Concept and Fundamentals of Turnaround
The Term Turnaround in the economic and legal context refers to the reversal of a negative trend within a company, especially in the face of imminent insolvency or financial crisis. The aim of a turnaround is to restore liquidity, eliminate existential threats to the company, and achieve a sustainable return to stable economic conditions. The turnaround process is closely linked with various legal requirements that are central to the restructuring and reorganization of companies.
Legal Framework Conditions of Turnaround
Gesellschaftsrechtliche Grundlagen
The legal basis for turnaround measures often lies in the corporate law regulations that determine the legal organization of a company. Under German law, this results in particular in the obligation of management to immediately file for insolvency in the event of insolvency grounds (§ 15a InsO). Additionally, the duty of proper management (§ 43 GmbHG, § 93 AktG) is decisive. Management must take appropriate measures to avert impending insolvency or over-indebtedness.
Insolvency Law Provisions
Insolvency law provides the legal framework for turnarounds during a corporate crisis. Various restructuring and reorganization tools are available, tailored to the specific crisis stages and objectives of the company.
Grounds for Insolvency
The main grounds for insolvency are:
- Inability to pay (§ 17 InsO): The company is unable to meet its due payment obligations.
- Imminent insolvency (§ 18 InsO): Insolvency is foreseeable but has not yet occurred.
- Over-indebtedness (§ 19 InsO): The debtor’s assets are no longer sufficient to cover existing liabilities.
Insolvency Filing Obligations
The statutory obligation to file for insolvency derives from § 15a InsO. The management of a limited liability company (e.g., GmbH or AG) must, in the event of an insolvency reason, file for insolvency without undue delay, but at the latest within three weeks.
Restructuring Procedures
The most important insolvency law restructuring instruments include:
- Self-administration (§§ 270 ff. InsO): Management retains authority to act under court supervision in order to carry out the restructuring independently.
- Protective Shield Proceedings (§ 270b InsO): A preliminary insolvency proceeding for the purpose of restructuring under creditor protection, providing the debtor with special tools for reorganization.
- Insolvency Plan Proceedings (§§ 217 ff. InsO): In this process, the company can work with creditors to develop and implement a restructuring and reorganization plan outside the regular insolvency estate.
Labor Law Aspects
Within a turnaround, labor law measures are typically required, especially in connection with restructuring and staff reductions. In such cases, the Protection Against Dismissal Act (KSchG) must be observed when changes are made to operations. In larger companies, there is also a mandatory requirement for works council involvement (§§ 111 ff. BetrVG).
In addition, the regulations related to mass dismissals (§ 17 KSchG) and social security reporting requirements must be considered. The correct execution of labor law measures is crucial for avoiding legal disputes and ensuring a legally secure restructuring.
Tax Law Implications
A turnaround also regularly has tax law relevance. This particularly concerns the treatment of restructuring gains (§ 3a EStG), VAT adjustments (in the case of defaults or restructuring settlements), as well as potential liability risks for management and the company. Furthermore, tax loss carryforwards under § 8c KStG may be affected by changes in the shareholder structure.
Process and Legal Structuring of a Turnaround
Phases of a Turnaround
The turnaround process is usually divided into several phases, each with its own legal requirements:
- Situation Analysis: Assessment of insolvency grounds, viability of restructuring, and legal scope for action.
- Conceptualization Phase: Development of a legally secure restructuring plan, coordination with creditors, consideration of insolvency, corporate, and labor law requirements.
- Implementation: Execution of restructuring measures, implementation of necessary company and labor law procedures, and, if required, initiation of judicial restructuring proceedings.
- Safeguarding Sustainability: Supervision of management and compliance with legal requirements to ensure the lasting success of the turnaround.
Stakeholder Involvement
The legal structuring of a turnaround requires the involvement of various stakeholders (creditors, employees, and, if applicable, insolvency courts), whose rights are particularly protected by insolvency law and other statutory frameworks. Creditor approval is especially decisive for the success of insolvency plan proceedings.
Liability and Criminal Risks
Management Liability
During a turnaround, there is an increased risk of liability for those responsible within the company. Failure to file for insolvency in good time can lead to personal liability (§ 64 GmbHG old version, § 15b InsO new version). Payments made after the occurrence of insolvency grounds are generally to be avoided unless expressly privileged.
Criminal Law Risks
In addition to civil liability, criminal consequences may arise, for example, due to delayed insolvency filing (§ 15a para. 4 InsO), bankruptcy (§ 283 StGB), or fraud (§ 263 StGB). Compliance with the obligation to file for insolvency, as well as the proper and timely execution of all turnaround measures, is essential to prevent criminal offenses.
Significance of European and International Framework Conditions
The legal requirements for turnaround and restructuring measures are increasingly shaped by European directives. The Restructuring and Insolvency Directive (EU) 2019/1023 contains requirements for preventive restructuring frameworks to promote early restructuring and the avoidance of insolvency. The national implementation of these requirements significantly influences the design of restructuring measures, for example, through the Act on the Stabilization and Restructuring of Companies (StaRUG), which since 2021 has provided new options for out-of-court restructuring.
Summary
The turnaround constitutes a complex, legally regulated process aimed at restoring the economic viability of companies in crisis. The legal environment is primarily defined by corporate, insolvency, labor, and tax regulations. Careful observance of all statutory obligations and the interests of stakeholders is essential to minimize liability risks for management and maximize the chances of a successful turnaround. National and international legal developments continually provide new options for companies and their management in dealing with corporate crises.
Frequently Asked Questions
Who is legally responsible for planning and implementing a turnaround?
In the legal context, the responsibility for planning and implementing a turnaround primarily lies with the business owner or management. For corporations such as a GmbH or AG, company agreements and corporate law—especially the Limited Liability Companies Act (GmbH-Gesetz) and the Stock Corporation Act (Aktiengesetz)—establish that the management bodies (management, executive board) are required to manage the business in compliance with legal, technical, and economic requirements. In the event of a turnaround, these bodies also bear overall responsibility for obtaining the necessary permits, monitoring occupational health and safety regulations, complying with environmental requirements, and ensuring the safe coordination of all participating companies, subcontractors, and professionals. They must ensure contractual obligations are met—for example, towards customers, suppliers, or lessors. Violations of these duties may result in civil and criminal liability, such as in the case of workplace accidents, environmental damage, or breaches of contract. In specific cases, the delegation to a turnaround manager may be permissible, but ultimate responsibility and the duty to supervise remain with the legal representative.
What labor law specifics must be considered during a turnaround?
During a turnaround, which is usually accompanied by extensive shutdown, maintenance, conversion, or restructuring measures, numerous labor law specifics arise. First, it should be noted that regular staff often experience temporary changes in working hours, work assignments, or locations. Overtime, weekend work, and shift operations must always comply with the Working Hours Act and, if applicable, collective bargaining agreements; exceeding these requires official exceptions. The works council must also be involved in accordance with the Works Constitution Act, for example through hearings, conciliation procedures, or questions regarding health and safety. Special rules also apply to the engagement of external service providers and temporary workers—here, the Temporary Employment Act (AÜG), the Verification Act, and occupational health and safety regulations must be strictly adhered to. Due to an increased risk of accidents, legal obligations relating to risk assessment, operating instructions, and briefings under the Occupational Health and Safety Act and DGUV regulations must be implemented particularly rigorously. Participation rights, for example regarding transfers, must also be taken into account.
What legal obligations exist regarding occupational health and safety during turnarounds?
Operators of industrial plants are subject to heightened occupational health and safety obligations during a turnaround. The legal basis is the Occupational Health and Safety Act (ArbSchG) as well as industry-specific regulations such as the Ordinance on Industrial Safety and Health (BetrSichV) or the Hazardous Substances Ordinance (GefStoffV). Before the turnaround begins, operators must conduct a comprehensive risk assessment, analyze possible hazards, and document corresponding measures (e.g., training sessions, personal protective equipment, safety clearances) in writing. There is a special duty to involve all external service providers and subcontractors in these safety measures and to provide proof of their instruction—this often includes creating and approving safety and health protection plans. Reports to the statutory accident insurance and/or the relevant supervisory authority are mandatory in the event of particular risks, as is the preparation of emergency plans in accordance with § 10 ArbSchG. Disregarding these obligations may result in significant fines or even criminal prosecution.
What permits and notification requirements are legally necessary prior to a turnaround?
Prior to a turnaround, numerous regulatory permits may be required or notification obligations must be observed, depending on the industry and scope. Under the Federal Immission Control Act (BImSchG), for instance, a shutdown requiring approval may need to be reported to the permitting authority in good time, particularly if emissions, waste, or work procedures are changed. Interventions and operational changes may also have to be reported under the Water Resources Act (WHG), the Trade Regulation Act (GewO), waste law (KrWG), and state-specific environmental regulations. If Seveso III operator obligations (major accident establishments) apply, independent information and documentation requirements (e.g., to the district government, fire department) must be fulfilled. In addition, special permits are often necessary for work on electrical or pressurized systems, scaffolding, or hot work (e.g., welding). Road and pathway rights, access, or assembly notifications may also carry legal weight, depending on the scale.
What liability risks do companies and their representatives face during turnarounds?
During a turnaround, companies and their organs face significant civil, administrative, and criminal liability risks. Civil law claims for damages under § 823 BGB (e.g., in cases of personal injury or property damage) may arise if due diligence obligations (such as in occupational health and safety) are breached. Environment-related damages can also give rise to claims under environmental law or obligate remediation. Management is personally liable if organizational, selection, or monitoring duties are not fulfilled. Criminal law risks may arise from negligent bodily injury (§ 229 StGB), negligent homicide (§ 222 StGB), or environmental offenses (§§ 324ff. StGB). Compliance violations, for example due to lack of control, can be subject to fines (e.g., under OWiG), regardless of whether actual damage occurred. Administrative consequences, such as orders to cease operations or to take remedial actions, are also possible.
What specifics apply to contracts with external service providers during a turnaround?
There are numerous legal specifics for engaging external service providers during a turnaround. Above all, clear contractual arrangements regarding responsibilities, deliverables, and liability and insurance matters are needed. Service or work contracts often include specific acceptance, defect, and warranty provisions. Special attention must also be paid to the legally secure engagement of subcontractors—especially with regard to the Posted Workers Act (AEntG), the Minimum Wage Act (MiLoG), and potential bogus self-employment. Data protection (GDPR), confidentiality obligations, and provisions to protect company know-how should be clearly regulated by contract. It must also be clearly defined how participation in occupational health and safety (including participation in safety inspections and access to safety training) will be arranged, since the operator of the plant remains responsible for compliance with these regulations, even if external personnel are used.
How are the requirements for documentation legally structured?
The legal requirements for documentation during a turnaround are particularly strictly regulated. Companies are obligated to document all safety-relevant procedures, such as risk assessments, instructions, inspections, or work approvals, promptly and in a comprehensible manner. The basis for this is provided by the Occupational Health and Safety Act (§ 6 ArbSchG), the Ordinance on Industrial Safety and Health (§ 17 BetrSichV), and numerous industry-specific standards (e.g., DGUV Regulation 1). Changes to process engineering organization, handover protocols, as well as all applications and permits submitted to authorities, must also be archived. The documentation serves as proof of compliance with legal obligations and as evidence in the event of damage or during official inspections. Violations of documentation obligations are regularly penalized as administrative offenses and increase the personal liability risk of responsible persons.
