From practice: liquidity in reorganisation proceedings

An article by Wolfgang Pones, co-founder of COMMITLY

Fact box for those in a hurry: planning, and not only in a crisis

• If the insolvency petition is not filed in time, the managing director can be prosecuted for delaying insolvency proceedings!
• Suppliers already hammering at the door is not an indicator of insolvency.
• During the reorganisation proceedings themselves, the entrepreneur is closely supervised by the insolvency administrator and the creditors’ committee.
• The interplay of short-term with medium- and long-term liquidity planning provides a high degree of transparency and close control of business development.
• Precise and realistic planning produced by the company itself generally strengthens the confidence that the financing institutions have in the company.

Wolfgang Pones, co-founder of COMMITLY, has many years of experience in financial management at small and medium-sized companies. Over the past 20 years he has also accompanied reorganisation proceedings several times, both as a consultant and as a managing director. In addition to his experience, his law studies at the Juridicum in Vienna and his training as a tax adviser have helped him here. Here he gives us an insight into the reasons for reorganisation proceedings and the importance of liquidity planning and monitoring during this challenging time.

Reasons for reorganisation proceedings

Reorganisation proceedings can become necessary when a company is no longer able to pay its payment obligations as they fall due. Christian Kedzierski examined the topic in detail in this guest article. What sounds so unspecific has massive implications for the bodies authorised to represent the company, that is, its managing directors. Insolvency – the inability to pay invoices as they fall due – occurs faster than people assume. Above all in Germany.

In connection with section 66 of the Austrian Insolvency Code, the Austrian Supreme Court (OGH) defines and interprets it as follows: insolvency occurs when the debtor is unable to pay 5% of its debts that are due within a short time. “Within a short time” is interpreted as three months at most.

In connection with section 17 of the German Insolvency Code, the German Federal Court of Justice (BGH) defines a temporary payment difficulty as lasting no more than 21 days (!), that is, just three weeks. So if the funds can be raised within three weeks to meet all payment obligations, there is no insolvency.

If the company is insolvent, the managing director must file an insolvency petition. As part of that petition, reorganisation proceedings can be applied for. The various options within the proceedings are not discussed further here. Only one thing matters: if the insolvency petition is not filed in time, the managing director can be prosecuted for delaying insolvency proceedings!

And one more clarification that is very important for everyday business life: the entrepreneur has to monitor the ability to pay on a regular basis. Suppliers already hammering at the door is not an indicator of insolvency. That would be more of an indicator of a possible delay in filing for insolvency.

Insolvency law and liquidity planning

Not only in everyday business life, but precisely on the basis of the statutory foundations of the Insolvency Code, capital requirements and short-term liquidity planning are highly important, at least for the duration of the reorganisation proceedings.

Experience as a managing director in reorganisation proceedings shows that it is usually in the nature of things that planning and liquidity instruments are available only to a limited extent. Yet precisely in the process surrounding the Insolvency Code, alongside a short-term overview of business development, liquidity planning on a weekly basis has to be drawn up first, taking into account the circumstances specific to the proceedings.

In addition, the plan usually has to be reconciled with current developments at least weekly and then updated. For the proceedings themselves it is advisable to draw up medium- to long-term liquidity planning right at the start as well, and to update this continuously too.

Insolvency administrator and creditors’ committee

During the reorganisation proceedings themselves, the company – and with it the entrepreneur – is closely supervised by the insolvency administrator and the creditors’ committee. It is not unusual for an external consultant to be required and brought in as well.

Through the interplay of short-term with medium- and long-term liquidity planning, management, the insolvency administrator and the creditors’ committee have a high degree of transparency and close control of business development.

These documents are not only requirements on the part of the legislator within the meaning of the Insolvency Code; afterwards (once the reorganisation proceedings have been completed successfully) they are also a helpful basis for further developing the company’s internal instruments, which can map the ongoing and “vital” monitoring within the company.

Reorganisation concept = concept for the future?

Realistic liquidity planning that can be modelled is very helpful for demonstrating the chances of a return, especially when building concepts for the future, which can be highly important even in the run-up to reorganisation proceedings and which have to be included in the insolvency plan.

As a side effect that is often necessary and also desired, liquidity planning also becomes an important basis for any sales process that follows the reorganisation process. In the course of the due diligence carried out by potential buyers, a plan combined with a view of liquidity is an absolutely essential instrument and, if executed properly, thoroughly beneficial for the sales process.

The reorganisation plan should also be mapped in a comprehensive restructuring concept or an even more long-term reorganisation concept. This forms the basis for creditors’ decisions, allowing them to assess how much money they will still receive (the quota). For shareholders and investors, the reorganisation concept provides an overview of a feasible path to reorganisation and, possibly, a successful sale of the company thereafter.

The role of the restructuring department

Not least, liquidity in particular has to be planned, tracked and, where necessary, adjusted very precisely in crisis situations. Financial institutions and their restructuring departments usually require monitoring of the company’s own data in advance, in cooperation with external consultants. But a plan drawn up externally can never be a basis for developing your own company.

Precise and realistic planning produced by the company itself strengthens the confidence that the financing institutions have in the company during this phase.

That confidence can then lead to a stable and successful outcome on the way through the reorganisation proceedings. Above all, decisions are taken in a more fact-based way. Often, spelling out the financial consequences also leads to alternative forms of financing (factoring, for example) being introduced, which are then used in the company beyond the proceedings.

Missing internal instruments

In most cases, however, precisely at companies facing the challenge of restructuring measures, the liquidity situation is caused not only by external reasons such as a changed market situation or outdated technical conditions, but also by missing internal processes or instruments. The company’s internal foundations are therefore usually reduced to information from accounting. And in the worst case – because it is the most cost-intensive and above all the slowest – even from external accounting.

Accounting in particular, however, is by no means a substitute for an ongoing liquidity calculation, let alone planning.

The data is normally available only with a delay – with external support, even with a considerable delay – and so cannot serve to plan and steer the company at all. At this point, short-term liquidity planning and medium-term planning therefore have to be set up immediately and, above all, maintained continuously.

As already explained above, this step lays the foundation for confidence-building and legally required steps, both in the “preliminary stage”, usually via the restructuring departments of the financial institutions, and subsequently in the proceedings themselves. Almost always, the financing institutions in particular are not only a significant part of the quota among the creditors but also an important partner beyond the successful conclusion of the proceedings.

This “partnership” can be strengthened enormously by appropriate planning and liquidity instruments, whereby handling these instruments “as a matter of course” also has to be actively practised in the company and embedded in its processes.

Depending on the size of the company, this responsibility lies either directly with the management or owners or has to be integrated as a process into the structure of the finance department. Treating planning and liquidity as a matter of course in this way makes it easier, within the company, to deal with external consultants brought in by the bank or by the company itself to prepare for the reorganisation proceedings. It should not go unmentioned, though, that this support comes at a price and that it therefore worsens the cost situation further at an already tense time.

Planning, and not only in a crisis

By combining internal and external expertise and practical experience, planning and liquidity instruments can be developed for a company in a crisis situation that will be of great benefit in the future and once the restructuring measures have been concluded successfully. In my view, management must insist unconditionally on the use of these instruments beyond the period of the (out-of-)court reorganisation.

Even where the shareholders sell the company – often a common “emergency solution” in the course of restructurings – the necessity and the advantages of sensible liquidity planning become apparent.

Credits: Photo by Clem Onojeghuo on Unsplash