Procedure for restructuring
Regarding the preparation of expert restructuring opinions, we take standard IDW S 6 of the Institute of Public Auditors in Germany (Institut der Wirtschaftsprüfer) as a basis. We follow a 4-step process: 1. First, we assess whether there are grounds for insolvency and issue recommendations for action in order to avoid liability. 2. For corporations (& Co.), we draw up what is known as a viability forecast (Fortbestehensprognose). 3. We then prepare the expert restructuring opinion. 4. We support you with the implementation process from a tax-related, business management and legal perspective. This means that you receive comprehensive, one-stop restructuring services that also cover the implementation process.
The following timescales are usually calculated for the individual steps in the process:
|1. Identifying the grounds for insolvency||Between a few days and a maximum of 3 weeks|
|2. Viability forecast||6-8 weeks|
|3. Expert restructuring opinion||2-6 months|
|4. Implementation of the expert restructuring opinion||6-18 months|
1. Duty of the managing director to assess whether the company is insolvent
Assessing whether the company is insolvent is the top priority due to the possibility of criminal law and civil law liability. The assessment to establish whether the company is insolvent must be completed within a few days, but within 3 weeks at the most with regard to section 15a of the German Insolvency Code (InsO). The outcome of the assessment must be documented in writing.
In a current ruling (of 27 March 2012, case ref.: II ZR 171/10), the German Federal Court of Justice (BGH) commented on the question as to when a managing director can be held liable for payments made after a company has become insolvent pursuant to section 64 of the German Limited Liability Companies Act (GmbHG) and subject to what requirements the managing director can avoid liability.
Pursuant to section 64 GmbHG, managing directors are obliged to reimburse the company for payments made after the company has become insolvent or has been found to be over-indebted. When determining the amount of the liability claim, amounts paid into the company’s assets shall not be offset. This creates a huge liability risk for managing directors.
An element of fault is required in order for the managing directors to be liable, although ordinary negligence is already deemed to be sufficient in this regard. The diligence of a prudent businessman shall be taken as the benchmark for the assessment. It is assumed, to the detriment of the managing director, that the latter has acted culpably, namely without applying the degree of prudence required of a representative body of a limited liability company (GmbH).
Regarding the subjective facts, the fact that the managing director ought to have been aware that the company was insolvent is sufficient. This fact is also assumed to form part of the element of fault.
The managing director of a limited liability company is expected to continually verify the company’s financial position. This includes, in particular, establish whether the company is insolvent. If the managing director realises that, on a certain cut-off date, the company is unable to satisfy its liabilities that have fallen due and have been requested in full, then he must assess the limited liability company’s solvency based on a liquidity balance sheet.
He is deemed to be acting negligently if he fails to obtain the necessary information and knowledge required to check whether he has a duty to file for insolvency in a timely manner. Where the managing director does not have sufficient knowledge of his own, he may need to seek expert advice.
Managing directors who do not have sufficient expert knowledge of their own are only excused if they sought advice from an impartial individual with the qualifications required in order to clarify the issues in question, presenting the company’s situation in full and disclosing the necessary documents, and then finds that the company is not to be deemed insolvent. In addition, in order to be deemed to have exercised the care of a prudent and conscientious manager, the managing director must perform a plausibility check on the outcome of the assessment.
The managing director can be excused if he commissions a suitably qualified individual, as soon as signs of a crisis emerge, to assess whether the company is insolvent and should file for insolvency, and then acts in line with the expert advice provided after performing the necessary plausibility check. Based on the intent and purpose of the provision, however, this assessment must be performed by an expert third party without delay and the managing director cannot deem the immediate placement of the assignment with the third party to be sufficient, but rather must urge the third party to present the outcome of the assessment without delay.
You can find more information on the reasons for insolvency in our white paper entitled “Grounds for insolvency”.
2. Resolving grounds for insolvency at short notice where appropriate
In the event that there are grounds for insolvency, these must be resolved without delay (in particular with regard to section 15 a InsO, section 263 of the German Criminal Code (StGB)).
3. Ensuring the ability to act
The following measures are designed to restore/maintain the ability to act:
- Preparation of a short-term liquidity plan. The period that this initial plan should cover depends on the circumstances of the individual case. A planning period of 2-3 months is often recommended.
- Clarify creditor due dates
- Clarify creditor security rights
- Eliminate any factors that generate considerable costs in the short term
4. Company analysis
As part of the restructuring process, we provide you with detailed information on your financial status quo. In order to do this, we analyse your annual financial statements from the past 3 to 5 years and evaluate your position among your peers using Porter's five forces analysis. Next, we conduct a SWOT analysis to identify your company’s strengths and weaknesses. Finally, we analyse the causes of the crisis and the current stage of the crisis with you in order to develop a vision for the restructured company based on this information. This may involve completely redefining the corporate strategy.
5. Determining the current stage of the crisis
Companies in crisis tend to reach various stages before becoming insolvent, including stakeholder, strategy, product and unit sales crises, as well as results and liquidity crises. The stages of the crisis do not necessarily have to develop in this order: they can also occur in parallel, as isolated developments or can overlap. Crises tend to come to a head over time.
Based on IDW S 6, the individual stages of a crisis have to be analysed in full.
6. Developing a vision for the restructured company
Developing a vision for the restructured company is one of the main aims of a restructuring process. IDW S 6 defines the vision for the restructured company as follows:
The vision for the restructured company outlines the basic features of a restructured company which, in financial terms, must at the very least have a sustainable average profit in line with the sector standards and appropriate equity resources. It is not sufficient to simply describe the current situation. Rather, a vision has to be presented of a future company that has once again made itself attractive to providers of equity and debt capital alike.
At the same time, the vision serves to help identify suitable restructuring measures that are required to allow the company to hold its own against its competitors with its products or services. In this respect, it helps to create a focus for the various units within the company and to coordinate the individuals responsible for taking action.
7. Definition of measures
The stage of the crisis that the company is currently in determines the content and measures featured in the restructuring concept. In line with the level of urgency, the restructuring measures are initially aimed at resolving any grounds for insolvency (inability to pay and over-indebtedness), i.e. at ensuring the company’s ability to pay (programme to ensure liquidity) and ensuring that assets cover liabilities, then at allowing the company to move back into the black by implementing an efficient cost reduction and efficiency improvement programme, and then at strategically (re-)aligning the company, which may also include the relevant stakeholders where appropriate, in order to tap into success potential to strengthen the company’s competitive standing and, in doing so, exploit growth potential.
8. Development of a restructuring concept/preliminary stage prior to a viability forecast
This sort of concept contains
- in the first section, statements on actual key company data, cause and effect relationships and legal and economic influencing factors.
- Then, based on a systematic assessment of the situation, it describes the measures to be taken based on the vision for the restructured company and quantifies their impact as part of a liquidity, earnings and asset plan (integrated plan). The restructuring concept must be feasible regarding the contributions that the affected stakeholders have to make (primarily partners/shareholders, lenders, the management and employees) and regarding the implementation of the required operational and strategic restructuring measures.
The special features of the assignment in question play a decisive role in the concept.
At the time of commissioning, the assignment must clearly specify whether the concept
- is a comprehensive restructuring concept within the meaning of this IDW standard or
- only covers some areas of this sort of concept, e.g. the preparation of a liquidity plan for the purposes of a viability forecast or a further-reaching going-concern forecast pursuant to section 252 (1) no. 2 of the German Commercial Code on the basis of an integrated plan.
In order to avert imminent insolvency, the first stage of the restructuring concept has to involve setting out measures to establish/ensure the company’s ability to survive (positive going-concern forecast) that prevent or resolve the future risk to the company’s existence, i.e. in particular the risk of insolvency or over-indebtedness, at least for the current and the following year.
Next, the restructuring concept has to show how the company undergoing restructuring can achieve this ability to survive as a going concern in the long run. This requires the company to be competitive on its relevant market or to be more than likely able to achieve this sort of competitive standing.
The company’s competitiveness is also based predominantly on its staff potential, i.e. the knowledge, skills, loyalty and motivation of the management and the workforce, allowing the company to generate value for customers by offering marketable products and services. In order to achieve this, the company’s management must be willing, able and have the opportunity to further develop the company, within a reasonable period of time, in such a way that it can attain a market position allowing it to generate a sustainable profit in line with the sector standards with appropriate equity resources, thus making it attractive to capital providers again (profitability). At this stage, the planning period is to be extended accordingly.
The main components of a restructuring concept within the meaning of this IDW standard are:
- A description of the subject-matter and scope of the assignment
- Basic information on the company’s financial and legal situation in its environment, including an analysis of its net assets, financial position and results of operations
- An analysis of the stage of the crisis and the causes of the crisis, including an analysis as to whether there is a risk of insolvency
- Presentation of the vision, including the business model of the restructured company
- The measures to combat the company crisis and avert the risk of insolvency
- An integrated company plan
- A summary assessment of the company’s potential for restructuring
Sustainable restructuring calls for a concept to strengthen/restore competitiveness and has to feature more than just short-term and medium-term measures. Adherence to deadlines and financial requirements is of decisive importance to the success of the restructuring process. As a result, the restructuring concept should specify the deadlines and financial requirements for the individual measures, as well as the individuals responsible for them.
As the stages of the crisis develop, the causes behind previous crisis stages exacerbate the problems that arise when the crisis reaches the stage of a results and liquidity crisis. In order to prevent insolvency, the first step involves taking measures to ensure liquidity and eliminate losses. But sustainable restructuring success can only be achieved once the causes behind the previous and parallel crisis stages have also been eliminated.
The more advanced the company crisis is, the more important it becomes to assess restructuring strategies, too, within the framework of possible insolvency proceedings and compare these with out-of-court restructuring.
9. Restructuring controlling
Company restructuring is not a static state, but a dynamic process. Once the restructuring concept has been developed, the measures defined therein have to be structured and implemented within the periods specified.
As a result, the restructuring controlling process is first of all about checking that the implementation plans are being adhered to. This requires clear responsibilities to be assigned for the individual projects, and clear remits and deadlines to be set. The information is then collected by one or several individuals responsible (e.g. a steering committee).
Reports are submitted at short intervals in the first phase. Later, the reporting intervals can be extended further. Reports should be submitted in a standardised form.
The second aim of restructuring controlling is to check the success of the defined measures. Changes in the overall framework can result in the restructuring plan having to be adjusted to suit these new circumstances. It is then necessary not only to analyse the past data, but also to update the future data accordingly. In the event of negative developments, the company’s potential for restructuring may have to be called into question again and corresponding calculations performed.
Creditors and, in particular, banks often call for restructuring controlling with a corresponding reporting process. These reports then include not only target/actual analyses, but also information on the dynamic development of the restructuring process. These duties are often transferred to independent third parties, e.g. auditors, in order to arrive at objective results. During this phase, the company is aiming to win back trust that it might have lost. In many cases, the implementation of the restructuring controlling process is decisive for the success of the restructuring process on the whole.