The protective shield proceedings pursuant to § 270d InsO enable companies to restructure under debtor-in-possession management. Learn about the requirements, the procedure and when this option represents the better alternative.
Protective Shield Proceedings: Restructuring Under the Protection of Insolvency Law
When a company finds itself in financial distress, many stakeholders immediately think of classic insolvency proceedings with loss of control, stigmatisation and liquidation. However, German insolvency law offers the protective shield proceedings pursuant to § 270d InsO as an instrument that enables viable companies to develop a restructuring plan under the protection of insolvency law and in debtor-in-possession management. This article explains the requirements, the procedure and the success factors of these special proceedings.
What Are Protective Shield Proceedings?
Protective shield proceedings are a special form of debtor-in-possession proceedings within the framework of insolvency law. They were introduced in 2012 by the Act on the Further Facilitation of Corporate Restructuring (ESUG) and are governed by § 270d InsO (formerly § 270b InsO).
The core concept: the company remains under the management of its existing leadership and develops an insolvency plan as a restructuring plan within a deadline set by the court -- protected from enforcement measures and with the ability to terminate burdensome contracts.
Distinction from Regular Debtor-in-Possession Proceedings
Whereas in regular debtor-in-possession proceedings (§ 270 InsO) the court may at any time appoint a provisional insolvency administrator, protective shield proceedings grant the debtor a protected period of up to three months to develop an insolvency plan. During this period, no insolvency administrator is appointed; instead, only a custodian is appointed who supervises but does not replace the management.
Requirements for Protective Shield Proceedings
Insolvency Application and Ground for Insolvency
Protective shield proceedings require the debtor to combine an application for the opening of insolvency proceedings with an application for debtor-in-possession management and protective shield. The following grounds for insolvency may apply:
- Imminent inability to pay (§ 18 InsO): the company will foreseeably be unable to meet its payment obligations as they fall due.
- Over-indebtedness (§ 19 InsO): the company's assets no longer cover its existing liabilities, provided there is no positive going-concern prognosis.
Crucially: at the time of filing, the company must not yet be unable to pay within the meaning of § 17 InsO. If inability to pay has already occurred, access to protective shield proceedings is barred. This underscores the importance of filing early.
Expert Certificate
The application must be accompanied by a certificate from a tax advisor, auditor or lawyer experienced in insolvency matters confirming that:
- imminent inability to pay or over-indebtedness exists, but not yet inability to pay
- the intended restructuring is not obviously without prospect of success
This certificate is a central document and requires a thorough examination of the company's financial circumstances.
Procedure of Protective Shield Proceedings
Phase 1: Filing and Order
- The debtor files a combined application with the competent insolvency court (insolvency application + debtor-in-possession application + protective shield application)
- The court appoints a provisional custodian (the debtor has the right to propose a candidate)
- The court orders protective measures, in particular the suspension of enforcement measures
- The court sets a deadline of a maximum of three months for the submission of an insolvency plan
Phase 2: Plan Development (up to 3 months)
During the protective shield period:
- Management remains in office and continues day-to-day operations
- The company develops the insolvency plan with the support of restructuring advisors
- Estate liabilities may be incurred, which take priority in plan execution
- The company may terminate burdensome contracts (special right of termination pursuant to § 103 InsO)
- Employees benefit from insolvency pay from the Federal Employment Agency (up to three months)
Phase 3: Insolvency Plan Proceedings
After opening of the insolvency proceedings, the insolvency plan is presented to creditors:
- Creditors are divided into groups
- Each group votes on the plan (head and sum majority required)
- The court may replace the consent of individual groups under certain conditions (prohibition of obstructionist behaviour, § 245 InsO)
- After confirmation by the court, the plan becomes legally binding
The Custodian: Supervision Rather Than Displacement
In protective shield proceedings, no insolvency administrator is appointed to assume management. Instead, a custodian is appointed whose tasks differ fundamentally from those of an insolvency administrator:
Duties of the Custodian
- Supervision of the management and the economic situation
- Examination of the asset situation and management measures
- Consent requirement for transactions outside the ordinary course of business
- Notification duty to the court in the event of adverse developments
- Cash management: the custodian may assume cash management where necessary to protect creditors
Debtor's Right to Propose
The debtor has the right to propose a custodian to the court. The court may only deviate from this proposal if the proposed person is manifestly unsuitable. This enables the company to install a trusted person as custodian.
Advantages Over Regular Insolvency Proceedings
Protective shield proceedings offer considerable strategic advantages over regular insolvency proceedings:
- Debtor-in-possession management: the existing management remains in office and retains operational control
- Protected planning phase: three months without enforcement pressure to develop a restructuring concept
- Signal effect: protective shield proceedings signal to customers, suppliers and employees that a controlled restructuring is being pursued
- Insolvency pay: up to three months of wage continuation by the Federal Employment Agency significantly relieves liquidity pressure
- Contract termination: ability to terminate burdensome ongoing obligations
- Tax advantages: restructuring gains from an insolvency plan are tax-exempt under certain conditions (§ 3a EStG)
Comparison with StaRUG Proceedings
Since 2021, the Corporate Stabilisation and Restructuring Act (StaRUG) provides an additional restructuring instrument. The key differences:
| Criterion | Protective Shield Proceedings | StaRUG |
|---|---|---|
| Insolvency application | Required | Not required |
| Publicity | Insolvency announcement | Can remain confidential |
| Employee claims | Can be included | Excluded |
| Insolvency pay | Available | Not available |
| Contract termination | § 103 InsO possible | Not possible |
| Stigmatisation | Higher (insolvency proceedings) | Lower |
| Restructuring depth | More far-reaching | More limited |
The choice of the right instrument depends on the specific situation of the company. The StaRUG is more suitable for cases in which primarily financial liabilities are to be restructured, while protective shield proceedings offer advantages where deep operational restructuring is needed.
Prominent Examples from Practice
Protective shield proceedings have proven their worth in German restructuring practice. Numerous well-known companies have successfully used this instrument to restructure and continue operations. Experience shows that companies with a viable business model and committed stakeholders in particular have good restructuring prospects.
Success Factors for Protective Shield Proceedings
From advisory practice, the following critical success factors can be identified:
- Early filing: the earlier proceedings are initiated, the greater the room for manoeuvre
- Transparent communication: open dialogue with creditors, employees, customers and suppliers builds trust
- Experienced advisors: the selection of qualified restructuring advisors and a suitable custodian is crucial
- Viable business model: the core business must be sustainable or capable of being made sustainable
- Liquidity safeguarding: financing of ongoing business operations during the planning phase must be secured
- Stakeholder management: the support of key creditors and employees is essential for the success of the insolvency plan
Conclusion
Protective shield proceedings are a powerful instrument for companies that recognise the signs of financial distress early and are prepared to carry out sustainable restructuring under the protection of insolvency law. The decisive advantage lies in the combination of debtor-in-possession management, a protected planning phase and the far-reaching structuring options of insolvency plan proceedings.
compleneo has extensive experience in supporting protective shield proceedings and debtor-in-possession administrations. We support you from the initial crisis diagnosis through the preparation of the required certificate to plan development and implementation. Contact us early -- because in restructuring law, time is the decisive factor.
