Protective shield procedure

Legislators finally wish to help the process of self-administration gain acceptance so that, in an ideal scenario, and with the approval of the shareholders, the best possible use will be made of the knowledge and experience so far acquired by the company management, thereby avoiding the considerable expenditure of time and money needed to allow an insolvency administrator to become familiar with the specific case.

In the past, self-administration was very cautiously applied, mainly because the insolvent debtor had no way of knowing how the proceedings would go. In the time between the filing of the application and the institution of the insolvency proceedings, the insolvency court always appointed a provisional insolvency administrator, with sometimes far-reaching powers. It was not until the court reached a decision on the initiation of the insolvency proceedings, i.e. about two to three months later, that a decision was also reached on whether or not to order self-administration.  Not ordering it meant risking considerable negative economic effects on the further course of the insolvency proceedings, especially if self-administration had already been announced by the debtor at the time when the application for insolvency had been filed.

The ESUG [Act for Further Facilitating the Turnaround of Companies] simplifies the conditions for ordering self-administration. Now the creditors, via the committee of creditors, are included in the decision about ordering self-administration before insolvency proceedings are initiated. So-called provisional self-administration can be ordered already in the phase between the filing of the insolvency application and the initiation of the proceedings (Section 270a InsO [Insolvency Act]). Thus, the court makes a preliminary decision about ordering self-administration when the proceedings are initiated. As a result, this eliminates the legal uncertainty regarding whether or not self-administration will be ordered once the proceedings have commenced. If the provisional committee of creditors is unanimously in favour of the debtor applying for self-administration, the court cannot refuse this application, not even if the court is of the opinion that ordering self-administration will be disadvantageous to the creditors.

Protective shield procedure introduced

The new protective shield procedure (Section 270b InsO), which is another form of provisional self-administration and further reinforces the effects thereof, offers the debtor an independent turnaround procedure that can be used in the period between the application for an insolvency to be initiated and the actual initiation of proceedings. In response to an application to this effect and the decision of the court, a debtor is given a period of up to three months to draw up a turnaround plan, acting independently and without any enforcement measures being implemented, in a kind of “protective shield procedure”, under the supervision of a provisional trustee. This plan can then be used as an insolvency plan. According to Section 270b Para 1 Sentence 3 InsO, the condition that must be met before such a protective shield plan can be initiated is that the debtor submits, together with the insolvency application, a certified statement of reasons, prepared by a tax consultant, financial auditor, attorney, or a person with similar qualifications, who is experienced in insolvency matters. The statement must make it clear that insolvency or over-indebtedness is imminent, but insolvency does not yet exist, and that the attempted turnaround is not obviously futile. The protective shield procedure is greatly strengthened by the debtor’s right to create liabilities (Section 270b Para 3 InsO). He thus enjoys the same legal position held until now only by a powerful provisional insolvency administrator.

With the amendment to Section 270 InsO and the new regulations contained in Sections 270a, 270b InsO, a debtor who is willing to attempt a turnaround is better able to predict whether self-administration will be ordered. If the procedure is well prepared and it has the backing of the most important creditors, it is practically assured that self-administration will be ordered in the future. It can then not be prevented either by the insolvency court or by the provisional administrator.