Debtor-in-possession proceedings allow insolvent companies to restructure under their own management. We explain the requirements, process and key success factors.
What Are Debtor-in-Possession Proceedings?
Debtor-in-possession proceedings (Eigenverwaltung) pursuant to §§ 270 ff. InsO represent a special form of insolvency proceedings in which the company is restructured under the continued management of its existing directors. Unlike standard insolvency proceedings, no insolvency administrator is appointed to take over the management. Instead, a custodian (Sachwalter) supervises the management.
Requirements for Debtor-in-Possession Proceedings
Formal Requirements
- Application: The debtor must file an application for debtor-in-possession proceedings together with the insolvency petition (§ 270a InsO)
- Debtor-in-possession plan: The application must be accompanied by a debtor-in-possession plan comprising a six-month financial plan, a restructuring concept and a description of the status of negotiations with creditors
Substantive Requirements
The court will order debtor-in-possession proceedings if no circumstances are known that would suggest the order would disadvantage creditors (§ 270 Abs. 1 InsO). Proceedings would be disadvantageous particularly in cases of:
- Inadequate bookkeeping or deficient management in the past
- Criminal offences to the detriment of creditors
- Absence of a restructuring concept
- Lack of cooperation with creditors
Process of Debtor-in-Possession Proceedings
Phase 1: Preparation (Before Filing)
Thorough preparation is the key to success. This includes:
- Preparation of the debtor-in-possession plan
- Selection and engagement of experienced restructuring advisors
- Preliminary discussions with the competent insolvency court
- Securing liquidity for the start-up phase
- Informing and involving key creditors
Phase 2: Opening Proceedings
After filing, the court reviews the requirements and appoints a preliminary custodian. The management remains in office but is subject to supervision by the custodian. During this phase, the wages and salaries of employees must be secured through insolvency money (Insolvenzgeld) in particular.
Phase 3: Opened Proceedings
With the formal opening of insolvency proceedings under debtor-in-possession management, the actual restructuring phase begins. The management continues to conduct ongoing operations, negotiates with creditors and develops an insolvency plan. The custodian supervises the management and has a right of consent for certain transactions.
Phase 4: Insolvency Plan
The regular objective of debtor-in-possession proceedings is restructuring through an insolvency plan. This plan sets out how creditors will be satisfied and how the company will continue its operations. The plan must be approved by creditors and confirmed by the court.
The Protective Shield Procedure as a Special Form
The protective shield procedure (Schutzschirmverfahren) pursuant to § 270d InsO is a privileged form of debtor-in-possession proceedings available to companies that are merely facing imminent insolvency or over-indebtedness. Advantages:
- Management has up to three months to develop a restructuring plan
- The preliminary custodian cannot be appointed against the debtor's wishes
- The debtor may propose the preliminary custodian
- A certificate from a tax advisor, auditor or lawyer confirming the company's viability for restructuring is required
Success Factors for Debtor-in-Possession Proceedings
Professional Advisory Support
Debtor-in-possession proceedings require an experienced advisory team: restructuring consultants for operational restructuring, insolvency lawyers for procedural matters and tax advisors for tax-related aspects.
Transparency Towards Creditors
Open communication with creditors builds trust and is a prerequisite for approval of the insolvency plan. Regular reporting and the involvement of the creditors' committee are essential.
Safeguarding Ongoing Operations
Continuing business operations requires stabilising supply chains, retaining key employees and maintaining customer relationships.
Viable Restructuring Concept
A realistic restructuring concept supported by the key stakeholders is the foundation for the insolvency plan. It must address the root causes of the crisis and demonstrate a sustainable improvement in competitive positioning.
Statistics and Success Rates
Debtor-in-possession proceedings have established themselves as a restructuring tool. Success rates are significantly higher than in standard insolvency proceedings. Studies show that companies restructured through debtor-in-possession proceedings exhibit a higher survival rate and preserve more jobs.
Conclusion
Debtor-in-possession proceedings offer companies in insolvency the opportunity to restructure under their own management. Prerequisites are thorough preparation, a viable restructuring concept and the support of experienced advisors. When properly employed, debtor-in-possession proceedings are a powerful instrument for rescuing companies in distress.
