Insolvency in self-administration: When nothing else helps

It is the nightmare scenario in the course of a corporate crisis: it is no longer possible to service the liabilities. Company insolvency is unavoidable. Then, according to the Insolvency Code, the only thing left to do is to liquidate the remaining assets and distribute the proceeds among the creditors. So far, so understandable. But many people don't know that there is another option. According to Section 1 InsO (Insolvency Code), it is also conceivable to make a different arrangement in an insolvency plan, in particular to preserve the company and thus give the honest debtor an opportunity to free themselves from their remaining liabilities. To be precise, this is insolvency under self-administration.
 

What is insolvency under self-administration?

A serious corporate crisis that cannot be overcome with conventional crisis management does not necessarily lead to the dissolution of the company. Rather, there is legal legitimacy for attempting to keep the insolvent company afloat for the time being: It remains on the market and is given the chance of a scheduled turnaround. Special arrangements of this kind essentially involve a partial payment settlement with the insolvency creditors, which the parties involved set out in an insolvency plan. In order to reach such a settlement, the creditors must of course be convinced that it makes economic sense to agree to a partial payment despite the company's insolvency. Under this premise, it is then possible to work on overcoming the company crisis with insolvency proceedings without an external insolvency administrator. Insolvency under self-administration does require a trustee who controls the process. However, the actual insolvency proceedings remain in the hands of the debtor in self-administered insolvency.
 

When does self-administered insolvency make sense?

Restructuring experts consider insolvency in self-administration to be particularly sensible when

• there is no prospect of overcoming the corporate crisis with traditional restructuring measures.
• succeeds in convincing creditors that the company and its management can be retained.

The advantage of insolvency under self-administration is obvious: on the one hand, it makes sense to draw on the existing entrepreneurial expertise, which is essential for successful turnaround management. Secondly, insolvency under self-administration is considerably more cost-effective than traditional insolvency proceedings. This is because the administrator does not even receive two thirds of the standard remuneration of an external insolvency administrator.

💡READING TIP💡
In our special topic "Ways out of the crisis", you will receive proven best practices and first-hand expert tips for reorganization, restructuring and turnaround. Download now!

Prerequisites for insolvency under self-administration

In principle, the debtor company in an insolvency crisis is granted the right to manage and dispose of the insolvency estate under the supervision of a trustee if the insolvency court orders insolvency under self-administration. However, two requirements must be met for this:

1. The debtor must have filed a corresponding application for the initiation of insolvency in self-administration proceedings.
2. There must be no known circumstances that suggest that the order could lead to disadvantages for the creditors.

In order to decide whether the second requirement is met, the insolvency court hears the provisional creditor committee. This committee must vote unanimously in favor of ordering insolvency under self-administration. At this point in the insolvency proceedings, the creditors must already be convinced that the company will be able to continue as a going concern and that insolvency under self-administration is to their advantage. To this end, it is essential that the management initiates suitable measures to reorganize the company.
 

Insolvency under self-administration: the course of proceedings

Proceedings for insolvency under self-administration essentially go through four phases: the application, the opening and main proceedings and the conclusion.

Application for insolvency under self-administration

First, the insolvency court decides whether the application for insolvency under self-administration is admissible. A decision must be made not only on the opening of insolvency proceedings, but also on the application for insolvency under self-administration. Among other things, the debtor company must provide the court with a list of creditors and their claims as well as the key financial figures for the previous financial year. Further details can be found in the ESUG (Act to Further Facilitate the Restructuring of Companies).

A preliminary creditors' committee is formed after the application for insolvency under self-administration is filed. Depending on the size of the company, this committee consists of three to five creditors and aims to protect the interests of the creditors and prevent individuals from being disadvantaged.

In order to decide on the application, the insolvency court not only checks whether the two aforementioned requirements for insolvency proceedings under self-administration are met, but also whether it is possible to open insolvency proceedings at all. Firstly, there must be a reason for insolvency, i.e. actual or probable insolvency or over-indebtedness. The opening of proceedings also requires proof that the existing insolvency assets are sufficient to cover the costs of the proceedings. If all requirements are met, the insolvency court opens insolvency proceedings under self-administration.

Opening proceedings: Building up liquidity

The actual insolvency proceedings serve to satisfy the creditors. To do this, the debtor company must first build up liquidity again. This is precisely what the three-month opening proceedings are intended for in self-administered insolvency. The crisis managers of the debtor company have various instruments at their disposal: In addition to acute restructuring measures, insolvency money and the assumption of all personnel costs by the employment agency help to build up liquidity.

Main proceedings: Satisfying creditors

After the insolvent company has regained its liquidity in the opening proceedings, the aim of the main proceedings of an insolvency in self-administration is to satisfy the creditors. To do this, they must first register their claims with the debtor. To make this possible for all creditors, the insolvency of the debtor company - and thus the company crisis that threatens its existence - is made public. The next step is to determine the creditors' claims as justified or recognized as disputed at an examination meeting at the insolvency court and to record this accordingly. In addition to the judicial officer of the competent insolvency court, the administrator already appointed is responsible for this.

Once all claims have been registered, the actual insolvency proceedings begin: the creditors decide in a meeting how their claims can best be settled. The debtor company must also report on the list of assets, the list of creditors and the statement of assets and liabilities. It should also try to convince the creditors of the viability of the company undergoing corporate insolvency. This is because the creditors discuss the report and vote on the further course of the insolvency in self-administration. If doubts arise at the creditors' meeting about the economic viability of the company as a going concern, the corporate crisis ends with a liquidation: the company disappears from the market immediately, the assets are sold and the proceeds are used to satisfy the creditors.

However, if the creditors consider a continuation to be sensible, they can decide against or in favor of the existing management. In the first case, there is a transferring restructuring, which ends the provisional insolvency in self-administration; the company is sold in the form of asset deals. In the second case, the creditors' meeting confirms the insolvency in self-administration. An insolvency plan must then be drawn up, which contains measures to restructure the company and satisfy the creditors. The fine-tuning of the insolvency plan can entail quite difficult negotiations. It can take several weeks before the insolvency plan is finally confirmed.

Conclusion of insolvency in self-administration

Insolvency proceedings in self-administration end with acceptance of the insolvency plan. The costs of the proceedings are paid and the creditors receive at least part of their claims. Once the final report has been submitted, the company can resume regular operations following insolvency in self-administration.

Is your company in the midst of a serious crisis? Don't hesitate to contact us. We will support you immediately in finding suitable interim professionals for an insolvency in self-administration!