The legal basis for insolvency law is the Insolvency Code. According to this, an entrepreneur or managing director is subject to the legal obligation to file for insolvency immediately, i.e. without culpable hesitation, if insolvency occurs. In the case of the most common reason for insolvency, insolvency, the maximum period is three weeks. If the reason for insolvency is over-indebtedness, the deadline is six weeks.
To take advantage of the maximum periods, the management must therefore take recognizably suitable measures to avert insolvency, such as
- credit discussions with the bank,
- Discussions with potential investors,
- Negotiations on creditor waivers or deferrals,
- Generation of other liquid funds
- and the like.
What happens if SMEs miss the deadline for filing for insolvency?
If the company has failed to file for insolvency within the deadline, it is in what is known as delayed filing for insolvency, for which the relevant point in time is when the reason for insolvency occurs - and not when it is established. The management is personally liable for all payments made after the occurrence of the reason for filing for insolvency that were not absolutely necessary to maintain business operations. Insolvency administrators regularly analyze whether the insolvency occurred significantly earlier and whether the insolvency application was filed late. In order to avoid personal liability, entrepreneurs and managing directors should therefore always keep an eye on the economic situation of the company and check for possible grounds for filing for insolvency or entrust this check to an experienced restructuring expert.
To prevent this from happening, it is important to regularly check the most important key figures for impending insolvency. The following four measures are suitable for this:
1. Detect any over-indebtedness.
Low equity and a low equity ratio can be an initial indication of impending insolvency. In particular, equity that has already been used up, also known as negative equity, is a very clear warning sign that over-indebtedness already exists in most cases. Such balance sheet over-indebtedness should prompt the management to carry out further checks.
Since the financial crisis, over-indebtedness has been linked to a so-called negative going concern forecast: the inability to maintain the company's liquidity for the current and following financial year. The current forecast period for this is twelve months. If solvency is at risk during this period and the company is not expected to continue as a going concern (negative going concern forecast), the company's assets and liabilities must be revalued at liquidation values - which in most cases leads to a negative balance (negative net assets) and thus to over-indebtedness under insolvency law.
In contrast, a positive going concern forecast exists if the company is solvent throughout a period of currently twelve months and can meet its liabilities as they fall due. To avoid personal liability on the part of the management, it is advisable to consult a restructuring consultant with experience of insolvency to clarify this issue.
2. Exclude key date-related coverage gaps.
An insolvency exists if the company can pay less than 90 percent of the liabilities due within three weeks. This is a reporting date-related consideration of the liabilities due on one day in relation to the liquid funds available on the same day (including free overdraft facilities). The choice of cut-off date is not insignificant as, for example, on the due dates for wages, social security contributions, sales and payroll taxes, there must usually be considerably more liquid funds available to cover these due liabilities than on other days. Partial servicing of due liabilities due to base effects can also have a significant impact on the amount of the calculated coverage gap. The correct recording of data and its evaluation therefore require specialist expertise.
3. Review ongoing liquidity planning.
An imminent insolvency exists if it can be recognized at an early stage that an insolvency will occur in the future - for example, because loans due cannot be repaid on time or expected losses threaten to consume liquidity. The early detection of insolvency is therefore carried out in particular via the ongoing planning of liquidity and the monitoring of solvency. As with the forecast period for the going concern forecast, it is advisable to regularly prepare and update weekly liquidity planning over a period of at least twelve months. In order to avoid an incorrect procedure - and thus possible personal liability of the management - it is also advisable to commission an experienced external restructuring consultant for this purpose.
4. Watch out for symptoms of crisis.
In principle, a corporate crisis can be divided into six different phases:
Stakeholder crisis,
Strategiekrise,
Product and sales crisis,
Success crisis,
liquidity crisis and
insolvency maturity.
An SME does not always go through all crisis phases, or at least does not always perceive them as such during the course of the crisis.
The early detection of risks is possible, for example, through the regular collection and monitoring of key figures:
declining sales, shrinking margins and gross profits, rising cost ratios in relation to sales, etc. are already signs of a success crisis.
Declining sales figures, the loss of important customers or submarkets and a lack of product pipeline are indicators of a product and sales crisis.
A strategic crisis manifests itself, for example, in a lack of or incorrect realignment of the company in the face of changing markets and environmental conditions or new competitors entering the market.
And what if restructuring is actually necessary?
The type of restructuring of the company depends primarily on the crisis phase it is in. Experience shows that company crises only become apparent from the success crisis onwards. Management often only recognizes them as such from the liquidity crisis onwards. The choice of restructuring instruments also depends on whether there are grounds for insolvency - or not. Which instrument is possible and sensible in a specific case is also determined by the causes of the crisis that need to be resolved. Due to the complexity and the prerequisites for occurrence, only experienced experts who can adequately assess the effects and impacts of the various procedures should make an independent assessment.
Can the company be restructured during insolvency?
If there is a need for operational restructuring in the event of insolvency, such as staff reductions, site closures, termination of loss-making contracts, termination of rental and leasing agreements, etc., the operational restructuring may be necessary, the own administration procedure and the protective shield procedure should be examined as proven options. Both are linked to the initiation of insolvency proceedings. Over-indebtedness and imminent insolvency are standardized as grounds for insolvency for protective shield proceedings, while insolvency that has already occurred is also standardized for self-administered insolvency. In both types of proceedings, the management retains the power of disposal over the company. Instead of an insolvency administrator, the court only appoints a so-called administrator to supervise the company.
How long do self-administration proceedings or protective shield proceedings take?
Both self-administration proceedings and protective shield proceedings are ideally concluded with an insolvency plan at the end of the insolvency proceedings. As the debtor, the SME offers the creditors a quota on their claim in the form of a settlement. The average duration of the proceedings for both variants is six to nine months. In very simple cases, proceedings can be concluded after four to five months. In the case of difficult creditor negotiations, however, the duration can increase to a year or more.
