Since the various Covid-19 programs ceased by end of June 2022, a significant part of German corporations are likely to face difficulties with respect to liquidity in the near future.

There has been significant State Aid in place providing companies with liquidity during the Covid-19 crisis in Germany. However, the various programs ceased by end of June this year, and whilst significant supply chain issues arose and economy has to deal with the shortage of raw materials as well as increasing energy prices, managers of German corporations need to evaluate what to do in such a situation to survive and continue operations.

Executives monitoring duties

Management is now even more required to comply with its ongoing obligations to make sure the company stays liquid and does not fall insolvent.

In this respect executives need to forecast liquidity – not only for the short term, but also for the long term – and need to do a balance sheet test on an ongoing basis.

And before liquidity comes to an end, management must carefully and comprehensively diligence available restructuring options. This should take place sufficiently in time before the corporation runs out of liquidity bearing in mind that the assessment and implementation of required measures often take at least 3 to 6 months.

Various restructuring options to be analyzed

There are restructuring options available that one would usually consider in an upcoming crisis. However, not all of them are suitable in each case.

The most relevant options to always bear in mind are measures to save liquidity. This could comprise the reduction of costs and expenses e.g. wages and rent. Another typical measure could be a financial restructuring (e.g. reducing debt services or deferring maturity of debt). Existing group-wide cash-pooling agreements need to be reviewed and if required be changed or even terminated to avoid liquidity being taken from the company in a situation where the cash-pool leading affiliate is itself facing a crisis. Further, a reorganization needs to be taken into account in particular with regards to the shutdown of cost-intensive business sections, or the sale of inefficient business units. An alternative could eventually also be a pre-packaged insolvency by means of debtor-in-possession proceedings and an insolvency plan.

Further, trying to obtain fresh liquidity is another part of the options. In the current times, one would need to consider alternative state aid for companies affected by the Ukraine-Russia conflict due to rising energy prices as well as disrupted supply chains. The German government has worked out new programs to support these companies. These in particular include:

  • A new program to provide loans for investments and working capital with reduced interest to corporations of all sizes;
  • The state further provides specific guaranties as security to banks for loans for working capital and investments;
  • To stabilize companies particularly relevant for the market, targeted equity and hybrid capital support can be provided by the state;
  • There is also a temporary and narrowly defined cost subsidy available for companies particularly affected by increasing gas and electricity prices;
  • And there is in place a financing program for power suppliers affected by high margining.

Should these tools not be applicable for a German company in a crises and banks are not willing to grant standard bank loans, a sale and lease back of company assets could be a solution. This might comprise company premises such as the factory or office building, but also machinery, tools, fixed assets or circulating assets. Liquidity can also be obtained by means of factoring of payment claims against company customers. Alternatively, strengthening the corporation's equity base (by existing shareholders providing required liquidity or by getting additional investors on board) can be part of a restructuring.

When insolvency is at risk

Should it however come to a crisis that cannot be overcome, a company faces insolvency under German Insolvency Regulations. Management is then required by law to file for insolvency in case of illiquidity and over-indebtedness. In these cases also creditors may file for insolvency against the company. Filing needs to occur within 3 weeks from the moment illiquidity and within 6 weeks from the moment over-indebtedness occurs. If any such insolvency reason is existing, the company can file for regular insolvency proceedings (insolvency administrator being appointed by court to take over operations). Alternatively, the debtor continues operations by means of debtor-in-possession proceedings where management stays in place under the supervision of a a court appointed trustee and with the help of insolvency experts supporting management during these complex proceedings.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.