Self-Administration (Eigenverwaltung) in Practice

What self administration means in German insolvency law

Self administration (Eigenverwaltung) is a form of German insolvency proceedings in which the debtor's management keeps control of the business and the assets, under the supervision of a custodian (Sachwalter) instead of an insolvency administrator. The court orders self administration on the debtor's application, unless preliminary self-administration would have to be refused or revoked (§ 270f(1) InsO). It is designed for viable companies with competent management that want to restructure through an insolvency plan or an orderly sale while keeping operational continuity and stakeholder confidence.

Since the reform with effect from 1 January 2021, access to self administration depends on detailed self-administration planning, and the courts examine applications more strictly than before. At the same time, the procedure remains attractive: management stays in charge, the debtor can use the restructuring tools of insolvency law and the stigma of a classic administration is reduced. In larger German restructurings, self-administration combined with an insolvency plan has become a standard route.

The self-administration plan under § 270a InsO

The application must be accompanied by self-administration planning comprising a financial plan covering six months with a sound account of the sources of financing, a concept for the proceedings based on the nature, extent and causes of the crisis, the status of negotiations with creditors, shareholders and third parties, the arrangements made to ensure compliance with insolvency law duties, and a reasoned statement of expected additional or reduced costs compared with regular proceedings (§ 270a(1) InsO).

The debtor must also declare arrears towards employees, pension beneficiaries, tax authorities, social security institutions and suppliers, any enforcement stays obtained in the previous three years and compliance with disclosure obligations for the previous three financial years (§ 270a(2) InsO).

The planning is not a formality. It is the basis on which the court, the preliminary creditors' committee and the custodian assess whether the debtor can run the proceedings in the interest of creditors. Financial plans should be integrated with the company's accounting, show weekly or monthly liquidity, account for insolvency money pre-financing and set out the restructuring measures and their costs. Inconsistent or overly optimistic planning is a frequent reason for difficulties in court and with creditors.

When courts refuse self administration

The court appoints a preliminary custodian, ordering preliminary self-administration, if the planning is complete and conclusive and no circumstances indicate that it rests on incorrect facts in material respects; remediable defects can be cured within a period of up to 20 days (§ 270b(1) InsO).

The hurdle rises where warning signs exist: if the financial plan does not cover the costs of self-administration and of continuing the ordinary business, if the expected costs of self-administration substantially exceed those of regular proceedings, or if there are arrears towards employees or substantial arrears towards other priority creditors, enforcement stays in the previous three years or breaches of disclosure duties, the custodian is appointed only if the debtor is nevertheless expected to be willing and able to align management with the interests of creditors (§ 270b(2) InsO).

The preliminary creditors' committee must be given the opportunity to comment before the decision, and the court is bound by a unanimous resolution of the committee supporting preliminary self-administration (§ 270b(3) InsO).

After the order, preliminary self-administration is revoked by appointing a preliminary insolvency administrator if the debtor seriously breaches insolvency law duties or otherwise shows that it is unwilling or unable to align its management with creditors' interests, for example because the planning was based on incorrect facts, the accounting is too deficient to assess the planning, or liability claims against current or former board members exist whose enforcement would be impeded (§ 270e(1) InsO). In opened proceedings, the court revokes self-administration on similar grounds or on application of the creditors' assembly (§ 272 InsO).

The custodian and the division of roles in self administration

The custodian examines the debtor's economic position and monitors management and expenditure, and must inform the creditors' committee and the court without delay if continuing self-administration is likely to disadvantage creditors (§ 274 InsO). The debtor should enter into obligations outside the ordinary course of business only with the custodian's consent, and should not enter into obligations even in the ordinary course if the custodian objects; the custodian can also require that all incoming and outgoing payments are handled through it (§ 275 InsO).

Some powers remain reserved for the custodian. Only the custodian can assert the estate's liability claims and challenge transactions under the avoidance rules (§ 280 InsO), which protects creditors where management's own conduct before the crisis is in question.

The debtor exercises the rights to perform or reject mutual contracts and the insolvency employment law tools in agreement with the custodian, and certain rights, such as terminating works agreements or applying to the labour court in connection with operational changes, are effective only with the custodian's consent (§ 279 InsO). The debtor also realises assets subject to security rights, with only the actual costs of realisation and VAT deductible rather than the flat-rate contributions of regular proceedings (§ 282 InsO).

Management liability

Managing directors acting in self administration are liable under the rules applicable to insolvency administrators (§ 276a(2) InsO), and the supervisory board and shareholders' meeting have no influence on management during the proceedings (§ 276a(1) InsO). Directors should therefore treat the creditors' interests as paramount, document decisions carefully and ensure that D&O cover is adequate for the period of the proceedings and for claims arising afterwards.

Self administration and the insolvency plan

Most self administration cases aim at an insolvency plan. The creditors' assembly can instruct the custodian or the debtor to prepare a plan; where the debtor is instructed, the custodian participates in an advisory role (§ 284(1) InsO). In practice, the debtor often submits the plan itself, prepared with its advisers and negotiated with key creditors in advance. The plan can restructure claims, release the debtor from residual debt, convert debt into equity and intervene in shareholders' rights. Our insight on insolvency plan proceedings describes the process in detail.

Alternatively, self administration can be used for a sale of the business as a going concern, often through a structured M&A process run by the debtor with the custodian's involvement. Buyers benefit from acquiring the assets free of most historic liabilities, while the debtor retains the ability to compare a sale with a plan solution. Our insight on buying assets from an insolvency administrator discusses the transaction mechanics, which apply with modifications where the debtor in self-administration sells.

The creditors' perspective and typical timetable

For creditors, self-administration changes the counterpart but not their basic rights. Claims are filed with the custodian rather than with an administrator (§ 270f(2) InsO), secured creditors keep their rights to separate satisfaction, and the creditors' assembly and committee retain their powers, including the power to apply for revocation. Large creditors often seek a seat on the preliminary creditors' committee, because the committee's position on the application, on the choice of custodian and on major transactions can be decisive. Our insight on the creditors' committee in German insolvency explains how committees work.

Suppliers and service providers should check whether the debtor has been authorised to incur administrative expenses and whether new orders are covered by the financial plan. Customers want to know that warranties and spare parts supply will continue. Lenders with security over receivables or inventory need to agree with the debtor and custodian how collateral is used in the ordinary course and how proceeds are accounted for, because the debtor, not an administrator, realises collateral in self-administration.

A typical timetable runs as follows: preparation of planning and filing within a few weeks before the application; preliminary self-administration for around three months, coinciding with the insolvency money period; opening of proceedings; and submission, voting and confirmation of an insolvency plan within a few further months, after which the proceedings are terminated. Sale processes can run in parallel. The total duration depends on the complexity of the business, the number of creditors and whether the plan is contested, but a well-prepared case can often move from filing to plan confirmation in well under a year.

Preliminary self-administration and the protective shield

In the period between filing and opening, the debtor operates in preliminary self-administration. On application, the court must authorise it to incur obligations that will rank as administrative expenses (Masseverbindlichkeiten), with special reasons required for obligations outside the financial plan (§ 270c(4) InsO). Insolvency money from the Federal Employment Agency covers wages for up to three months before opening and is usually pre-financed by a bank, which creates liquidity for the restructuring. Where the debtor is only imminently illiquid or over-indebted and presents an adviser's certificate, it can use protective shield proceedings with a debtor-proposed custodian; see our insight on protective shield proceedings.

Group insolvencies raise additional questions. Where several group companies file, the courts can coordinate proceedings, and debtors in self-administration are subject to cooperation duties within the group (§ 270g InsO). Planning should address intra-group supplies, cash pooling, shared services and the treatment of intra-group claims from the outset, and the group's financing banks should be involved early, because the termination of a cash pool or the freezing of accounts can otherwise disrupt operations in the first days after filing.

How TRW & Co helps

We advise companies and their management on self administration, from preparing the self-administration planning and declarations, through governance and communication with the court, the custodian and the creditors' committee, to the insolvency plan or sale process. We also advise creditors, creditors' committee members, investors and buyers in self-administration cases. We work with our insolvency proceedings, directors' duties and employment teams. This page is general information, not legal advice. To discuss your situation, please contact us.