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Protective shield procedure as an alternative to emergency loans
25. Juni 2020
Protective shield procedures, self-administration and an insolvency plan offer sensible solutions for financial restructuring. We present a protective shield procedure as an alternative to emergency loans.
There are various measures to help companies during the crisis. Over the past few weeks, we have presented different options to you on our website. In addition to the KfW fast loan, you can, for example, apply for deferral of your tax prepayments or social security contributions. Deferral of rent and lease payments is also an option in times of crisis.
These measures can secure short-term liquidity and are therefore suitable crisis instruments.
Deferrals result in higher financial burdens after the crisis
However, in the medium to long term, the deferred funds are to be paid of course.
This means a higher burden at a later date, as you will then have to pay the deferred contributions together with newly accrued ones.
You can save yourself this double burden by using a protective shield. We present the protective shield procedure as an alternative to emergency loans.
Restructuring as a possible solution
The current support measures are mainly limited to the procurement of liquidity. However, some companies may not be able to generate the required funds in the future for the additionally raised loans during Corona times. Therefore, the question arises for entrepreneurs and management as to how the emergency loans will be repaid after the acute crisis.
Financial restructuring measures will play a greater role in the future. Protective shield, self-administration and an insolvency plan are suitable instruments for restructuring the liabilities side (equity and debt capital of the company) to maintain the company.
The national legislature has thus created the possibility of using the restructuring tools of insolvency proceedings without transferring corporate control to an insolvency administrator.
Protective shield procedure and self-administration
Protective shield procedure
The protective shield procedure is only permitted if the company is not yet suffering from acutely illiquid, but merely threatened to become illiquid.
In consultation with the creditors involved, the protective shield procedure allows to develop a restructuring concept within three months, which can be implemented within a short period of time in cooperation between the company, the solicitor and the court.
If illiquid has already occurred, self-administration is possible.
In the procedure of self-administration, the time-limited requirements of the protective shield procedure do not apply. It is also possible to perform self-administration if illiquid has already occurred, e.g. because current account credit lines (credit lines granted to bridge liquidity bottlenecks) have been exhausted, state aid has not been accessible or customers are also in difficulties.
Differences between Protective shield procedure and self-administration
Protective shield procedures and self-administration differ from the classic regular insolvency proceedings. The difference here is that management retains control of the company and also of the entire restructuring process. The management remains in charge, the shareholders retain their rights of control and participation. An insolvency administrator is not appointed.
The court-appointed solicitor merely monitors compliance with the legal framework. Operational decisions continue to be made by the management, which is supported by its own restructuring experts.
Liquidity relief through insolvency payments
Immediately after the court has ordered the provisional self-administration or the „protective shield procedure”, the conditions for the pre-financing of the insolvency compensation are regularly met.
Cooperation with specialized banks can secure payments of net wages and salaries within a few days, which are outstanding or due in the following months. This does not require the obligatory bank audit or additional securities that would otherwise be necessary.
In contrast to short-time working compensation, the insolvency payments cover 100% of the total net wage. The loan will be repaid after the opening of proceedings between the bank and the Federal Employment Agency. The company is relieved of wage and salary payments and thus noticeably gains liquidity.
Reduction of continuing obligations
With the opening of an insolvency proceeding, the company may choose which contracts it prefers to fulfil and which not, either in protective shield procedures or in self-administration. This enables the company to avoid unfavourable obligations and unprofitable projects at short notice.
Furthermore, shorter notice periods for employment relationships as well as specific regulations on the reconciliation of interests and social compensation plans often create room for required adjustments and renegotiations with employees and works councils.
In both cases, the management, together with its advisors, develops a restructuring concept for the company, which is incorporated into the insolvency plan.
Benefits of the insolvency plan
The insolvency plan serves to present the economic situation of the company and regulates the legal framework of the individual reorganization measures, the satisfaction quotas of the respective creditor groups and the conditions for the termination of the proceedings.
The creditors, working in predefined groups, vote on the submitted insolvency plan, which is then confirmed by a court.
This way, liabilities can be regulated in a sustainable and legally secure manner, even if individual creditors express opposition.
Regulations of the insolvency plan
The regulations of the court-approved insolvency plan are binding for all creditors.
In most cases, the company will remain in the existing ownership or shareholder structure. In other cases, new shareholders will join the company, e.g. by converting debts into participations through so-called debt-equity swaps or by new investors entering the company.
The company itself develops the appropriate solution for the respective situation.
Asset deal – a concrete alternative
If an insolvency plan is unable to be implemented, the takeover of the entire business, already restructured in self-administration or protective shield procedures, or the takeover of profitable sections of the business in the form of an asset deal often becomes a concrete alternative.
A company which is newly established for this purpose purchases the essential assets with the approval of the administrator and the meeting of creditors. The new company is not liable for old debts and the paid purchase price is passed on to the creditors of the former company.
Financial restructuring under a protective shield or under self-administration will become increasingly important for restructuring of the liabilities side.
This applies both to operationally solvent companies that do not require performance-related restructuring measures and to companies which recognise the current situation as an opportunity for a sustainable reorientation.