Companies in Insolvency: Toolbox for Restructuring

Ongoing Business Operations as a Starting Point

The Insolvency Code provides numerous instruments for restructuring companies. However, this requires continued business operations after filing the application, as only ongoing business operations can serve as a starting point for changes. For this purpose, the Insolvency Code provides the necessary framework conditions: For example, discontinuation after filing for insolvency should only occur under strict conditions and generally be reserved for the decision of the creditors' meeting after the opening of proceedings. Additionally, with the advance financing of insolvency payments, the (self-)administrator has a liquidity-effective tool at their disposal to temporarily maintain business operations.

Operational Restructuring Instruments

Termination of Tenancy Agreements

In insolvency proceedings, the (self-)administrator can terminate long-term obligations with a maximum notice period of three months. This applies particularly to rental agreements for real estate or premises, even if the lease agreement provides for a longer contract duration.

Other Long-Term Obligations

For reciprocal contracts that have not yet been fully fulfilled, such as unprocessed purchase agreements, ongoing leasing contracts, or long-term energy supply contracts, the (self-)administrator, in German called Eigenverwalter, can choose between fulfillment or non-fulfillment of the contracts. If he chooses non-fulfillment, the contract is considered terminated. In this case, the contractual partner can only register any damages as an insolvency claim in the insolvency table. If the (self-)administrator chooses to fulfill the contract, the contract will continue.

Note: The contractual partner cannot terminate the contract themselves. They can only request the exercise of the right of choice. In this case, the silence of the (self-)administrator is considered a choice of non-fulfillment.

Contractual agreements granting the contractual partner a special termination right in insolvency are invalid to protect the insolvency estate, Sec. 119 InsO. This is intended to prevent insolvency from being used to terminate contracts and deprive the company of its foundation.

Job cuts easier to implement

In insolvency, personnel adjustments can be implemented more easily. For example, the notice period for employment contracts is limited to a maximum of three months, even if the actual notice period (contractual or statutory) is longer. While operational changes (such as workforce reductions and corresponding dismissals on a significant scale) remain subject to co-determination, social plan compensations are capped twice and amount to a maximum total of up to two and a half months' wages for the affected employees. If no insolvency plan is established, no more than one-third of the distributable insolvency estate may be used for social plan claims.

Financial Restructuring Instruments

Once operational measures are implemented during insolvency, the financial aspects must be addressed. Debt is often a factor triggering insolvency, whether due to short-term, uncovered liabilities (insolvency) or structural over-indebtedness. Additionally, the implemented operational measures may increase the level of debt.

Transferring restructuring and the insolvency plan can be used to restore profitability (income statement) and reduce debt on the liabilities side (balance sheet).Transferring Restructuring

In transferring restructuring, the assets (assets) of the operationally restructured company are transferred to a new legal entity through an asset deal. The liabilities remain with the insolvent legal entity. As a result, the insolvency estate receives a purchase price, which is distributed proportionally to creditors after deducting procedural and ongoing operating costs (estate liabilities).

Contracts - except for employment contracts in the context of the so-called business transfer - do not automatically transfer to the new legal entity in an asset deal. Contract transfer requires the consent of the contractual partner, making transferring restructuring cumbersome and sometimes even impossible.

Restructuring through an Insolvency Plan

Alternatively, restructuring can occur through an insolvency plan. In this case, the legal entity itself is restructured. In the context of an insolvency plan, creditors and the debtor agree - in simplified terms - on a quota payment. The insolvency plan is a complex document consisting of a descriptive part and a formative part. It must be presented to creditors (and possibly shareholders) for a vote in a court hearing and voting session.

The insolvency plan requires majorities - unanimous consent of all creditors is not necessary. Creditors vote in groups. Within the groups, both the majority of creditors (headcount majority) and the majority of claims (sum majority) are required. Generally, the consent of all groups is necessary, but at least the majority of groups. In exceptional cases, the court can replace the consent of individual groups (so-called obstruction prohibition). Individual creditors can only oppose the plan if they are worse off due to the plan. For this reason, the insolvency plan must include a detailed comparison calculation that transparently demonstrates that creditors are not worse off due to the plan.

The creditor majority can also decide on corporate measures in an insolvency plan and bring about a change in the shareholder structure. After a legally binding insolvency plan, the court lifts the insolvency proceedings, and the legal entity restructuring is completed.

Conclusion

Even though the best crisis is the one that can be avoided, it may still happen that insolvency becomes unavoidable. This does not mean the end; rather, it can open opportunities to strategically reposition the company. Understood in this way, insolvency can also offer the possibility of a second chance.