Protective shield proceedings

If a company finds itself in crisis, all is not lost: Even in this situation, there is usually enough time for those responsible to take action, as well as many different tools and types of proceedings they can use to counteract and overcome financial difficulties. One of these is protective shield proceedings, introduced with the insolvency law reform in 2012. Protective shield proceedings are a special form of self-administration, in which a company’s management deals with reorganisation of their company autonomously – usually assisted by a reorganisation expert acting as chief restructuring officer (CRO), who provides advice and operational support to management during planning and implementation of the reorganisation. The protection against enforcement by creditors that protective shield proceedings provide also offers greater security and an improved ability to plan the reorganisation. The outcome of the procedure is always an insolvency plan that offers the company multiple opportunities for shaping the company’s future. The eligibility requirements for this type of proceedings, however, are more demanding than those for self-administration or standard insolvency. Protective shield proceedings last three months, after which time insolvency proceedings are commenced and the protective shield is converted into self-administration.

Process

Eligibility requirements for access to protective shield proceedings

To be able to apply to the court for permission to reorganise its business autonomously in the context of protective shield proceedings, the company must meet the eligibility requirements for protective shield proceedings as laid down by legislators in insolvency law. The debtor must not yet be illiquid or overindebted. Protective shield proceedings – like the preventive restructuring framework offered by the Act on the Stabilisation and Restructuring Framework for Businesses (Unternehmensstabilisierungs- und -restrukturierungsgesetz, StaRUG) – can be requested only where the company is in a situation of imminent illiquidity.

The protective shield process

If the company fulfils these eligibility requirements, it can apply for protective shield proceedings. The application to the insolvency court must be submitted by the company itself. To show that illiquidity has not yet occurred, the application must be accompanied by a reorganisation report prepared by a tax advisor, certified public accountant, lawyer, or other comparably qualified person experienced in insolvency matters. If the court approves the application, the company has a three-month period (the “protective shield”) to prepare an insolvency plan and submit it to the court. After the three months, insolvency proceedings in self-administration are commenced and the company’s management can reach final agreement with the court and the creditors on the reorganisation measures set out in the insolvency plan and implement them. Once all of the measures have been implemented, the court terminates the proceedings.

Benefits

The advantages of protective shield proceedings

The advantages of protective shield proceedings include all of the benefits of self-administration, plus many more.

The biggest advantage of protective shield proceedings for companies is that they allow management to stay in full control of the business and retain the power to manage and dispose of the company’s assets. All contracts remain in force unchanged for the duration of the protective shield, and the interests of creditors are also protected. Responsibility for ensuring this lies with the court-appointed supervisor. The supervisor monitors the actions of management and their advisors and ensures that the rules set out in the Insolvency Code (Insolvenzordnung, InsO) are followed. The company can propose a specific person to act as supervisor when submitting its application for protective shield proceedings. If the creditors agree to the proposal, the court is bound by it and cannot reject the candidate for supervisor.

Protective shield proceedings also protect employees for three months. They continue to receive the full amount of their net salary up to the pension insurance contribution ceiling in the form of insolvency pay. This means that protective shield proceedings tend not to result in redundancies.

In addition, protective shield proceedings enable companies to end unfavourable contracts, even long-term contracts, with a reduced notice period.

Under the protective shield, the company is protected against enforcement action by creditors for three months. The company can use this time to prepare an insolvency plan and present it to the creditors.

Thanks to the insolvency plan as the reorganisation tool of choice, protective shield proceedings also offer companies a way to reorganise quickly. In most proceedings of this kind, it is only a few months before the court terminates proceedings and the company can put the crisis behind it.

How Schultze & Braun can help you with protective shield proceedings

We help you at every stage of the protective shield process: from when you first consider whether protective shield proceedings offer a suitable path to sustainable reorganisation in your specific case, through to termination of the proceedings and the subsequent reorganisation carried out in self-administration. Schultze & Braun’s business specialists will analyse your company and prepare the statements required for the application. Our reorganisation experts will work with you to prepare all the records that the court needs to see and help you to submit your application for protective shield proceedings. We also help you to find a suitable supervisor and to prepare and arrange advance financing of insolvency pay.

If the court approves your application, we will help you and your company’s whole management team steer the reorganisation successfully and minimise liability risks. We will advise you on insolvency law and, if you wish, take operational responsibility as general agents or chief restructuring officers as part of the representative bodies of your company. We will prepare negotiations with all parties involved in the proceedings and accompany you during meetings. We will draw up the insolvency plan and all necessary financial forecasts and comparative analyses. We will work with you to ensure that you reach successful agreement with the supervisor, the court and the creditors, and that the measures agreed are implemented swiftly. And even after the reorganisation is complete we will always be there to listen.

What can we do for you?

Contact

Detlef Specovius
Rechtsanwalt (Attorney at Law), Fachanwalt für Insolvenz- und Sanierungsrecht (Certified Specialist in Insolvency and Reorganisation Law)

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