Taken by Suprise: Protective Shield Proceedings
Creditors are often taken completely by surprise when a customer or client enters into protective shield proceedings. Such proceedings involve self-administration, and it can often appear as if individual creditors have little power over such decisions. It is often the case that neither the published annual financial statements nor the client’s payment history would suggest insolvency proceedings were imminent.
The legislator has created the possibility of an early insolvency application so that the debtor can reorganise themselves in protective shield proceedings. And thus, the customer or client can file for insolvency in the case of “imminent insolvency”, i.e. insolvency that may not occur for several months according to the debtor’s planned invoices. Numerous companies, even larger ones, have made use of this option in recent years. They are represented by law firms that specialise in such proceedings and prepare to enter such protective shield proceedings for a longer period of time in advance.
Perhaps your long-standing client or customer is already preparing for such proceedings? In such situations, contacting an insolvency specialist will provide you with the needed guidance.
Insolvency restructuring regularly involves the greatest possible loss of claims by creditors (the so-called “haircut”). In the end, the client has “shaken off” most of its debts, has reorganised its company and can continue its business. The insolvency proceedings are carried out quickly and can be completed in six months.
Given the economic crisis triggered by the pandemic, a sharp increase in the number of such insolvency proceedings must be expected in the coming months and years.
Actions Creditors can Take: Respond to Protective Shield Proceedings
You cannot prevent insolvency proceedings. However, you can influence the course planned by the customer or client and their specialist lawyers and, if necessary, reduce your loss of receivables. We can briefly outline your options for action here. The author has presented these comprehensively in his essay „Der Gläubiger im Schutzschirmverfahren und im Berichtstermin des Planinsolvenzverfahrens“ (“The creditor in the protective shield proceedings and in the report meeting of the plan insolvency proceedings”), published in the Zeitschrift für Wirtschaftsrecht (ZIP 2021/558 et seq.).
The Need for Action
You should now immediately take a look at the files of the insolvency proceedings. Here you will find a lot of information about the current economic situation of your client. Among other things, you can see which creditors (claim amounts and addresses) are affected by the proceedings and the debtor’s objectives. You should then contact the debtor and their lawyers to show that you want to exercise your rights in the insolvency proceedings fully.
Bundling the Creditors’ Interests
In insolvency proceedings, the creditors decide on the proposals of the client and their lawyers. Among other things, the creditors can decide in the report meeting whether to shut down the debtor company and thus prevent the planned reorganisation by protective shield proceedings. However, this requires certain creditor majorities. Therefore, the creditor’s negotiating power in their talks with the debtor and their lawyers increases to the extent that they can also speak for other creditors. If the creditor can achieve in the talks that, for example, the debtor’s shareholders make a higher equity contribution in the context of an insolvency plan than originally planned, this negotiation success benefits all creditors in the form of an increased plan quota. Special advantages for individual creditors are not permitted in protective shield proceedings.
To spread the workload and costs over as many creditors as possible, joint legal representation of the mobilised creditors is a good idea. The legal representation of these creditors also means that they can negotiate the complex economic and legal issues with the debtors and their specialist lawyers “at eye level”.
Risk Management & Active Debtor Management
Active debtor management should be pursued given the expected wave of protective shield proceedings and planned insolvency proceedings. Even in the case of long-standing customers with inconspicuous annual financial statements and considerable company size, it should be checked whether the supplier credits granted and their conditions (collateralisation) correspond to the current default risk. A line reduction or collateralisation of unsecured loans may be indicated in individual cases.
Expert Advice in Matters of German Insolvency Law
At Schlun & Elseven Rechtsanwälte, we advise both creditors and debtors in German insolvency law and the protective shield proceedings. We work with global clients from our offices and conference rooms across Germany. If you require support or assistance on issues concerning the insolvency procedure in Germany, corporate restructuring, private insolvency or advice as a creditor in German insolvency proceedings, please make sure to contact us directly.
The information provided in this article intends to provide a general overview of how to respond to protective shield proceedings as a creditor. However, it should not be seen as a replacement for professional advice.