As we reported yesterday, the legislator has suspended the obligation to file for insolvency as an emergency measure until September 30, 2020. However, this only eliminates a formal and liability problem, and does not really help companies. Whether and to what extent the financial measures – primarily the simplified and extended short-time working allowance, tax breaks and support from state aid programs – will really be able to alleviate the plight of companies can only be seen in the future and with further developments.
However, it is already clear that in many areas the problems will have an impact that extends far beyond the core crisis of the corona pandemic, whether because business is affected for a longer period of time, is difficult to restart, customers or suppliers have dropped out, or the financial consequences cannot be absorbed. In many quarters, a wave of insolvencies is expected to roll towards us.
Companies and business owners would therefore be well advised to look beyond the immediate crisis and consider their medium-term expectations for the next few months, developing a scenario for this purpose in order to identify risks at an early stage and counter them with appropriate measures. Experience has shown that many restructurings fail because they were initiated too late.
Restructuring in insolvency proceedings
The very term "insolvency" is a red rag for many people. In many cases, it means the end of the company and often also the personal insolvency of the entrepreneur himself. The German Insolvency Code now provides restructuring instruments that aim to save the company. The implementation of an EU directive should further improve these instruments.
Insolvency plan
The centerpiece of such a reorganization is usually an insolvency plan. It is intended to preserve the company in whole or in part, while at the same time granting creditors the best possible satisfaction and thereby preventing the break-up and liquidation of the company. The insolvency plan is a very flexible restructuring instrument that allows for many possibilities, including changes in the shareholder structure. It is a vehicle for implementing creative ideas and thus taking into account the particular situation of the company. Ultimately, the creditors vote on the insolvency plan at a discussion hearing at the insolvency court, where, due to the legal regulations, a "blocking shareholder" can be overruled if necessary, which is otherwise often a considerable obstacle to a reorganization measure. It is therefore also important to convince the creditors, which often works well, especially in the case of long-standing business relationships. Unfortunately, the implementation process is still somewhat laborious, so it often takes several months before the procedure is completed and the reorganization plan can be implemented. All the more reason to address the issue at an early stage, before the company's crisis leaves no alternative but to take action and there is no longer enough time to implement a reorganization plan. At that point, the company is placed in the hands of an insolvency administrator and the entrepreneur loses control.
Self-administration
In the meantime, self-administration has become established, in which the entrepreneur remains capable of acting and responsible and is merely assisted by a so-called trustee appointed by the court. The trustee takes on various tasks (e.g. the schedule of creditors) and monitors the company during the crisis. Self-administration makes particular sense if an insolvency plan is to be implemented at the same time. Since the insolvency court must be convinced that self-administration makes sense when the application is filed, the basic principles of the reorganization should already be available at this point and communicated to the court. The courts usually require the self-administering company to have expertise in the area of reorganization and insolvency, but this can also be ensured by an external consultant. Debtor-in-possession management often results in a significantly lower loss of trust among customers and suppliers, thus making it easier to continue business operations during the crisis and to convince people of the restructuring plan. An application for debtor-in-possession management should therefore always be well prepared and presented to the insolvency court accordingly.
Protective shield proceedings
Another important restructuring instrument is the protective shield procedure. It can only be used in conjunction with debtor-in-possession management and requires that the company is still solvent. Insolvency must not have occurred yet. A protective shield procedure is therefore only considered in the event of impending insolvency and/or over-indebtedness and requires, in particular, early recognition of the crisis and an appropriate response to it.
A requirement for protective shield proceedings is the presentation of an external expert opinion certifying that there is no insolvency and that the intended reorganization is promising. This expert opinion must not be prepared by the consultant who prepares the reorganization and the insolvency plan or who files the application with the court.
The protective shield procedure then blocks impending enforcement measures and the foreseeable collapse that would lead to the obligation to file for insolvency by "stopping" the old creditors, so that time can be used to draw up and implement a restructuring plan. In this context, auxiliary tools such as the pre-financing of insolvency substitute benefits can be used if it is likely that the essential jobs can be preserved. Another advantage is that the company can determine the person of the provisional administrator, which improves the predictability of the processes, since coordination can and should be carried out at an early stage with the intended reorganization administrator.
Restructuring healthy companies
The means outlined above are particularly suitable for implementing a restructuring of a company that is fundamentally healthy but has run into difficulties as a result of a particular event.
The statements represent initial information that was current for the law applicable in Germany at the time of initial publication. The legal situation may have changed since then. Furthermore, the information provided cannot replace individual advice on a specific matter. Please contact us for this purpose.