The Protective Shield Proceeding – Requirements and Procedure

I. WHY THIS TOPIC IS IMPORTANT

When a company faces a crisis, soon the question arises which restructuring tool offers the greatest scope for action. The protective shield proceeding is a special form of preliminary self-administration and allows for the preparation of an (also operational) restructuring under the protection of insolvency law before an actual illiquidity has occurred.

The goal is to prepare an insolvency plan within a short period of time while retaining the existing management. If properly prepared, the proceeding can increase the chances of a successful restructuring, limit reputational risks, and facilitate an orderly coordination with creditors.

II. REQUIREMENTS FOR PROTECTIVE SHIELD PROCEEDINGS

Protective shield proceedings require that the company is facing imminent illiquidity (drohende Zahlungsunfähigkeit) or is over-indebted (überschuldet) but is not yet illiquid (zahlungsunfähig). A robust liquidity and over-indebtedness assessment is therefore crucial: imminent illiquidity is typically determined through a forward-looking liquidity planning; over-indebtedness exists when assets no longer cover existing liabilities and there is no positive going-concern prognosis. If, however, actual illiquidity has already occurred, protective shield proceedings are no longer available.

Furthermore, a protective shield proceeding requires the debtor to apply for the opening of insolvency proceedings, for the ordering of self-administration (under submission of a self-administration plan consisting of a financial plan, a restructuring concept, a description of the status of negotiations, the measures taken to ensure compliance with insolvency law obligations, and a cost comparison between self-administration and third-party administration) as well as for the setting of a deadline for the submission of an insolvency plan.

The application must also be accompanied by a reasoned certification from a person experienced in insolvency matters, confirming that there is imminent illiquidity or over-indebtedness, but not actual illiquidity, and that the intended restructuring is not obviously futile. In practice, the certification should be based on a comprehensible liquidity plan, a plausible restructuring concept, and orderly documentation of the key assumptions.

III. PROCEDURE FOR PROTECTIVE SHIELD AND INSOLVENCY PROCEEDINGS

Filing of the application: The company files for the opening of insolvency proceedings under self-administration and, concurrently, for the ordering of protective shield proceedings.

Protective shield phase (up to three months): The court orders provisional measures, if requested, appoints a preliminary insolvency trustee (Sachwalter), and sets a deadline of no more than three months for the submission of an insolvency plan. The management generally remains in office and continues to operate the company under the supervision of the insolvency trustee.

Opening of insolvency proceedings: Upon expiration of the protective shield period, the court decides on the opening of formal insolvency proceedings and the continuation of self-administration. Protective shield proceedings may be terminated prematurely if the restructuring becomes manifestly futile or if material obligations are breached.

Insolvency proceedings and insolvency plan: Once proceedings are opened, creditors vote on the insolvency plan. Upon approval and court confirmation, the proceedings may be terminated and the restructuring implemented as planned.

Plan implementation: After termination of the proceedings, the company implements the measures set forth in the insolvency plan and continues business operations. Depending on the plan, ongoing court supervision may be ordered.

IV. RECOMMENDATIONS

The following considerations apply in particular to companies and managing directors contemplating a protective shield proceeding:

• Assess crisis status early and determine eligibility for protective shield proceedings: Liquidity, over-indebtedness status, and the going-concern prognosis should be continuously monitored and documented. Before filing an application, it must be determined whether there is imminent illiquidity or over-indebtedness and whether the restructuring is not manifestly futile.
• Thorough preparation: Protective shield proceedings should be carefully prepared. In addition to the mandatory self-administration plan, which should be developed as early as possible, it is also advisable to coordinate the required certification with an expert experienced in insolvency matters at an early stage.
• Plan stakeholder communication: Banks, key suppliers, customers, and employees should be engaged through a coordinated communication strategy.
• Structure the insolvency plan early: The economic restructuring measures, creditor contributions, and operational implementation steps should be prepared as precisely as possible before filing the application.
• Seek professional advice: The procedural strategy should be closely coordinated with appropriate legal, financial, and communications advisors to ensure that deadlines, liability risks, and restructuring opportunities are properly managed.