“Turnaround” – do we still have the right focus?

“It’s not just about doing the right things,
but doing things the right way.”
Peter Drucker

German insolvency law has been a permanent construction site since the end of the 1970s. This truism will not change even after the SanInsFoG came into force at the beginning of 2021 (see here), as the EU Commission’s efforts to harmonise national insolvency regimes show (here). And it is precisely these EU efforts that, in case of doubt, are more likely to have forced Germany to change its perspective than the previous purely national reforms. After all, the introduction of a “pre-insolvency restructuring procedure” (based on EU requirements) in the form of the StaRUG (see most recently here) and the limitation of the insolvency periods and thus filing obligations, which in the meantime have become quite excessive, chosen by the SanInsFoG to fit into German law should actually direct the focus more on the (out-of-court) restructuring of companies than on insolvency resolution. Nevertheless, I have the impression that the professional discussions are more focused on further increasing the efficiency of insolvency law (“are we doing things right?”) than on increasing effectiveness towards more (sustainable) restructurings.

Are we doing the right things?

…to turn Peter Drucker’s aforementioned quote around. Perhaps the restructuring rate in insolvency can no longer be increased by improving efficiency. Unfortunately, this idea cannot be substantiated statistically at present, because although the German Insolvency Statistics Act is also supposed to collect data “on the success of restructuring”, at least the Destatis surveys do not show this so far. Thus, to date, one can only fall back on the data of private providers, e.g. the insolvency statistics of Schultze & Braun, which have been established for years (most recently here, in German), the unfortunately no longer updated data of the Bonn Institute for SME Research (see e.g. here, in German) or currently a survey by Behrend/Möllers on “Success factors of insolvencies, reorganisations and restructurings”. As I myself stated in 2011 (here, footnote 27, in German), “it is frightening how little and little precise statistical material exists on insolvencies and restructuring; a discussion backed up with figures is therefore not really possible for Germany.” And despite the introduction of the Insolvency Statistics Act in the meantime, little or nothing has changed in this regard.”

But the few (current) statistical data speak a pretty clear language: attempts at restructuring – ESUG or StaRUG notwithstanding – generally seem to fail – whether out of court (here and here, both in German) or in court (here and in more detail here (again in German)). Not much has happened in the last twenty years. And this means that reports about the failed (insolvency-related) reorganisations of, for example, Kettler (see here, in German) could not only be the notorious “anecdotal evidence”, but actually the tip of the iceberg.

Accordingly, the current focus on near-insolvency and insolvency-related remediation reminds me of the analytical error discovered by Abraham Wald in his research on the strengthening of aircraft fuselages to protect them from being shot down (here and in more depth here). In fact, for the corresponding improvement proposals in the Royal Airforce during the Second World War, only those aircraft that had not crashed were examined, not those that had crashed. This was obvious, since it was not so easy to get hold of the latter – they had mostly crashed over enemy territory. Without a doubt, however, it would have made more sense to examine crashed aircraft in order to determine the most appropriate protective measures.

Transferred to corporate restructuring, the situation is of course exactly the opposite – we know, so to speak, the details of the “shot down” companies better than those of the companies “brought home” (without insolvency), to stay in the picture. My impression is that due to the somewhat better data situation, at least in the insolvency field, a focus on “insolvency-driven restructuring” has developed in the last twenty years, which insolvency administrators naturally like to take up and develop further. In other words, the discussion revolves around a constant increase in the efficiency of (insolvency-related / insolvency-driven) restructurings.

Will that get us anywhere?

Probably not, because there is a good chance that after twenty years the insolvency regime will have been optimised in such a way that further measures will probably produce little success at greater expense. It is to be feared that the restructuring rate in and around insolvency before the introduction of the InsO was around ten percent and after the SanInsFoG it is more likely to give up a few more percent to the StaRUG. And the insolvency rates are unlikely to be increased significantly by any amount of reforming zeal (see here and here for the rather frustrating figures, in German).

Necessary: a shift in focus towards a “restructuring culture

Accordingly, it might make sense to shift the focus away from legal procedures and towards the promotion of business concepts. This entrepreneurial approach is of course not as tangible as procedures cast in formal rules. But perhaps this approach could also achieve better results with less effort for all parties involved.

Irrespective of whether a wave of insolvencies threatens after Corona or not (see here, in German), against this backdrop the focus of policy-makers should rather concentrate on improving the statistical data on restructuring, reorganisation and insolvency before further reform steps are taken, in order to examine how successful reorganisations actually are in the various crisis stages of companies (see here on the “crisis progression curve”). To this end, an attempt should at least be made to statistically record out-of-court restructuring measures above a certain intensity. One approach could be to collect corresponding information on the reporting obligation within the framework of the now introduced early crisis detection according to §§ 1, 102 StaRUG in conjunction with an expansion / improvement of the insolvency statistics. The results of such surveys – especially as time series – should also take the focus off insolvency and perhaps lead to a strengthening of the “restructuring culture”. Which brings us to “doing” the “right things”.

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