IDW S 6: Requirements for Restructuring Concepts

The Standard oft the Institute of Public Auditors in Germany - IDW Standard (IDW S6) "Requirements for Restructuring Concepts" describes what needs to be considered when creating restructuring concepts.

The Federal Court of Justice in Germany, BGH, has established central aspects of restructuring concepts in various judgments and defined requirements, which at least partially require an economic interpretation. IDW S 6, in its current version, takes into account all relevant judgments of the BGH, specifies them considering economic aspects, and integrates them to create the foundations for a coherent and promising restructuring concept.

Core Requirements for Restructuring Concepts

Ability to Continue

Restructuring capability requires, according to the highest court rulings on Level 1, the ability to continue in the sense of a positive insolvency law continuation prognosis, i. e., the financing throughout the restructuring period.

Competitiveness

Additionally, on Level 2, a thorough restructuring is required, namely the restoration of the profitability of the business activity to be able to compete on one’s own strength (competitiveness).

According to IDW S 6, a company is competitive if it can be continued permanently. Competitiveness regularly refers not only to the employee and product/service potential but also to the company's ability to adapt and transform in response to external developments.

Note: In this context, the requirements of digitization and compliance with environmental, social, and corporate governance criteria (ESG) must be considered.

Financiability

Competitiveness presupposes market financiability. This means that at the end of the restructuring period, the company must have adequate positive equity and an appropriate return.

A core component of the restructuring concept is the mission of the restructured company. The mission describes the goal of the company's development and shows how the company - considering the restructuring measures - becomes attractive again for equity and debt capital providers.

For the creation of a restructuring concept, the company must be able to be restructured with predominant probability. This criterion is crucial for the insolvency law continuation prognosis (§ 19 para. 2 of the German Insolvency Regulations, InsO) and the restructuring capability. A company is considered capable of restructuring if the business model can be made competitive and refinancing-capable in the market through suitable restructuring measures. Differences arise in the respective forecast period: For the continuation prognosis, the forecast period is twelve months, while for restructuring capability, it encompasses a longer period.

Note: Even when restructuring smaller companies, all core requirements for restructuring concepts must be observed. However, the extent of activity and reporting can be adapted to the typically lower complexity of the company.

The Innovations of IDW S 6 at a Glance

The topics ESG (Environment - Social - Corporate Governance) and digitization have been newly included in IDW S 6 due to their high societal and economic relevance. However, regarding their treatment in IDW S 6, they fundamentally do not differ from other aspects of corporate restructuring. These are clarifications and not new requirements for restructuring concepts.

Note: If ESG or digitization requirements are significant and essential for the company or its future development, they had to be considered in a restructuring concept already.

If ESG requirements impair the future viability of the business model and the success of the restructuring, compliance with them may be a prerequisite for the company's long-term continuation.

Relevant questions in connection with ESG criteria can be, for example:

• What regulatory and economic requirements exist for the company regarding the three dimensions of ESG, and what opportunity or risk drivers exist in the industry?
• Do ESG risks have an impact on the causes of the crisis?
• What measures are suitable for managing ESG risks, and how can they be quantified?
• What investment or cost expenditure for adapting the business model to foreseeable ESG requirements must be considered in the restructuring planning?

Compliance with ESG criteria requires, in addition to communication with stakeholders, also the integration of ESG risks into the general risk management process. Failure to consider these criteria can lead to criminal and/or reputational risks or limited financing options.

For many companies, the digital strategy of the company to be restructured is also crucial for the success of the restructuring. Essential components of the digital strategy include, among others, digital sales opportunities, digital business processes, and precautions against cyber-attacks.

Regarding the fulfillment of requirements for cyber security, the following questions, for example, may be significant:

• How is the IT access and authorization system organized?
• How often is a backup created, and are the backups stored offline or online?
• Is there an adequately qualified "response team" in case of a cyber-attack?
• What (further) measures need to be taken to manage cyber risks, and how can these be quantified?
• What investment or cost expenditure for establishing adequate cyber security must be considered in the restructuring planning?

Note: The consideration of ESG and cyber security requirements in a restructuring concept according to IDW S 6 is generally less extensive than a comprehensive ESG or IT due diligence.

When preparing the restructuring plan, tax implications and consequences of the measures must be considered, as they can influence the success of the restructuring. Future costs for consulting and monitoring the implementation of the restructuring measures should also be planned.

All components of the restructuring concept must be viewed in their interaction; an isolated problem analysis is insufficient. In the event of imminent insolvency or over-indebtedness – but not in the case of insolvency – quickly implementable immediate measures are necessary, and there is the possibility to use the protective shield procedure according to § 270d InsO or StaRUG (Law on the stabilization and restructuring framework of companies) instruments.

Note: The "Questions and Answers on the Preparation and Assessment of Restructuring Concepts according to IDW S 6" have also been updated. The additions mainly concern the topics of ESG, digitization, and taxes. Adjustments were also made to developments in restructuring practice.