With the introduction of the StaRUG (Act on the Stabilization and Restructuring Framework for Enterprises), the German legislature has established a legal framework for corporate restructuring outside of formal insolvency proceedings.
According to Section 1 (1) StaRUG, members of a legal entity’s executive management are required to continuously monitor developments that may endanger the continued existence of the entity. Upon identifying such risks, they must take appropriate countermeasures and report without undue delay to the internal supervisory bodies responsible for overseeing management. If these countermeasures affect the competencies of other corporate bodies, those bodies must also be involved without delay.
From this, the following core duties of executive management can be derived:
1. A continuous duty to monitor risk developments,
2. A duty to initiate appropriate countermeasures,
3. A duty to report to internal supervisory bodies, and
4. A duty to involve other competent corporate bodies, where necessary
The StaRUG itself does not specify in detail the required scope of such early crisis detection. However, the legislative rationale refers to the older KonTraG (Control and Transparency in Business Act), which emphasizes that the design of an early risk detection system depends on company-specific factors such as size, structure, and access to capital markets. It is therefore broadly accepted that management should be granted a degree of discretion - provided that the system is capable of fulfilling the legal obligations mentioned.
The following measures have proven particularly effective in implementing the requirements under Section 1 StaRUG:
1. Liquidity Planning with an 18–24-Month Horizon
A rolling, integrated liquidity and financial planning model updated throughout the year is recommended. This enables early detection of potential liquidity shortfalls and timely intervention.
2. Regular and Structured Risk Identification
Risks - both internal and external, including those from political or economic environments - should be regularly identified and analyzed using systematic methods. Creative techniques like brainstorming are generally insufficient. Instead, structured approaches should be employed that enable comprehensive risk identification. For internal crisis factors, tools for structured business model analysis are recommended. When applying creative methods, these should be supplemented with standardized checklists.
3. Continuous Risk Monitoring Using Leading Indicators
Theoretical models of early crisis detection distinguish between:
• Early warning (based on key performance indicators and projections),
• Early detection (indicator-based with predictive capabilities), and
• Early diagnosis (based on weak signals, often difficult to quantify)
In practice, indicator-based early detection is considered particularly effective. Risks can be visualized using a Balanced Scorecard tailored to early crisis detection, incorporating suitable leading indicators. For example, the number of new customer inquiries may serve as an early indicator of future revenue development. An indicator is considered robust if the relationship between the observed issue (the indicandum) and the indicator is reliably and validly measurable.
4. Establishing a Reporting System with Documented Procedures
A reliable early risk detection system requires thorough documentation, including at minimum:
• The procedures used for risk identification,
• Defined update intervals,
• Clearly assigned responsibilities, and
• A formal reporting process to the company’s competent supervisory bodies (e.g., supervisory board or advisory board).
5. Risk Aggregation When Appropriate
In certain situations, aggregation of risks may be required. This involves using quantitative methods - such as Monte Carlo simulations - to assess the overall risk exposure and, for example, determine the maximum potential loss at a defined confidence level (e.g., a 95% threshold). This approach is particularly useful when managing multiple interdependent risks.
Conclusion
The StaRUG imposes on executive management not only a duty to respond to existing crises, but also a proactive obligation to detect potential threats to corporate viability at an early stage. The establishment of a structured early warning system is therefore not merely best practice - it is a legal requirement. For small and medium-sized enterprises in particular, such a system is an essential component of long-term corporate resilience.
Would you like to learn how to implement a legally compliant and economically viable early crisis detection system tailored to your organization? Feel free to contact us - we would be pleased to advise you.
