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Sale or Bankruptcy—Do I Really Have to Choose?
Entrepreneurs whose businesses are facing financial difficulties often find themselves in an extremely stressful situation. Revenue is declining, and financial flexibility is noticeably shrinking.
During this phase, many business owners feel under enormous pressure and believe they must quickly choose between two seemingly bad alternatives: Either to sell the business as quickly as possible or to file for bankruptcy—though the latter is often associated in the public eye with the loss of the business, its breakup, and ultimate failure.
Insolvency under Self-Administration—The Better Way Out of the Crisis
This very perspective is no longer relevant today. This is because self-administered insolvency, in particular, offers entrepreneurs a promising alternative that is still frequently underestimated.
Under self-administered insolvency, the entrepreneur remains at the helm and continues to manage day-to-day operations independently, while simultaneously gaining time—thanks to the protection afforded by the Insolvency Code—to implement the necessary restructuring measures. In this way, the entrepreneur retains ownership of the company, which they generally do not wish to sell, as it often represents their life’s work.
In contrast, selling the business in a crisis situation may seem attractive at first, as it allows the entrepreneur to rid themselves of looming problems while simultaneously generating proceeds from the sale. However, the agreed-upon purchase price typically already factors in the existing difficulties. The result is that the entrepreneur sells the business below its true value and is subsequently left with no prospects.
In contrast, self-administered restructuring offers the opportunity to restructure the company sustainably, make it profitable in the long term, and either continue operating it oneself or—later, from a position of stability—sell it at a significantly better price.
Numerous successful examples show that insolvency under self-administration by no means signifies the end today, but rather enables a powerful fresh start. Through this instrument, the entrepreneur regains the ability to actively determine the future of their life’s work, rather than having to give up prematurely under pressure.
Insolvency under self-administration: Seizing opportunities instead of a forced sale
Insolvency under self-administration is a special type of proceeding that enables entrepreneurs to restructure their business on their own terms while simultaneously enjoying protection from enforcement actions and creditors.
In contrast to standard insolvency proceedings, in which an insolvency trustee is appointed to determine the company’s future course no later than the opening of the insolvency proceedings, self-administered insolvency leaves management in the hands of the existing entrepreneur.
Instead of an insolvency trustee, the court appoints only a so-called administrator, whose duties are comparatively limited. The administrator primarily monitors whether management complies with applicable laws during the proceedings and adequately considers the interests of creditors.
A key advantage of self-administration is that the business owner retains control over their company and can actively shape the restructuring process. Unlike in the past, when insolvency was often associated with handing over control to an insolvency administrator—and thus the loss of a lifetime’s work—business owners today retain control over their companies.
Other significant advantages of self-administration include, among others,
Employees’ wages and salaries are secured by the insolvency allowance for up to three months.
There are simplified termination options for unfavorable contracts.
The notice period for employees is limited to a maximum of three months.
Upon the opening of self-administration proceedings, unsecured liabilities are discharged.
Social plan costs are capped at a maximum of 2.5 months’ salary.
Opportunities for Company Sellers and Buyers – How Self-Administration and M&A Strategically Interlock
Opportunities for Business Sellers
In the context of self-administration, it may become apparent that fresh capital is needed for a sustainable restructuring and the long-term continuation of the business. In such cases, it makes sense to specifically seek out an investor who can contribute capital and additional expertise to the company.
The investor’s involvement can take various forms, such as acquiring a minority stake, taking over specific business units, or a targeted capital increase as part of an insolvency plan proceeding.
The strategic combination of self-administration and targeted investor participation opens up significant opportunities. Through fresh capital and new momentum, the company gains stability and innovative strength, enabling it to better capitalize on market opportunities. At the same time, management retains its ability to act and maintains influence over strategic decisions.
Another important aspect is the sustainable increase in the company’s value through a successful restructuring. A successful restructuring improves profitability, which in turn makes the subsequent sale of the company significantly more attractive.
Entrepreneurs who initially preserve and further develop their life’s work benefit later either through the long-term returns of the restructured company or through a sale at a significantly higher price, since the successfully overcome crisis no longer has a negative impact on value.
Opportunities for Business Sellers
For potential buyers of a company in crisis, the combination of self-administered insolvency with an M&A process also offers particular advantages. This applies above all to cases in which, for example, important licenses or certifications are tied to the struggling legal entity and must therefore be preserved.
By conducting a structured self-administered insolvency proceeding, it is possible to significantly reduce liability risks for the acquirer. Potential risks, such as opaque financial structures or (hidden) liability risks, are systematically eliminated through the proceeding.
This is particularly important in the case of a share deal following self-administration or when becoming a shareholder as part of an insolvency plan.
Furthermore, the guided restructuring process creates clear structures, improves internal transparency, and allows for a realistic assessment of the company’s future development. This strengthens the confidence of potential investors.
Self-Administered Insolvency as Active Protection Against Liability
If insolvency is unavoidable, a timely petition to open insolvency proceedings under self-administration actively protects entrepreneurs from personal liability and, in particular, from the accusation of unduly delaying insolvency.
When does a delay in filing for insolvency occur?
A delay in filing for insolvency occurs when, despite the onset of insolvency (Section 17 InsO) or over-indebtedness (Section 19 InsO), management fails to file the legally required insolvency petition or files it too late (Section 15a(1) InsO).
Important to know: The occurrence of insolvency or over-indebtedness does not preclude the use of the special procedure known as self-administration.
In Germany, delaying insolvency proceedings for legal entities (e.g., GmbH or AG) is a criminal offense under § 15a(4), (5) InsO, which can result in significant criminal as well as civil consequences for the responsible managing directors or board members.
Special Considerations for Management Consisting of Multiple Members
If the management consists of several persons, all members may be held equally personally liable. This is because each member of management is personally responsible for filing the insolvency petition properly and in a timely manner.
Even managing directors who only learn of the company’s financial difficulties at a later date are obligated to immediately assess the situation and, if necessary, file for insolvency themselves.
In this context, a managing director is not relieved of liability by arguing that other members of the management team should have handled the matter based on internal rules of responsibility.
To avoid personal liability risks, a regular, timely, and objective review of the company’s liquidity and financial position is therefore essential. In the event of insolvency or over-indebtedness, an application for insolvency must be filed immediately, but no later than three weeks after the onset of insolvency or six weeks after the onset of over-indebtedness (Section 15a(1) InsO).
StaRUG as a Strategic Complement to Self-Administration and M&A – Preventive Restructuring Instead of Insolvency
Since 2021, the “Act on the Stabilization and Restructuring Framework for Companies” (StaRUG) has provided companies and self-employed individuals with a means to address impending insolvency at an early stage without having to undergo insolvency proceedings.
The StaRUG procedure thus requires that, according to the company’s own liquidity planning, insolvency is imminent but has not yet occurred.
Consequently, the procedure is explicitly aimed at companies and self-employed individuals in the early stages of a crisis who wish to act proactively and with foresight to avoid a deeper crisis or insolvency.
Advantages of a StaRUG proceeding
A key advantage of the StaRUG procedure is that it enables restructuring to be carried out largely under the company’s or entrepreneur’s own management. In contrast to self-administered insolvency proceedings, the StaRUG process generally takes place outside the context of insolvency proceedings, thereby avoiding the stigma associated with insolvency.
In addition, it allows for the targeted restructuring of individual liabilities through a restructuring plan, which can be confirmed by a court even in the face of opposition from individual creditors. A prerequisite for this is that a majority of the affected creditor groups approve the plan.
For whom are StaRUG proceedings particularly suitable?
StaRUG is particularly well-suited for companies that recognize their financial difficulties early on, still have sufficient liquidity, and whose business model is fundamentally viable.
It is ideal for companies that wish to restructure obligations to individual creditors or groups of creditors—such as banks, bondholders, or key suppliers—without subjecting the entire business or all liabilities to a restructuring process.
In contrast, self-administered restructuring is better suited for companies that have already become insolvent. This is not only because, in such cases, the option to enter StaRUG proceedings is generally closed off.
In most cases, companies at this stage require more extensive restructuring measures—such as far-reaching operational changes, contract adjustments, or workforce reductions—and these can only be carried out effectively under the protection of insolvency proceedings.
