Cut Your Losses or Is There a Secret Solution to Insolvency?

Cut Your Losses or Is There a Secret Solution to Insolvency?

There are reports that there could be another economic crisis brewing. Whether this is truly the case or not, is another question, however, Lawyer Monthly decided to discuss with insolvency practitioners Dr Franc Zimmerman and Knut Rebholz about the Great Recession, what we learnt from it, how it affected Germany and how companies can tackle insolvency and restructuring.


As an expert in insolvency and bankruptcy, what is the current state of Germany’s insolvency landscape?

After the Great Recession, which began in 2007 and in 2008 with repercussions that were felt in Germany, it was generally to be expected that many German companies would have to declare bankruptcy. Rescue packages were created and rescue measures were taken, not only by the German Federal Government, but also internationally, to avoid a complete collapse of the worldwide economic system. In the course of this, Germany has amended the insolvency reason of over-indebtedness in insolvency law, as they were worried that due to the effects of the economic crisis, many companies would be over-indebted and disappear from the market and consequentially the impact of the international economic crisis would have catalytic effects.

This international economic crisis was triggered by a sort of “snowball system”, which was essentially combatted with future counter-financing measures. The feared effects did not arise in Germany due to the stabilisation measures introduced by the Federal Government and on account of the prevailing interest policy, which was introduced to accompany the rescue measures. The counter-financing measures currently take the form of attractively priced loans, which means that the German economy appears to be prospering through “cheap money”; the number of insolvency proceedings has been continuously decreasing for years, from which the effects of the aforementioned measures can be seen. However, one must also pose the question as to where the money on the market provided by the state through the stabilisation measures comes from. If one poses this question, it is quite probable to assume that a new snowball system was created which counter-finances the old snowball system, which caused the Great Recession. In many cases, properties in Germany are currently sold clearly above their market value, which on the one hand documents that the value attributed to money is no longer in line with actual values, and on the other hand so that many investors can try to secure their money at least partially through (supposedly safe) investments.

As a result, we are of the opinion that currently – in contrast with what appears outwardly – there is an unstable economic situation in Germany, as the boundary conditions were created “artificially” and the number of insolvency proceedings will increase, at the latest once the interest policy changes.


Are insolvency and bankruptcy levels beginning to decrease now that the economic recovery is gaining momentum?

Yes, the number of insolvency proceedings has been clearly going down for some years now. Even small and mid-sized companies which cannot present any concept for the future, profit from the general economic conditions in Germany currently prevailing. They often also receive funds from private investors who invest generously in search of a better interest for their existing funds and therefore keep so many companies afloat which would not be able to survive from the yields of their own business operations.

Parallel to this, the German Insolvency Act 2012 attempts to emulate restructuring procedures similar to the US Chapter 11. To this end, the Insolvency Act introduced the possibility of the so-called (preliminary) self-administration (sections 270a, 270b Insolvency Act/InsO). This in particular means that the company itself retains control over its actions and there are no restraint risks as in the classical (preliminary) insolvency proceedings, as no (preliminary) insolvency practitioner is appointed by the insolvency court, which then alone and without influence of the company has the power of disposition, but a so-called insolvency administrator who acts as a control person on behalf of the creditors. This however requires that the company itself can prove that it has expertise in insolvency law, which usually is only possible by contracting or integrating qualified consultants, who in the case of larger companies often either work as chief representatives, or even take up a position in the board as CRO (Chief Restructuring Officer). This type of procedure requires an active preparation incorporating the creditors who, during the formation of a preliminary creditor committee reflecting the creditor structure, must also legally be able to determine the insolvency administrator whom the insolvency court uses to uphold the creditors’ interests.

As a result, these days predominantly large companies try to position themselves on a future-orientated foundation with the tools of (preliminary) self-administration provided by the Insolvency Act and to free themselves from old liabilities. The procedures in accordance with sections 270 a, 270 b Insolvency Act are very appealing and effective as they offer the opportunity of executing the procedure quickly and mostly without a great deal of public attention.

Currently, the greatest challenge is struggling to attain the so-called tax exemption for recapitalisation gains. Usually at the end of such a restructuring procedure, there is an insolvency plan solution: in other words, a kind of arrangement with the creditors involving the creditors foregoing part of their claims. When creditors forego their claims, generally there are accounting profit results, which then has to be taxed. The German Federal Ministry of Finance had made (supposedly) binding provisions in 2003 and 2009, in which the tax on recapitalisation gains in restructuring cases governed by insolvency law was waived; however, the Federal Fiscal Court decided in 2017 with convincing arguments that the German Federal Ministry of Finance was not appointed or legitimised to do this due to the separation of powers in force in Germany. This decision clearly set back Germany overnight – although Germany was on the right path and was able to compete in Europe from a restructuring law viewpoint. The German legislator has in the meantime correspondingly adapted a bill with the same goal, but now European legislative questions also play a decisive role, so that the planned law is currently being reviewed on a European level. It is clear that restructuring can generally only succeed if the creditors waive their old claims and it is therefore necessary that the question of tax on recapitalisation gains is clarified soon as, otherwise Germany will be unattractive as a restructuring location and – generally – as a business location. However, in our opinion, there is reason to be hopeful, as one cannot deny the fact that every restructuring is cheaper for the creditors involved and the state as “involuntary creditor” than the liquidation of the company, as the state is left with a company which still pays taxes after the former has been restructured. Furthermore, the state does not have to bear the risk of unemployment of the employees working in the company in question.


What are the key pieces of advice you give your clients in order to avoid insolvency?

There is no blanket answer to this question. There are statistics which try to work out reasons for bankruptcy. In actual fact, every company is different. There are companies whose existence is overtaken by developments and others which fail due to poor management. What we often see in our day to day work is that action is often taken too late (in some cases considerably) on the management level and market changes are simply ignored. Special attention must be paid to digitalisation which partially involves high costs which are often avoided as an investment, even in profitable times. This can result in companies being left behind unable to catch up.

Every entrepreneur lives from hope. The entrepreneur must always hope that the next day a customer will order services or its products. From this situation many entrepreneurs, directors or board members often recognise too late that a crisis situation has already arisen. An accurate, on-going and critical appraisal of the order books could prevent this. Frequently, the key figures are very heavily involved in the operative processes themselves, so that often they cannot find time to take a step back and objectively focus on the company and its situation. If there are any doubts, we advise getting an expert opinion as early as possible, especially as restructuring options generally decrease proportionally.


How has the insolvency environment altered since you began your career?

When we started working in the mid 90s as associates, there were only a very few law firms specialising in insolvency which had started and completed bankruptcy cases under restructuring aspects. The standard practice back then was to close and wind up the companies without even considering or checking the option of restructuring. In the past decades this led to a negative association of the image of insolvency practitioners.

We have considered this to be the wrong approach for ages. At the end of the 80s, the persons after whom our law firm is named already began keeping companies afloat in the course of the insolvency proceedings and preserving them as part of a transferred restructuring resulting from the insolvency proceedings. After all, if a company is shut down, this results in shut-down costs being incurred which indirectly affect the interests of creditor satisfaction, as these costs have to be met upfront from the existing funds. Right from the start it was thus our top priority to avoid the shutting down costs by keeping the business afloat, and additionally to create the foundations for the players involved to continue to pursue lucrative business operations with the (previously insolvent) company. This was a new concept for the parties involved in the respective process at the time. It was, however, mostly convincing and in the meantime has become the goal of the proceedings today in Germany. A change has taken place here from purely winding up a company and shutting it down to a restructuring culture which is also evident in the fact that, in particular, the (preliminary) self-management procedure is also used positively as a strategic restructuring instrument.

The market for insolvency practitioners has also completely changed. There has been a complete change from a relatively small-scale system to an open market system. The number of insolvency practitioners has almost increased ten-fold. At the end of the 90s, there were approx. 200 insolvency practitioners in Germany. Today, the number of practitioners registered at the insolvency courts is around 2,000. Due to the increased number of practitioners, the number of cases which have decreased are more widely distributed, i.e. the number of cases processed by a practitioner is going down. An important change has in particular resulted through the amendments to legislation with the introduction of the Act on Simplification of Corporate Restructuring in the Insolvency Act, which especially facilitates access to the special form of procedure of the (preliminary) self-administration and has thus strengthened the latter. Particularly in these cases, insolvency proceedings which are consciously initiated as restructuring procedures, are no longer issued fully independently by the insolvency court. The reorganisation and restructuring consultant are responsible in this case to create the preconditions for executing the procedure in co-operation with the creditors and thus can also influence the appointment of the insolvency administrator.

The acquisition point for the practitioners and insolvency administrators, especially for the complex procedures, has thus moved from the courts to the aforementioned parties involved.


How often is restructuring a viable route for companies in trouble? Are there any situations in which restructuring is definitely not an option?

Basically, every company can be restructured if there is a market for the product the company is selling or the service it is offering. There are industries which are no longer capable of surviving in the future. Hardly anyone buys a typewriter these days; it has been taken over by computers. But in a number of cases, the companies do not know themselves well enough and do not concentrate on their strengths. It is then a question of highlighting and focussing on these strengths. Frequently enough, thanks to an objective external perspective, the intrinsic strengths of the company can be brought to the forefront, whereby the management and employees are sometimes surprised what unique selling point and market opportunities their company actually has, of which those involved were not aware.

However, there are also companies which do not have this and have no economic justification to exist. They are then not capable of being restructured and not worth being saved – even if often an attempt is nonetheless made. One has to be able to recognise this situation too. To this extent, the insolvency proceedings are still a market shake-out tool.


Mr. Rebholz, what has been your most challenging case so far and why? How did you overcome such challenges and how did it shape your future in law?

In the last two years two cases spring to mind: a German manufacturer of lightweight aircraft, once a market leader with more than 2,000 planes sold worldwide. Here many factors came together: the production facilities with originally 600 employees had been located in the Ukraine since the mid 90s and had suffered badly under the political developments of the past few years. Added to this were strategic errors by the management, who had got involved in various projects and whose financing were not fully secured in the end. This had repercussions on its core business and led to extreme losses. In this case I was able to gain a lot of experience with contractual partners in the international field, in addition to almost all European countries also in Asia, the Arab countries and South America. This was equally due to the preparation for the transfer solution subsequently implemented being an enormous challenge on account of the complex regulations applicable to the authorisations required by manufacturers imposed by the European Air Safety Association EASA.

I also had to process several cases in the renewable energy field, especially for companies which operated biogas plants, including one of the most powerful individual plants in Germany. I was very surprised by the high loss in value of such plants. Due to the many subsequent investments which still had to be made buyers were often only prepared to pay 10 to 20% of the financing volume still outstanding as the purchase price for this type of plants, irrespective of the revenues secured by legislation.


Dr Zimmermann, as co-author of “Continuing operations in bankruptcy”, can you share ways in which businesses can make the most out of a bad situation such as bankruptcy?

As an insolvency practitioner and restructuring consultant, one automatically thinks differently than the management level of companies and also differently than the creditors affected by the crisis situation. There really isn’t a bad situation per se, unless of course the management/the board is unable to acknowledge that there is a crisis situation. If the management bodies react too late then consecutive valuable restructuring options are lost. Getting an expert opinion in good time does not do any harm and can make a big impact as relevant measures to get the company out of the crisis can be introduced in good time. According to the relevant statistics and experience in our law firm, the impending crisis situation is recognised by the managers and boards with a time delay of 1 to 1.5 years. This is far too late and means that many restructuring options which would have been available before an insolvency situation arose can no longer be implemented due to the time schedules. This on the one hand is certainly due to the pride of the management and that they want to get it sorted themselves, and on the other hand, because they are scared of what the liability issues could result for the management. However, it is often misunderstood in this situation that if professional counselling and support is obtained in good time, the restructuring can be optimally executed on the one hand and on the other hand, the feared liability risks of the management level do not even ever arise.


Bankruptcy and restructuring is often a dreaded side effect for business people; what motivates you in the area of insolvency law in order to help your clients?

Of course no one wishes an insolvency scenario. Nevertheless, how an insolvency situation is dealt with is heavily determined by culture. Insolvency scenarios are a mandatory and necessary part of any credit-based or business-based society. Did you know that there were already tools in place to clean up insolvency situations in the Roman Empire approximately 2000 years ago? Our society, which is generally geared towards success, has made insolvency a fail which everyone wants to avoid. But if considered correctly, an economic crisis is a logical consequence of a market economy based on performance and competition. The crisis situation which has arisen is not the goal pursued by the management, but a necessary risk for progress and development. Thus, it is motivation enough to help those who have consciously taken this risk and have tried to get things moving and advance them, factors which are a prerequisite for progress and future developments. It is inconceivable to move forward into the future socially and technically if there is no-one willing to take entrepreneurial risks. This would lead to a standstill. Thus we understand the protagonists and, in order to secure the future, try to do our utmost to maintain what has been reached. For example, Dr Zimmermann had an insolvency case where the insolvent company had developed totally new technologies in the field of reading devices for the blind and generally in the text recognition field and without a doubt was essentially operating on a future-orientated basis. It would have been destructive if the knowledge and these technologies would have been lost by the company being shut down.


Dr Franc Zimmerman and Knut Rebholz


Dr Franc Zimmerman and Knut Rebholz are partners at the liquidation law firm Mönning Feser Partner which is backed by more than 30 years of experience.

Dr. Franc Zimmermann: Lawyer, Insolvency Practitioner, Sequestrator, Restructuring Consultant, Specialist Lawyer for insolvency law

“I have been working as an insolvency practitioner for around 10 years now, nationwide for more than 10 insolvency courts and additionally nationwide as consultant in insolvency-related questions and as a restructuring consultant. I can draw upon experience from more than 1000 insolvency cases which I have processed and my efforts are targeted at working towards restructuring solutions in suitable cases.”


Knut Rebholz: Lawyer, Insolvency Practitioner, Sequestrator, Specialist Lawyer for insolvency law and labour law

“I have been working for around 15 years as an insolvency practitioner on a cross-regional basis from our Berlin office and additionally nationwide as a consultant in insolvency law questions and in restructuring. I have processed more than 1,000 insolvency cases in all different sizes attempting to keep companies afloat which are capable of being restructured and enabling them to stay in business.”


Our law firm is known throughout Germany and sought after in restructuring cases. This is partly due to the fact that our firm’s philosophy is aimed at restructuring companies in danger of going into insolvency or which are about to become insolvent. The key to our success is that our efforts focus on providing a comprehensive, far reaching and sustainable service for each client. We analyse and optimise corporate workflows taking into consideration the economic framework conditions on a cross-industry basis. Smaller companies are advised with the same care and expertise as larger ones.

The insolvency practitioners who work for us are certified pursuant to the Principles of Correct Insolvency Administration, ISO 9001 for insolvency practitioners as well as to ISO 9001 2008. Based on the number of bankruptcy cases processed, Mönning Feser Partner with its 13 branches and around 85 employees is one of the top ten German insolvency administration law firms.

Additionally, we provide counselling in all commercial law-related problems.

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