Crises recognised,
crisis averted.

Management’s responsibility for implementing an early crisis detection system is made clear in a specific discussion. Management and supervisory boards are fundamentally responsible for determining whether and to what extent existing early crisis detection processes are effective for identifying insolvency risks arising over a (considerable) 24-month forecasting period. For this is a statutory requirement.

Management is obliged:

• to monitor developments which could pose a going concern-threat to the company (early detection obligation)
• to take appropriate countermeasures (duty to avert and manage crises)
• to promptly inform the supervisory or advisory board and shareholder governance entities (duty to inform)

A new and interesting toolset is now in use in Germany in restructuring practice to avert insolvency. This preventive restructuring framework is a legally regulated set of instruments which for the first time enables restructuring counter to the will of individual creditors, even outside of insolvency proceedings.

The following five questions first have to be answered in the affirmative for this new option to be viably usable.

1. Has a comprehensive, turnaround-focused corporate or restructuring concept been presented?
2. Is the company overburdened with debt, thus requiring restructuring of its balance sheet liabilities in particular?
3. Is the company facing imminent insolvency within the next 24 months?
4. Have there been any obstruction attempts thus far, such as blocking a potential restructuring plan, or are such attempts expectable?
5. Can the instruments per the StaRUG Restructuring Act be used to bring about a solution that takes into account the relevant interests and contributions of the stakeholders?

If these questions are answered in the affirmative, very interesting solutions are possible with StaRUG which were previously unavailable, including particularly the possibility of overruling creditor minorities (“accord disruptors” especially) and obstructive creditor groups.

To obtain the support of a majority of creditors nonetheless required, a comprehensive, transparent and resilient turnaround plan is still required, as a majority of creditors have to be convinced that restructuring makes sense and has prospects for success. Successful execution of the restructuring project, with or without the StaRUG options, is made possible by seeking unbiased, holistic advice at an early stage.

Crises must be identified early on so suitable countermeasures can be proactively taken to successfully emerge and move on. An early warning crisis radar is to be implemented to systematically monitor potential insolvency risks as an active step for optimally ensuring viability over the long term. Such a system reduces managing director liability and protects the company against going-concern risks on a sustained basis. What are the requirements such early warning systems have to meet?

An early warning system has to ensure that indications of a crisis involving stakeholders, strategy, products/sales, earnings and/or liquidity are promptly identifiable so as to allow assessment of the connected risks. It has to allow focusing on key metrics specific to the company and charting developments within a management information system. Evaluation is conducted via fully integrated, rolling 24-month corporate forecasting (P&L, balance sheet, cash flow) and on liquidity projections based thereupon. Risks must be adequately taken into account in such forecasting, ideally by way of scenario running (best, base and stress cases).

• Rolling liquidity projections
• Monitoring of general and industry-specific parameters (changes in payment due terms, use of early payment discounts, etc.)

Potential signs of an emerging stakeholder crisis

• No long-term prolongation of credit lines
• Changes in vendor/supplier behaviour, commercial credit insurance problems
• Increased employee sick leave rate
• Employee turnover up

Profitability monitoring

• Narrowing gross margin
• Declining profitability
• Declining staff productivity
• Equity ratio falling
• Changes in other industry and company-specific metrics

Indications of disruptive changes in the market and competitive environment

• Market share changes
• Competitors entering or exiting the market
• General market developments
• Substitution risks
• Changes in buying behaviour