Unnoticed by many market participants, the StaRUG (Act on the Stabilisation and Restructuring Framework for Enterprises) came into force in Germany on 1 January 2021. This was done in an implementation of the EU Directive on a preventive restructuring framework (EU Directive 2019/1023).
In addition to new tools with which corporate crises can be combated at an early stage (new courts — restructuring courts — have been set up specifically for the restructuring procedure provided for in the StaRUG), an early warning system has also been set up for the detection and, even more importantly, the prevention of corporate crises.
Such a mandatory early detection system is not unknown to the German legal system. Since May 1 1998 (entry into force of the German Act on Control and Transparency in Business — KonTraG), section 91 (2) of the German Stock Corporation Act (Aktiengesetz — AktG) required the management boards of stock corporations to ensure that developments that endangered the continued existence of the company were identified at an early stage by introducing suitable measures (in particular a monitoring system). Based on these provisions, management boards could be held liable if they — demonstrably — did not sufficiently familiarise themselves with the risks of their business and did not set up a monitoring system for this purpose.
With the coming into force of the StaRUG on 1 January 2021, this obligation continuously to monitor developments that endanger the existence of the company has been extended to the managers of all limited liability companies (i e, also the classic GmbH & Co KG, see section 1 (2) StaRUG).
In other words, the establishment of a structured early warning system, with which business, tax and legal risks of considerable importance can be identified in good time, will be part of the duties of every managing director from 1 January 2021. Developments that threaten the existence of the company must be reported immediately to the supervisory bodies — supervisory board/advisory board/shareholders’ meeting — and appropriate countermeasures must be initiated. A breach of this duty can lead to personal liability of the managing director for the damage caused, up to and including access to private assets. Both injured third parties — creditors — and shareholders can be considered as claimants.
From a practical point of view, it should be noted that in the event of a legal dispute, it will not be sufficient to ‘recognise and weigh up such risks in one’s head on the basis of years of experience’; without sufficient documentation of the recognition and weighing-up processes, the manager(s) will probably be at a loss from a procedural point of view. Only the establishment of a clearly defined and documented early warning system can remedy this situation. The same applies to the corresponding documentation with regard to the information obligations and the countermeasures initiated.
It should be clarified that with the introduction of this obligation, no liability for the success of the countermeasures is intended. The liability of the management does not lie in the business risk that may have occurred — it lies in the failure to identify these risks in time and to initiate countermeasures.
However, this clarification should in no way be taken as a trivialisation. On the contrary: any years of practical experience show that in most cases, corporate crises and insolvencies are not necessarily caused by genuine business risks but frequently by the failure — or refusal — of the management to recognise risks threatening the existence of the company in good time or to initiate the necessary measures.
To find out more, please contact Arturk Bunk here.