ESUG Procedure – The Second Insolvency Investigation
2022 marks the tenth anniversary of the ESUG (Self-Administration and Protective Shield Proceedings) coming into effect. That’s why we’re taking a closer look at ESUG proceedings. Over the past ten years, it has become clear that both standard insolvency proceedings and ESUG proceedings are synonymous with successful and sustainable restructurings. Your tax advisor in Düsseldorf
and Oberhausen
has summarized the key findings of a study.
It is becoming increasingly common for the initial restructuring to prove less sustainable than anticipated. Companies must then return to the insolvency court. The result is a second insolvency. This quickly raises the question: How successful and sustainable is restructuring within the framework of an insolvency proceeding, self-administration, or a protective shield proceeding? Below is a summary of a study addressing these points.
Successful and Sustainable Restructurings
The key finding of the study is that, with regard to the second insolvencies examined, ESUG proceedings do not perform better than standard insolvency proceedings in terms of the sustainability of the restructuring. Conversely, this means that both standard insolvency proceedings and ESUG proceedings lead to successful and sustainable restructurings.
Sustainability rates are positive
The analysis of second insolvencies clearly shows that both procedures—ESUG and standard insolvency—are sustainable. This is evident from the analysis of approximately 2,200 self-administered proceedings and protective shield proceedings over a ten-year period, during which there were just 44 second insolvencies. This sustainability rate is a very good result. Standard insolvency and ESUG proceedings should therefore be applied equally. The appropriate form of restructuring should always be assessed individually for each company. The decisive factor in this should be the sustainability of the restructuring.
The COVID-19 Pandemic and Insolvencies
The economic impact of COVID-19 cannot be ignored. The categories “pre-COVID” and “during COVID” were designated as the periods of analysis. However, they show that the pandemic did not lead to a fundamentally more volatile environment for restructured companies. The highest number of second insolvencies occurred “before COVID-19.” “During COVID-19,” however, the number was significantly lower.
Furthermore, another clear effect of the COVID-19 pandemic is evident. In 2017, 2018, and especially 2019, a “wave of second insolvencies” emerged. This trend was broken in the first “COVID-19 year.” This trend is attributed to the decline in the number of insolvencies among corporations and partnerships in the calendar year 2020, the COVID-19 financial aid, and the suspension of the obligation to file for insolvency.
These measures prevented an increase in second insolvencies. That is the good news. However, there is concern that necessary restructuring has been postponed. This means that companies that are actually insolvent are continuing to operate in the market with government aid. If that is the case, there could be a significant increase in second insolvencies again in the coming years.
Wave of Second Insolvencies
The study analyzed the wave of second insolvencies (March 1, 2017, to February 29, 2020). Most of the initial insolvencies occurred two to five years ago. This means they took place in the early years of the ESUG. One explanation for the secondary insolvencies during this period is that a great deal was experimented with in the early years of the ESUG. It is assumed that even companies that were no longer suitable for restructuring were deemed eligible. However, analyses of the individual years 2017, 2018, and 2019 (March 1 to February 28 in each case) show that this impression is not confirmed when viewed on an annual basis.
There was certainly a phase of “trial and error.” Since restructuring experts first had to familiarize themselves with the new restructuring instruments, such a phase occurred after the ESUG came into effect. The study shows, however, that this had no negative effect on sustainability. The hope is that this will also be the case with the StaRUG.
Causes of initial insolvency overcome after five years
The study also found that the vast majority of identified second insolvencies occurred within the first five years following the first insolvency. This result shows that the sustainability of restructuring success can be recognized relatively quickly. The triggers and causes of the initial insolvency are thus generally fully overcome after just a few years.
Seeing and Seizing a Second Chance
The legislature’s goal is for corporate restructurings to be used as a second chance. This applies particularly to the ESUG. Thus, insolvency, self-administration, or protective shield proceedings should be viewed as a means to help put the company back on a sustainable footing.
The study also revealed a finding that underscores the importance of sustainable corporate restructuring: if companies file for insolvency again within five years of their initial insolvency, they are liquidated nearly 1.5 times more often than they are restructured.
The primary focus of restructuring is to preserve as many jobs as possible and ensure the company’s continued operation. However, it must not be forgotten that restructuring should also address the root causes that led to the insolvency. Short-term success can be achieved by reducing the liabilities side of the balance sheet and then continuing operations as before. However, since restructuring is intended to be sustainable, it is often necessary to make far-reaching cuts.
Tax Advisors in Düsseldorf and Oberhausen
If you have any questions regarding tax or legal matters, please feel free to contact us, your tax advisors in Düsseldorf and Oberhausen. The team at Trimborn.Partner is happy to assist you.
