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Introduction
There are many reasons why a company might find itself in an economic crisis. These reasons do not always lie within the company itself. The causes can often be found in customer relationships, the market environment, or external factors such as changes in commodity prices. Even if the company is not responsible for these factors, management must fulfill its legal obligations during a crisis.
Duties of Management
Section 1 of the StaRUG governs what is known as early crisis detection. In practice, this means that those who manage a company’s affairs are obligated to establish a system that enables them to identify risks to the company in a timely manner so that appropriate action can be taken. They are therefore obligated to establish an early risk detection system. In other words, they must be able to identify risks that would necessitate filing for insolvency. The creation of a liquidity plan is of central importance in this regard.
The early crisis detection system applies regardless of the company’s size. All corporations in Germany are required to implement an early crisis detection system.
The rationale behind this early-warning system is that the legislature seeks to ensure that company management addresses emerging crises at an early stage so that countermeasures can be taken.
If the restructuring measures taken are unsuccessful and the liquidity plan indicates that insolvency is unavoidable, immediate action must be taken. In addition to the daily pressures of running a business and the search for ways out of the crisis, failure to comply with these requirements can quickly lead to personal or even criminal liability.
Today, insolvency no longer primarily means the liquidation and breakup of the company. Instead, it represents, above all, a significant opportunity for a successful fresh start. The sooner action is taken, the less severe the disruptions and consequences will be—and the greater the chances of a promising future. Practical experience shows that acting early builds trust in those involved, as it demonstrates forward-thinking corporate leadership.
In addition to the traditional standard insolvency proceedings, the Insolvency Code provides for other types of proceedings that impose fewer restrictions on management and promote the restructuring of the company.
1. Types of Proceedings
Self-Administered Restructuring
Under self-administration, management retains responsibility and continues to run the company. This helps prevent, in particular, a loss of expertise. The company or its management is supported and supplemented—in addition to its advisors—only by a court-appointed administrator. The administrator verifies that management does not take any actions that would be detrimental to the creditors. His authority is limited solely to monitoring the self-administered restructuring and to approving extraordinary business transactions.
Restructuring Under the Protective Shield Procedure
The protective shield procedure aims to strengthen self-administered insolvency and encourage those responsible to pursue early restructuring. The protective shield procedure is nearly identical to the self-administration procedure described above. The advantage: This protective shield provides the company with a procedure that allows the debtor to systematically prepare for restructuring under the protection of the Insolvency Code. This often involves drafting a detailed insolvency plan to preserve the company.
Standard and Plan Proceedings
“In principle, the objective of insolvency proceedings is to satisfy a debtor’s creditors collectively by liquidating the assets and distributing the proceeds, or by agreeing to an alternative arrangement in an insolvency plan, particularly for the purpose of preserving the company” (Section 1 InsO). A distinction is made between standard proceedings and plan proceedings. Standard proceedings aim to satisfy creditors equally within the framework of a pro rata distribution. This is achieved through the liquidation of the company’s individual components or through so-called “transfer-based restructuring” in the form of the sale of parts of the company or the entire company.
The insolvency plan proceedings allow for unequal treatment of individual creditor groups and aim to preserve the business. To this end, a detailed insolvency plan must be submitted to the insolvency court and put to a vote by the creditors. Due to the unequal treatment of creditor groups, the insolvency plan requires specific approval procedures to become legally binding.
2. Best Practice
Last year, I had the opportunity to assist Wannenwetsch GmbH in insolvency proceedings. Wannenwetsch GmbH was a rock-solid company. However, it was part of a corporate group in which a subsidiary ran into financial difficulties and was forced to file for insolvency. The consequence?
The entire group was thrown into turmoil—including Wannenwetsch GmbH. Wannenwetsch GmbH specialized in high-pressure water jetting and held a market share of approximately 20% in Germany.
During the insolvency proceedings, my team and I were able to continue and stabilize business operations. Due to its strong market position, there were numerous interested parties and potential investors. To achieve the best possible outcome, I decided to auction off the entire company in an online auction.
This was a unique occurrence in Germany—the auctioning of an entire company while it was still in operation.
An investor was found who took over the business. Wannenwetsch GmbH remains in Thuringia, the Meiningen location is being retained, and business operations continue to run smoothly. All employees were retained—and new jobs were even created!
