes, as long as the plan satisfies the "best-interest-of-creditors" test and the "no-creditor-worse-off" principle. This allows for the restructuring plan to be approved and implemented even if not all creditor classes consent to it.

Court involvement: The StaRUG provides for court involvement at various stages of the process, including the approval of stabilization measures, confirmation of the restructuring plan, and adjudication of disputes. This ensures that the restructuring process remains fair and balanced for all parties involved.

Protection of new financing: StaRUG grants protection to new financing provided during the restructuring process, shielding it from potential clawback risks in subsequent insolvency proceedings. This encourages new financing to support the company's turnaround efforts.

Group coordination proceedings: The StaRUG framework also caters to group companies by allowing the establishment of group coordination proceedings. These proceedings facilitate the coordination and implementation of restructuring measures across multiple group entities, enabling a more comprehensive and streamlined approach to group restructuring.

While both StaRUG and UK pre-pack administration share the goal of facilitating efficient restructuring and business preservation, there are some key differences between the two frameworks:

Process Initiation: StaRUG allows companies to initiate the restructuring process voluntarily, while UK pre-pack administration is typically initiated when a company is already insolvent or facing imminent insolvency.

Debtor-in-possession (DIP) management: StaRUG emphasizes debtor-in-possession management, allowing the debtor company to retain control over its assets and operations throughout the restructuring process. In contrast, UK pre-pack administration involves the appointment of an insolvency practitioner as an administrator, who takes control of the company's assets and operations.

Restructuring Plan: StaRUG requires the preparation of a comprehensive restructuring plan that outlines the proposed measures for overcoming financial distress. UK pre-pack administration often focuses on the quick sale of a company's assets, usually to a new entity, which continues the business operations without the burden of the insolvent company's debts.

Court Involvement: StaRUG provides for court involvement at various stages, including the approval of stabilization measures, confirmation of the restructuring plan, and adjudication of disputes. UK pre-pack administration involves minimal court involvement, with most decisions being made by the insolvency practitioner and the creditors.

Creditor Rights: StaRUG allows for cross-class cram-downs, enabling the restructuring plan to be implemented even if not all creditor classes consent to it, provided certain conditions are met. UK pre-pack administration does not have a similar cram-down mechanism, and the sale of assets is often subject to approval by the secured creditors.

Group Coordination: StaRUG includes provisions for group coordination proceedings, which facilitate the coordination and implementation of restructuring measures across multiple group entities. UK pre-pack administration does not have specific provisions for group coordination and is typically applied on an individual company basis.

Public Perception: StaRUG is a relatively new framework, and its implementation may be perceived more positively by the public and stakeholders than pre-pack administration, which has faced criticism in the UK for being potentially abusive and lacking transparency.

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