Chief Restructuring Officer - crisis manager and ... dependent employee

Cost increases, sales slumps, lack of liquidity: these days, companies are facing major challenges. When a company runs into difficulties, it needs experienced people who have knowledge of such situations and are able to support or even assume the management. To this end, companies are increasingly using the services of Chief Restructuring Officers (CROs) again. We explain what tasks the CRO typically takes on and what points need to be considered for this position from a legal perspective.

A CRO is a crisis manager who is to work on temporary basis at the company in question. Companies rely on the fact that a CRO has extensive experience in crisis situations, that he then puts to use for the company in question. In practice, independent management consultants or experts from restructuring consultancies often take on the role of CRO as interim manager.

The CRO implements the restructuring plan. For this purpose, he is usually closely integrated into the company organisation and, in individual cases, also assumes an executive position in the company to be restructured. This raises the question of his commissioning and thus directly the social security obligation. This article primarily sheds light on the CRO’s social security classification.

Functions and tasks of a CRO

As part of the management level, the CRO has various functions, depending on the objectives of the restructuring concept. These include:

• veto, initiative and information rights with respect to all liquidity measures to be implemented,
• negotiation and communication with creditors, shareholders of the company to be restructured and credit institutions,
• and, in the event of his appointment as managing director, representation of the company in external relations.

In order to implement the measures required to restructure a company, the CRO involves the management in the internal relationship. Due to the typically diametrically opposed interests of creditors, credit institutions and company management – he acts as a communicator and mediator throughout the restructuring process.

To put it bluntly: in practical terms, the CRO fulfils management tasks and performs functions that extend well beyond the creation of a restructuring concept. In more complex restructurings, implementation by the CRO can often take several years. It is therefore not limited in advance to a narrowly defined restructuring project within a single measure.

Contractual status of a CRO

Generally, the CRO concludes a service agreement with the company and provides highly personal services. If the company also grants the CRO an executive position by appointing him as managing director or board member, this position is in addition to his service agreement under the law of obligations and creates further rights and obligations for the CRO under corporate law.

Social security status of a CRO

When a CRO is employed, the question arises as to his status under social security law, more precisely as to whether or not he is a dependent employee with an obligation to pay social security contributions (cf. Sec. 7 (1) sentence 1 German Social Code Book IV [Sozialgesetzbuch IV, SGB IV]). In this case, this is an activity that is bound by instructions and an integration into the work organisation of the party giving the instructions.

The CRO’s status under social security law has not yet been clarified by the highest court. Unsurprisingly, the case law of the courts of lower instance determines a potential social security obligation based on the criteria developed for dependent employment pursuant to Sec. 7 (1) sentence 2 SGB IV as part of an overall assessment.

The actual circumstances of the activity are decisive for the assessment of the status under social security law, especially with regard to the characteristics of being bound by instructions and integrated into the company's work organisation (cf. Sec. 7 (1) sentences 1 and 2 SGB IV). The CRO performs a comprehensive range of tasks as part of the management and is integrated into the company's work organisation. The decision-making powers, which can be far-reaching in individual cases, are often similar to the powers of an external managing director, which means that the CRO’s activities constitute dependent employment and he is subject to an obligation to pay social security contributions.

An application of the standards applicable to shareholder-managing directors is unlikely: as an external managing director or without an executive position, the CRO is bound by the company’s instructions only on the basis of a service agreement, despite having far-reaching powers. As an external party, he generally also does not hold any shares in the company. Typically, the CRO does not hold more than 50% of the company's capital, nor does the company grant him in the articles of association legal authority not to have to comply with shareholder resolutions.

Although the contractual basis offers legal leeway, this is limited as the CRO performs various activities in his function over a longer period of time. Thus, no project that excludes the social security obligation and is narrowly defined in terms of time and content can be contractually conceived. Ultimately, there is a modest number of renowned CROs on the market, which has a positive effect on the remuneration. However, this cannot be decisively used as a secondary indication for an exemption from the social security obligation.

As part of the management team, the CRO is therefore generally a dependent employee pursuant to Sec. 7 (1) sentence 1 SGB IV and is subject to a social security obligation.

Special case for pure consultancy services

In practice, this leads companies to seek other ways of availing themselves of the knowledge and skills of this specialised restructuring expert.

Notwithstanding the fact that self-employed individuals are often reluctant to engage in dependent employment, restructuring consulting firms that deploy a CRO also face the risk of the assessment as dependent employment constituting an illegal provision of a temporary employee. This is the case if a permanent employee is deployed as CRO on the basis of a consultancy agreement between the company and the restructuring consulting firm.

In practice, therefore, there are Chief Restructuring Officers who, in deviation from the basic model, neither become part of management nor take it over. Instead, while retaining the title of CRO, they assume a purely advisory role. This means that they are not integrated into the company’s organisation and are not bound to any instructions.

Ultimately, the purpose of such a model is often only to show a function of the CRO. In fact, it is purely an advisory service, which can be provided without problem as long as the all of the parties involved have a clear understanding of the roles and this understanding is not blurred during the practical execution of the assignment. In particular, in this constellation the CRO is not vested with any decision-making authority. For the management, this means an additional workload, as it has to execute the measures prepared by the CRO in addition to the day-to-day operational business.

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