What to do if you are threatened with insolvency?

Dusseldorf Steffen Müller and his team are used to looking into the future. At least when it comes to the development of corporate insolvencies in Germany. At the Leibniz Institute for Economic Research Halle (IWH), where Müller heads the Structural Change and Productivity department, the experts have developed an early indicator that very accurately predicts month after month what the official statistics usually only show with a delay of eight weeks: how many Partnerships and corporations recently had to give up for economic reasons.

Looking ahead to the next few months, Müller is not expecting anything good: “The number of insolvencies will continue to rise noticeably. In November 2022, we are likely to return to the level before the corona pandemic,” the expert estimates. For the year as a whole, the IWH is forecasting growth of 12 to 14 percent compared to 2021. In the first half of 2022, the figures were still slightly below the level of the previous year.

But there is currently hardly a company that is not working in crisis mode. A current study by the industry association BDI comes to the conclusion that, in view of the increased prices for energy and raw materials, a good third of medium-sized companies in Germany are at risk of surviving.

In this situation, the first priority for those responsible for the company is forward-looking liquidity planning. If you have a good financial warning system in place, you can recognize when things are getting tight and react in good time – for example with tightened receivables management or adjusted payment terms.

But what if these classic, tactical measures are not enough to create sufficient liquidity? “In a situation like this, it is important to look not only at internal financing but also at external financing options,” says Tillmann Peeters, Managing Partner of the consulting firm Falkensteg.

He is thinking, for example, of real estate sale-and-leaseback transactions or the complete sale of land that is currently not required. While you’ll rarely get the best price if you have your back against the wall, it’s all about survival first.

Peeters believes that little support can be expected from banks in such a mixed situation: “Credit institutions need detailed reports and positive going concern forecasts if they are to provide additional funds to a company in crisis.” This was different in the corona pandemic. The federal government took on a lot of risks.

>> Read here: Banks prepare for hard times

Larger companies with correspondingly high capital requirements have the option of doing business with a debt fund, i.e. a fund that grants loans. This alternative financing option outside of the banking environment has experienced a strong upswing in recent years. However, it may not be a cheap option for getting liquidity. But the same applies here: In the greatest need, nobody can afford to be choosy.

Some firms may also be experiencing for the first time how rising energy prices, extreme inflation, and rising wages and lending rates are eroding earnings. According to Peeters, however, only a few have so far sought external expert advice on how to overcome the crisis: “Most companies are convinced that they can navigate the cliffs on their own. In addition, they don’t want to spend money on consultants at a time when savings are the order of the day.”

The expert recommends that companies that get into difficulties also consider the option of restructuring by means of insolvency under self-administration in good time. In this case, management remains in control and guides the company through the process. Instead of an insolvency administrator (as in the standard procedure), the competent court only appoints a trustee who assumes a control and supervisory function.

Calculate the lead time

Insolvency under self-administration is particularly promising for companies with a well-functioning business model that have only gotten into difficulties as a result of unforeseen, temporary events. Early preparation for self-administration is crucial for the success of such a procedure.

The reorganization concept must show how the company is to be continued and financed at least for the next six months. “If you fight to the last bullet, you lose valuable time. In the worst case, he runs the risk of being guilty of delaying insolvency,” explains Peeters. Even in the best case, 14 days should be calculated for the preparation of the application for self-administration.

Since the beginning of 2021, ailing companies have also had the opportunity to go through their restructuring without going through insolvency proceedings. The law on the stabilization and restructuring framework for companies, StaRUG for short, wants to show companies solutions that are likely to become insolvent in the near future despite a viable business model. Together with a restructuring officer appointed by the court and the creditors, they draw up an overall settlement that must be accepted by the majority of the creditors.

Compared to insolvency proceedings, however, the options for action here are limited. For example, the StaRUG does not offer the possibility of freeing oneself from longer-term obligations (e.g. rental contracts) or downsizing. Therefore, consultant Peeters considers this instrument only suitable for cases in which a company cannot service financial debts. “But that’s rarely the case in the kind of crisis we’re headed for now. However, the time for the StaRUG will come when interest rates remain high and companies can no longer meet their financial obligations,” he predicts.

Whether and to what extent the federal government will expand its aid measures for ailing companies in the coming months cannot be foreseen. Justice Minister Marco Buschmann (FDP) recently announced a small relief for companies at risk of insolvency: in future, when checking for over-indebtedness, those responsible will only have to prove that they can continue their company for four months. Before that it had been twelve months. This regulation will initially apply until December 31, 2023.

More: The number of bankruptcies varies depending on the industry