Financial difficulty rarely strikes out of nowhere. In most cases there are signs for business-related difficulties or financial distress. The earlier that management, shareholders and board members recognise these signs and start taking steps to counter them, the better their chances are of either avoiding the crisis altogether or – if that is not possible – overcoming it successfully. Often a company’s first step is to attempt to reach an out-of-court settlement with its creditors. If an agreement of this kind is not or is no longer possible, insolvency in the form of self-administration (Insolvenz in Eigenverwaltung) presents good opportunities for reorganisation.
The major advantage of insolvency proceedings in self-administration is that the debtor’s management continues to hold the reins of the company and retains the power of disposal over the company’s assets during the reorganisation. Unlike in standard insolvency proceedings, companies in self-administration do not have an insolvency administrator. The management itself reorganises the company – often advised by a reorganisation expert acting as chief restructuring officer (CRO), who provides advice and operational support to them during preparation and implementation of the reorganisation. This reinforces confidence that self-administration will be handled properly and increases acceptance for the reorganisation among affected creditors.
Creditors’ interests are protected by the supervisor, who is appointed by the court and whose job it is to ensure compliance with the rules set out in the Insolvency Code (Insolvenzordnung, InsO) during insolvency proceedings in self-administration. Put simply, the role of the supervisor is to oversee the proceedings.
Essentially, self-administration enables a company to reorganise both its finances and its business – the notice periods for long-term contracts such as rental or leasing agreements are significantly reduced – under its own direction and make full use of the tools provided by insolvency law. During self-administration, employees also continue to receive their wages and salaries for up to three months in the form of insolvency pay.
Self-administration prevents the loss of product expertise and preserves business relationships on the market. Important contacts are maintained and so do not need to be laboriously re-established later on. Self-administration enables investors and customers to plan with greater certainty than with standard insolvency because it presents a clear route out of crisis. That makes it attractive for all involved.
If self-administration plans are well prepared and structured, a company can emerge strengthened from the proceedings.