New risk assessment obligations for German managing directors

Quick read

The German Act on the Stabilisation and Restructuring Framework for Business (StaRUG) came into force on 1 January 2021, incorporating the EU Restructuring Directive into German law. It provides the first pre-insolvency restructuring framework for the reorganisation of companies facing "imminent illiquidity" and the possibility of involving dissenting creditors. The restructuring plan – which is very similar to the English Scheme of Arrangement and the German insolvency plan – is the central instrument.

Section 1 StaRUG

The StaRUG also expands the scope of obligations and the associated potential liability risks for a company's management. Section 1 StaRUG explicitly provides a declaratory, general regulation on the early crisis detection and reaction obligations of the management of limited liability legal entities. Specifically, the managing directors, regardless of the company's size and sector, are obliged to:

monitor developments that could jeopardise the continued existence of the legal entity
take appropriate countermeasures
report to the supervisory body, advisory body or shareholder bodies without undue delay.

Early crisis detection system

The management must implement an early crisis detection system that provides an up-to-date database on the economic and financial situation of the company, monitored and updated regularly. The central element is a company's liquidity planning for the next 24 months.

The management is entitled to choose countermeasures to overcome a potential crisis within the scope of its own judgement, applying the required standard of care. If the management fails to implement an early crisis detection system or if countermeasures are not properly taken to address identified risks, personal liability could apply. This means that documenting the fulfilment of early crisis detection obligations and the corresponding management of developments is crucial.