- Shift from profit maximization to satisfying liabilities to creditors
- Shareholders are protected by Limited Liability
- After Liquidation the company ceases to exist
- Liquidation is often not the best option
- Creditors foregoing (parts) of the liabilities after a complete restructure of the company to allow further trading is often more advisable
- If the Liquidation procedure is too expensive (court fees, insolvency administrator, etc) the company is simply deleted from the Business Register and no further action is taken. The creditors loose their entire invenstment
When am I insolvent?
- not being able to pay the due liabilities
- second test
- negative equity in the balance sheet
- first test (easier)
- but if the company can still operate normally the company is still not insolvent
- e.g. real estate prices may be far lower in balance sheet than in reality and this difference can be all the difference
Insolvency Proceedings
- Managers need to file insolvency
- Creditors can file insolvency as well
- Management looses power to represent and lead the company
Route Liquidation
- After Liquidation the funds are split equally according to their share (everyone gets the same percent of their debts back)
- Some debts have priority, those of the court and the insolvency case in general are payed first
Route Settlement
- If a settlement cannot be reached the Route Liquidation is taken
- If more than 50% of creditors and more than 50% of debt can agree on a settlement to forego the debt then the company may stay operational, but will be restructured by the administrator
- at least 20% within 2 years need to be payed back, lower is not possible
- if company agrees to 30% or more within 2 years even managers may stay in power
- might be dangerous due to inept or conflicting managers
Pecking Order
Who receives money in what order. Only when the higher layer is completely satisfied (repayed) then the next lower layer gets some funds as well. incomplete!
- Creditors
- Banks
- Suppliers
- Employees
- Shareholders