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Insolvent shoe retailer Görtz:
Self-administration for restructuring
Photo: Maja Hitij / dpa
manager magazin: Mr. Grell, there are a number of prominent insolvencies these days: the toilet paper producer Hakle, the shoe retailer Görtz, the car supplier Dr. Cutter. Are these harbingers of a wave of bankruptcies?
Frank Grell:
I'm careful, you can talk something like that up.
We are in a very special situation.
And we must not fall into an apocalyptic mood just because there are more bankruptcies.
Bankruptcy does not necessarily mean the end of a company.
The protective shield procedure and insolvency under self-administration are restructuring instruments.
Protective shield proceedings and insolvency under personal responsibility, what does that mean?
In conventional insolvency proceedings, the court appoints an insolvency administrator from outside, who also assumes operational responsibility in the company.
In the cases mentioned here, management retains control of the company.
It is only assigned a court-appointed trustee who, in the interests of the creditors, makes sure that everything is running smoothly.
Companies can apply for this form of insolvency before they become insolvent. An impending insolvency is sufficient. In the face of threatening economic difficulties and a possible coming recession, could it be an option for companies to take refuge in early insolvency as a precautionary measure?
We need to look at why a company slips into bankruptcy.
At the moment, many companies have two main problems: energy prices have risen extremely - and buyers are holding back.
The result is a lack of liquidity and protective shield procedures or self-administration are tried and tested means of bridging this difficult time and tackling restructuring.
Such insolvency is not necessary for companies whose problem is over-indebtedness, which can use the StaRUG, for example.
The StaRUG - or long: Corporate Stabilization and Restructuring Act - is the new non-insolvency restructuring procedure that was introduced on January 1, 2021.
What is the difference between the protective shield procedure and self-administration?
In the protective shield procedure, the company can propose the external administrator itself, while this is determined by the court in simple self-administration.
In practice, however, this difference plays only a minor role.
It is always important to have a trustee who knows the business and industry and has experience in the field.
The management of the company and the court will attach equal importance to this.
That almost sounds as if a protective shield or self-administration are generally preferable to conventional insolvency proceedings?
"Insolvency does not necessarily mean the end for a company"
Yes, if the actual management stays at the helm, that naturally has advantages: they know the business, ideally they have the trust of the workforce, suppliers and customers.
However, it has to be said that the creditors also have to trust the management and agree to the procedure.
If they don't, the court can initiate conventional insolvency proceedings.
What are the requirements for insolvency under self-administration or in protective shield proceedings?
First of all – as I said – there must be a risk of insolvency.
This means that the company can still service the liabilities due today, but will run into insolvency in the next few months.
In order to choose a procedure in self-administration, one must also be sure that the management is also able to run the company under the special conditions of insolvency in self-administration or in the protective shield procedure.
To do this, you regularly need an expert who is brought in from outside and who complements the management.
Because for the actual management of the company, the operative business in the situation is already demanding enough.
You need an expert who knows the formal issues of insolvency and can work on them.
How is this continuing?
The management must show that it can act and work sensibly under the insolvency conditions.
You flee under the protective screen, that sounds easier than it is.
In order to gain the support of the creditors, one needs an idea of what to do in the bankruptcy proceedings.
An insolvency plan must explain: How do we restructure the company?
"You flee under the protective screen, that sounds easier than it is"
Can you give examples of how companies do this?
During the Corona period, many retailers were concerned with expanding their online presence.
You can also try to reorganize the financing structure.
In extreme cases, personnel measures are considered, which of course always involves painful interventions.
In order to think about and implement all of this, there is a period of three months during which the company also receives insolvency compensation from the state.
Rents for premises are also sometimes renegotiated as part of insolvency proceedings. In your experience, what is the significance of this option in practice?
That also plays a role.
There is no automatism, it has to be negotiated with everyone involved.
Our experience is that landlords are generally willing to talk because they don't want to lose their tenants, especially in difficult times.
However, one must not forget that landlords are not entirely free in their decisions either.
Often they have financed the property and need certain rental income to service their loans.
Further discussions with lenders may then have to be held there in order to adjust the financing structure.
At the moment, the problems facing companies are primarily about extreme energy costs that are overwhelming. It is unlikely that anything can be changed about this, even in the context of insolvency proceedings, the energy costs are externally specified.
In fact, the issue of energy costs is a task that must be addressed by politicians.
The bankruptcy process doesn't help.
However, the procedure helps to calm down other issues and, for example, to pause payment obligations.
The big problem is that companies are currently not only getting into difficulties on the cost side, but also on the sales side because we are reluctant to consume.
That makes the situation special at the moment.
The example of rents shows that creditors often have to make concessions as part of insolvency proceedings. To what extent is there a risk of contagion that could intensify a possible wave of insolvencies?
I think it's the job of politicians to get the issue of energy costs under control and to avoid such risks of contagion.
The fact that a contractual partner begins insolvency proceedings initially means that claims against him have to be reassessed.
This is an accounting issue and can certainly lead to over-indebtedness.
Here we see the legislator's plans to reduce the risk of over-indebtedness.
As far as the impact on liquidity is concerned, the problem is not so much that my contractual partner files for bankruptcy as that he can no longer pay for my goods.
In order not to get caught in a negative spiral, we have to get the cost issue under control in the current situation and improve buyer behavior.
that can succeed
Do you already see an increase in the number of insolvencies in your practice?
We see companies increasingly getting into trouble - because they have problems on both the cost side and the buy side.
We also see that the instruments of insolvency are being specifically examined in more and more cases.
Luckily, we are in the situation where the lenders are very understanding and willing to talk, so that the economy does not panic.
We are therefore not seeing any jump in the numbers at the moment.
And I hope that politicians can prevent the really big wave by taking the right measures.
Politicians are well advised to try to bring about stabilization.
The first measures are just becoming known: the federal government is planning to relax insolvency law. As you have already mentioned, the plan is to shorten the forecast period for over-indebtedness. Does that make sense in the current situation?
The shortening of the forecast period corresponds to a requirement of the TMA Turnaround Management Association Germany, an association of restructuring experts from a wide variety of professional fields, on whose board I sit.
As an association, we are pleased that politicians are acting in this way.
It makes the work of managing directors easier, especially in the current difficult situation.
After all, who can realistically say today what liquidity requirements a company will have to face in the next twelve months?
I welcome the plans because otherwise companies would have to go bankrupt unnecessarily.
Do you have any other suggestions to help companies get through the coming period better?
There are considerations to suspend the obligation to file for insolvency for a time, as was done during the Corona period.
Personally, I am not a big fan of such measures.
If a company is insolvent, this must result in a bankruptcy filing.
We cannot afford to have companies in the market that are insolvent on a large scale.
You are addressing a problem: Certain measures are also used to help companies that may be in difficulty regardless of the current situation and would have to go bankrupt. How great is this danger?
Of course, you have to consider whether you are protecting the right companies or the wrong ones.
But we are in a situation where we have to decide on measures like shortening the forecast period.
Even if a company that actually should have filed for insolvency actually benefits from this, we have to accept that.
In any case, we prevent a large number of companies that are actually healthy from being forced into bankruptcy proceedings simply by the volatility of the market.
If we then implement the further requirement of the TMA that management aligns its decisions with the interests of the creditors in the crisis, as in the Anglo-Saxon shift of fiduciary duty, then we have an additional corrective against exploiting the new regulations.
