Insolvency plan and self-administration

“Capitalism without bankruptcy is like Christianity without Hell.” Frank Borman

We have survived  the economic crisis and insolvencies have been way less frequent than was initially feared. However, now that the crisis is behind us, equity capital has taken a beating, in many cases it has actually been used up and figures are written in red. Often the fact that no insolvency application needs to be filed is just because, up until 31.12.2013, the concept of over-indebtedness had been defused by legislators in the sense that even if over-indebtedness exists on the balance sheet, there is no obligation to file for insolvency if there is a positive forecast for continuation of the business. Otherwise there would be a significantly higher number of insolvencies.

Cash is also tight in many companies. Rising sales create a need for advance financing. Banks are very reluctant to provide credit when the balance sheet picture is poor. Furthermore, prior to the crisis a number of firms stocked up on structured mezzanine capital. No less than 4.6 billion Euros are due for repayment over the next three years. Many companies will not receive any refinancing and are therefore potentially exposed to insolvency.


“There will be insolvency as long as there are companies.” Dr. Utz Brömmekamp

Whereas under previous bankruptcy law the focus was on achieving the best possible satisfaction of creditors, the intention of the Insolvency Code that came into effect in 1999 was to place more emphasis on turning the insolvent companies around. For this purpose the insolvency planning procedure, a concept that had hitherto been unknown in German law, and also the possibility of self-administration were created. Despite the many advantages that they offer compared with the traditional procedure these methods are still far too under-utilized.

This is also a reason why companies affected by the crisis moved their head offices to England in order to make use of the advantageous turnaround procedures available under British law. German legislators reacted by bringing in the insolvency code.

The current law offers adequate opportunities to bring about a turnaround through insolvency without the shareholders losing their shares in the company or without the managers losing control of it either.

When insolvency proceedings evolve along classic lines, the management hands control of the company over to the insolvency administrator at the latest when the procedure is initiated, and from that time on the administrator decides whether the company will continue in business or whether it will be liquidated, whether contracts can (still) be fulfilled or whether contractual relationships must be terminated.  Suppliers and customers are possibly irritated and disconcerted to find themselves dealing with an insolvency administrator who is unknown to them and with whom they have no connection whatsoever, and vice versa. The insolvency then proceeds and frequently ends with the company either being liquidated or sold. In such circumstances the shareholders generally suffer a total loss.

But there is another way of doing things.