The crisis begins before the point of insolvency
A weaker order book or a temporary liquidity crunch does not necessarily mean insolvency. However, they are warning signs. Under Section 1 of the StaRUG, directors of companies with limited liability must continuously monitor developments that could jeopardise the company’s continued existence and take appropriate countermeasures.
Typical warning signs include repeated deviations from the budget, exhausted credit lines, deteriorating payment terms, arrears in taxes or social security contributions, and the loss of key customers or suppliers. At this stage, one should not try to downplay the situation but rather carry out a thorough assessment: How long will the liquidity last? Is the business model still viable? Which measures will be effective in time?
Application deadlines are not restructuring deadlines
If insolvency or over-indebtedness has occurred, the application for insolvency must be filed in accordance with section 15a of the Insolvency Code (InsO) without culpable delay. The three or six weeks specified therein are merely maximum time limits. They must not be interpreted as additional time for consideration. A late application can have significant civil and criminal consequences.
Effective reorganisation therefore begins before the pressure of deadlines sets in. As long as there is sufficient time and liquidity available, out-of-court solutions, restructuring under the StaRUG, a ‘protective shield’ procedure or self-administration can be carefully weighed up against one another.
Self-administration begins before the application
Self-administration is not a process that can be improvised within a few days. Under section 270a of the Insolvency Code (InsO), it requires, amongst other things, a coherent self-administration plan. This includes a six-month financial plan, a strategy for conducting the proceedings, a summary of the status of negotiations with creditors and other stakeholders, and a comparison of the costs of the proceedings.
At the same time, arrangements must be made for financing, communication and operational measures. Banks, trade credit insurers, customers, suppliers and employees need clear answers. The sooner this work begins, the greater the chance that the court, the provisional creditors’ committee and the key creditors will support the chosen course of action.
What my experience shows
From our work in self-administration and protective shield proceedings, we know that time is often the most important asset in a crisis. Successful proceedings do not rely on a single legal manoeuvre. They result from realistic planning, robust figures and close coordination between the management, the restructuring team, the administrator and the creditors.
The later a company seeks help, the more its actions are dictated by liquidity crises and the pressure of liability. Those who seek help at an early stage, on the other hand, can still shape the outcome.
Five questions for the management
- Is the available liquidity sufficient for the next 13 weeks?
- Are deviations from the plan temporary or structural?
- Is there a risk of breaching financing covenants or falling into arrears?
- Is the core of the operational business model viable for restructuring?
- Which restructuring option best safeguards businesses and jobs?
Conclusion
Taking early action is not an admission of failure, but rather responsible corporate governance. It expands the toolkit, protects the management team and improves the chances of a successful restructuring.
The key rule is: do not wait until filing for insolvency is unavoidable before taking action. The best form of self-administration begins long before the insolvency application is filed.
Key points in brief
- Early crisis detection is a statutory management responsibility and the foundation of any restructuring.
- The deadlines for filing for insolvency are maximum time limits, not additional time for consideration.
- A well-prepared self-administration builds trust and preserves room for manoeuvre.
