Restructuring under insolvency protection or the “The owner keeps the company”

Corporate crises call into question companies’ very existence; a common problem, they have various causes, among them economic developments, changes in law, the volatility of commodity and currency markets, and internal factors such as management errors, wrong acquisitions or unbalanced financing structures. Crisis situations are exceptional situations, and even a well-positioned management rarely is sufficiently experienced and equipped to deal with them. Overcoming such crises presents a company's management with significant challenges. Often, the problems are compounded by the aftermath of the world financial and economic crisis that decisively weakened capital and eroded liquidity. Poor balance sheet ratios have led many banks to lower credit ratings and rein in lending despite the availability of sufficient funds on financial markets. These days, even minor issues amplifying the crisis, such as increases in competition or seasonal declines in sales, can turn a performance crisis into a full-blown liquidity crisis.

During the last major economic crisis in 2009, the legislature contributed greatly to overcoming it through legislative measures, e. g., via extending the duration of short-time work or offering state guarantees. Nevertheless, it was clear early on that the financial and economic crisis, in particular, would have further consequences.

For that reason and to further strengthen the German economy the legislature proactively enacted a new insolvency law on 1 March 2012. The ESUG (Act to Further Facilitate the Restructuring of Companies) promotes the restructuring of companies in Germany and has the particular feature of allowing restructuring under insolvency protection. This option is unique and is in many respects even superior to the renowned US Chapter 11. However, despite a number of publications and the successful conclusion of numerous proceedings, the new law is largely unknown or known only in part in many sectors of the German economy. As a consequence, far too few companies have made use of it.

Insolvency under the ESUG offers new strategic options for overcoming a crisis situation to an unprecedented extent to date. This includes the clear message that the company owner and management should continue to hold and direct the company - and do so in consultation with the creditors. Accordingly, the process under ESUG ends with a well-positioned company and does not spell the end of the company by liquidation or a so-called asset deal in which an investor buys the interesting assets, such as customer relationships, machinery and real property from the previous owner, while the insolvency administrator liquidates the rest.

Former shareholders are in that case left with an empty shell, and the company they previously owned no longer exists. The self-administered insolvency plan leads to another outcome; its goal is maintaining the existing owner, i.e., maintaining the existing company, maintaining the shareholder status of the existing shareholders unchanged to the extent possible. That is, only the legal entity is to be restructured.

 This is achieved by reducing the liabilities side of the balance sheet by removing old liabilities in whole or in part while eliminating the causes of the crisis through operational restructuring. Both balance sheet and operational restructuring are part of the so-called insolvency plan, on which the creditors must vote at the end of these preparatory proceedings. If they agree to the plan with the majorities required by law, the insolvency plan will often be confirmed by the court at a voting date and the proceedings will be definitively concluded within about two to four weeks. This means the entire insolvency proceedings can be concluded in as little as five to seven months.

Since the new law has taken effect, Buchalik Brömmekamp has been successful in permanently maintaining more than one hundred companies as going concerns by guiding them through a self-administered insolvency plan, in each case without the business owners losing their companies. In the proceedings we have implemented the business owners have largely retained their shareholder positions in full, and equity has been strengthened significantly. Equity ratios have been improved and moved from negative to the middle double-digit positive values, and sufficient liquidity has been generated in the process without the need for additional bank loans. On many occasions, we have even been able to significantly reduce the respective company's debt and to significantly or even completely eliminate any owner or management liability.

Professional preparation and implementation are an essential precondition for the success of the proceedings because they contain numerous pitfalls. Properly assessed and executed, insolvency under ESUG offers an outstanding opportunity for the owner to maintain its company and free itself from debt and make a fresh start. The results obtained are often near unbelievable, as the references found on clearly attest.

The following articles provide a brief but essential overview of the options offered by the new law. In the articles and in the references at the end, we show how companies have successfully come through a self-administered insolvency plan. Further information on the ESUG can be found in the references. Buchalik Brömmekamp will gladly supply you free of charge with the information referred to there.