Self-administration for freelance professionals and small business owners – optimum restructuring opportunities and approval guaranteed!

When it comes to small businesses, successes and failures are tightly bound up with the business owner themselves. In many cases, the normal restructuring tools cannot be used in emergencies due to the prominent and often indispensable role of the owner. In such cases, the self-administration procedure under the reformed Insolvenzordnung [German Insolvency Code] (Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen [German Act to Further Facilitate the Restructuring of Companies], or ESUG) can be particularly appealing as a crisis management model for freelance professionals and business owners.

There are many reasons why a small business or the office of a freelance professional might run into financial difficulties. An example of this is when business expansions turn out to be a poor investment due to unforeseen local developments, tying the company down with long-term rent payments, software licences, salary payments, causing continuous negative developments in the cash flow, month after month. In such a situation, any business-owner would want to be able to return to calmer waters, going back to the way things were before the ill-fated expansion.  

When normal insolvency proceedings are not possible due to professional regulations 

In spite of this, it is difficult to achieve a turnaround, because extrajudicial restructuring, liquidation or normal insolvency proceedings normally fail, because of a lack of consent from the relevant creditors, as well as a lack of options under commercial or procedural law. Instrictly legal terms, small business owners may still be able to contemplate having their company continue to oper- ate as a going concern under an insolvency administrator, assuming the rights of administration and disposal in accord- ance with the normal insolvency procedure. However, when freelance professionals become insolvent, this solution is of- ten not possible under the applicable professional regulations. This is a crucial factor for the following professional groups: 

  • Lawyers: Section 14(2) of the Bundesrechtsanwalts- ordnung, [German Federal Lawyers’ Code], or BRAO, (revocation of admission to practice law).
  • Tax consultants: Section 46(2)(4) of the Steuerberatungsgesetz [German Tax Consultancy Act], or StBerG, (revocation of appointment)
  • Auditors: Section 20(2)(5) of the Wirtschaftsprüferordnung [German Auditors’ Code], or WPO, (revocation of appointment)
  • Notaries: Section 50(1)(6) of the Bundesnotarordnung [German Federal Notarial Code], or BNotO, (removal of a notary from office)
  • Pharmacists: Section 7(1) of the Apothekengesetz [German Pharmacy Act], or ApoG, (personal management of a pharmacy for which the person is responsible) 

That is to say, an insolvency administrator would not be able to assume the position of a pharmacist, lawyer, tax consultant or architect, as he/she would lack the relevant qualifi- cations. In addition, the freelance professional will regularly face the threat of having his/her admission to practice revoked by the responsible professional association due to the impairment of assets as indicated by the insolvency.  

Nevertheless, liquidation of the practice or the small business is often contrary to the interests of business partners (such as customers and suppliers) in the continuation of the business model as a going concern. Their requirements will often be met as a result of the income gained from the going concern under insolvency proceedings. However, it must be ensured that the prospect of the requirements of the creditors being met will be better than if the debtor’s assets were liquidated.  

Self-administration has significant potential of success in restructuring  

Self-administration gives the freelance professional the chance to personally continue the company as a going con- cern. Instead of an insolvency administrator, the insolvency court will appoint a trustee, who will be tasked with (merely monitoring the management of the company by the creditor. In addition, information regarding the self-administration proceedings need not necessarily be made public, given that, unlike in normal insolvency proceedings, the duty of disclosure under Section 23 of the Insolvenzordnung does not apply. Only those parties directly affected by the insolvency (banks, customers, suppliers) need be informed of the proceedings by the company management, in order to generate trust. 

Ordering self-administration then allows for liquidity to be built by bringing about a range of individual effects. For example, the Bundesagentur für Arbeit [German Federal Employment Agency] will pay the salaries of all employees for up to three months prior to when the insolvency proceedings were opened. The suspension of debt servicing and the waiver of income tax up until the opening of the proceedings also helps build up liquidity. The debtor’s conducting self-administration can also allow the cancellation of long-term and unprofitable contracts, thereby fully repositioning himself/herself.  

An insolvency plan offers the best restructuring options 

If a positive forecast can be issued for the freelance professional/company, taking into account the measures outlined, additional restructuring measures can be implemented, e. g. the termination of rental or leasing contracts, the adjustment of interest in debt servicing to the restructuring interest rate, etc.  

The sole prerequisite for an insolvency plan such as this is that the creditors are not put in a worse position than they would be without the plan. Liquidation would mean the complete loss of claims for most creditors, particularly in the case of freelance professionals and small business owners, as in the case of a liquidation, know-how and intangible assets do not constitute an important asset.  

In addition, liquidation creates the risk that the creditor will become unemployed. That is to say that the uncertainty whether, immediately after his/her life’s work has been brought to an end, the debtor is willing and able to find de- pendent employment and make a living from non-garnished income can create risks for creditors.The insolvency plan may satisfy the claims of creditors out of the going concern. This means that although an insolvency plan may improve the situation, it does not represent a “business miracle”. In fact, it must be assumed that all of the groups of creditors formed prior to the creation of the plan will agree to the insolvency plan for the purpose of avoiding further harm to themselves and to be able to do business with the business owner in the future. If an insolvency plan has been submitted by the time at which the proceedings are opened, the court will already be in a position to combine the first meeting of creditors with the discussion and ballot meeting, making it possible to achieve a quick confirmation. In such cases, order is restored to the financial situation of the debtor and the revocation of admission/appointment comes to nothing – as the risk of admission/appointment being revoked, as detailed above, would be averted.  

Professional support 

The individual points set out above already make it clear that it would be difficult for a debtor to implement self-adminis- tration proceedings himself/herself, i. e. without professional support, because of their legal complexity and the, often essential, professional communication model. Seeking support from a consultant with experience in restructuring is highly recommended. A consultant will be able to contact all the parties concerned (creditors, the court, employees etc.), inform them in detail about the planned proceedings and persuade them of the prospects of success even before the application is made. Calling a (provisional) creditors commit- tee may be advisable. If the application is supported by the provisional creditors committee, the insolvency court will be required to order self-administration (Section 270 of the Insolvenzordnung). In addition, the (provisional) creditors committee can have a significant impact on the proceedings in another way, by unanimously proposing a (provisional) trustee, which, if suitable, the court will be required to appoint (Section 56a of the Insolvenzordnung). 

Conclusion 

Up until the 2012 reform of German insolvency law, self-administration was not a very attractive option for crisis man- agement in small companies and for freelance professionals. This was due to the absence of certain mechanisms which were only introduced when the law was amended. However, under certain conditions, the new regulations set out in the Insolvenzordnung (ESUG) now allow for the debtor’s rights of administration and disposal to continue without any re- strictions. This makes it possible to take advantage of the benefits of insolvency-specific restructuring in a very short time, without the business owner’s having to give up manage- ment powers or even lose their admission/appointment.