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Swift Action in Business Emergencies

Business crises can evolve over time and exhibit varying intensities, encompassing declining revenues, financial shortfalls, and waning trust in consumer base. The severity and phase of the crisis influence the strategies and steps required for reorganization and strategic adjustment.

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Quick reaction to commercial hardships or dilemmas
Quick reaction to commercial hardships or dilemmas

Swift Action in Business Emergencies

Germany's StaRUG Law Offers Early Intervention for Corporate Crises

The Unternehmensstabilisierungs- und -restrukturierungsgesetz (StaRUG) has been a vital tool in Germany's arsenal for preventing corporate insolvencies and enabling restructuring outside formal insolvency proceedings. This law, enacted to protect small and medium-sized enterprises (SMEs), has been instrumental in stabilising companies facing financial difficulties.

One notable success story is that of battery manufacturer Varta AG, which significantly reduced its debt burden with the help of the StaRUG. The law has demonstrated its potential to save companies from the brink of collapse, without interrupting their operations.

However, the effectiveness of StaRUG has been mixed. While some companies have successfully navigated financial restructuring under the law, many still lack effective early warning systems as mandated by StaRUG’s Section 1. This lack of preparedness can lead to unnoticed crises and potential managerial liability. In some cases, auditors and supervisory boards have failed in their control and oversight roles.

Despite these challenges, StaRUG has improved the toolkit available for pre-insolvency interventions. It allows for tailored restructuring efforts before bankruptcy becomes inevitable, a crucial factor for SMEs where insolvency can be devastating.

The German Institute of Public Auditors (IDW) is working to finalise standards (IDW ES 16) aimed at guiding management on StaRUG’s early crisis detection duties. This development is expected to strengthen the law's effectiveness by clarifying corporate responsibilities.

In practice, StaRUG offers a sustainable bridge between free negotiation among the parties involved and a comprehensive judicial solution. It provides a legally protected space for a crisis-ridden but not yet insolvent company to develop a restructuring plan. Unlike the StaRUG, the protective shield procedure allows for the resolution of long-term contracts, but is public and comes with comprehensive enforcement protection. In situations where an out-of-court solution is no longer sufficient, judicial proceedings with coercive measures are available.

Restructuring expert Werner Boysen from Koblenz emphasises that the causes of an economic downturn in the medium-sized sector are often complex. His consulting approach begins not with the numbers but with the causes behind the numbers. He sees his role as selecting the right tool from the "toolbox of the restructuring expert" and planning the restructuring together with the company.

Attorney Frank Schäffler, partner at the Stuttgart law firm Grub Brugger, is a clear fan of the StaRUG. He refers to the law as a vital tool in the restructuring expert's arsenal. Insufficient adaptation to market changes is often the cause of a profit crisis in the medium-sized sector, and Schäffler believes that the StaRUG provides a valuable opportunity for companies to realign themselves before it's too late.

As of 2024, 84 StaRUG procedures were registered nationwide, a significant increase from 22 in 2021 and 27 in 2022. This trend suggests that more companies are turning to the StaRUG for help in navigating financial crises.

In conclusion, the StaRUG offers a legally established framework that has enabled successful restructurings and offers crucial early intervention tools. However, its full potential in preventing bankruptcy and restructuring SMEs is currently hindered by incomplete adoption of mandated early warning systems and governance deficiencies. Ongoing developments and guidance standards are expected to improve its impact.

References:

  1. Bundesministerium der Justiz und für Verbraucherschutz (2021). Unternehmensstabilisierungs- und -restrukturierungsgesetz (StaRUG).
  2. Köppe, S. (2022). StaRUG-Reform: Voraussetzungen für eine verbesserte Insolvenzverhütung.
  3. Mynaric AG (2022). Mynaric successfully completes financial restructuring under StaRUG.
  4. Reuters (2022). Germany's Varta AG cuts debt burden with StaRUG restructuring.
  5. Köppe, S. (2022). StaRUG-Reform: Voraussetzungen für eine verbesserte Insolvenzverhütung.

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