Prevention of Corporate Crisis & Insolvency in Germany

What can be done and what has to be done if a crisis occurs

In the following we will present reasons for business crises, possibilities of crisis prevention, measures of company sanitation and application grounds for company insolvencies.

1. Company Crises

A corporate crisis can be considered a business-critical situation in which the company's essential strategic and operational goals are no longer achieved and fundamental interests of third parties, Creditors, shareholders or employees. Companies often have limited opportunities to raise funds during these phases.

Basically, a distinction can be made between strategy, success and liquidity crises. In the strategic crisis, it becomes clear that new products, customers or business segments are necessary to secure the company's turnover base. The company can still act in a strategic crisis and is often not yet threatened with any existential threat. If a strategy crisis is not managed, sales and losses are often falling. The company must now react. The crisis has created a success crisis. In the event of sustained losses, the crisis of success can ultimately lead to a liquidity crisis that threatens the existence of the company, which is characterized by the fact that the company is only able to maintain the company through a new capital injection. The liquidity crisis is the corporate crisis in the narrow sense and often requires considerable external support as well as drastic measures by the company management.

2. Crisis prevention

Measures to prevent crises can be derived well from investigations into insolvency. In 2006, the insurance company Euler Hermes published the following findings on insolvency:

The investigation has shown that the following management and financing errors are the most frequent causes of insolvency:

  • Missing Controlling (79%)
  • Financing gaps, insufficient equity (76%)
  • Weak Cash Management (64%)
  • Authoritarian, rigid leadership (57%)
  • Lack of transparency and communication (44%)
  • Investment error (42%)
  • Incorrect product planning (41%)

The following crisis prevention strategies are derived from this:

Regular strategic market analyzes regarding market development, product innovations and trends, customer development, development of competitors

  •  Regular controlling of relevant key figures
  •  Company planning including cash plans with ongoing target / actual variance analyzes
  •  Support of the management by expert and experienced third parties

3. Company recovery

The term "company recovery" is used to summarize measures that the company management can take in a crisis situation.

Remediation measures can be distinguished according to the duration of the measures. We have compiled a number of important restoration measures after the measures have been implemented:

A) Immediate action

  •     Output stop
  •     Investment stop
  •     Adjustment stop
  •     Capital increases
  •     Wage and salary reductions
  •     Receivables management, collection
  •     Interest and amortization
  •     Sale of non-operating assets
  •     claims for compensation
  •     Reduction of running costs and rent reductions

B) Tactical and strategic measures

  •     Sale-and-lease-back
  •     Location closures and shifts
  •     Sale of company parts (M & A)
  •     Introduction of new products
  •     Leaving contracts
  •     Cost adjustment measures
  •     Refinancing, refinancing
  •     Leasing, factoring
  •     Lending of assets
  •     Capital increases
  •     Reduction of liabilities by comparison
  •     Adjustment of product portfolio
  •     Price increases
  •     Returns or credit reduction
  •     Improved internal processes, improved controlling
  •     Debt-equity swap
  •     Insolvency with the aim of rehabilitation

4. Corporate insolvency

The following three applications for insolvency are laid down in Sections 17 to 19 of the Insolvency Act:

A) Impaired insolvency

If the company is unlikely to be able to meet its payment obligations due to the expected revenue and expenditure, the debtor can file an application for insolvency.

B) Insolvency

If the company is no longer in a position to meet its payment obligations or to raise short-term financial resources to prevent the insolvency, the debtor must necessarily submit an application for insolvency. In this case, the creditor also has the option of making an application for insolvency.

C) Over-indebtedness

In the case of a legal person or a company without a personally liable partner, the over-indebtedness can be reason for the opening insolvency proceedings. Over-indebtedness occurs when the assets of the debtor no longer cover the existing liabilities, unless the continuation of the enterprise is most likely according to circumstances.

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