Insolvency as a way out of the crisis

When an insolvency administrator comes to the company, it is usually already ablaze. The employees have already noticed weeks or months ago that something is going wrong and fear for their future. But no company gets into insolvency without a reason. Often, performance-related problems have not been eliminated for years.

For the insolvency administrator, the task now is to mobilize forces and motivate employees. In order to keep customers satisfied, the quality and delivery reliability must be at least as high as outside the insolvency proceedings. No manufacturer will permanently commission an insolvent company out of pity. This is particularly difficult in production. Here, in particular, experienced interim managers are needed to avoid a high level of sick leave or to prevent acts of sabotage in production.

What role does the insolvency administrator play? Why does it make sense to work with external consultants and what skills do interim managers need to have? How can staff be motivated and both quality and delivery reliability for customers be maintained? We talk about this with Detlef Specovius, lawyer and specialist in insolvency law at Schultze & Braun.

Detlef, what made you decide to become an insolvency administrator?

The decision was already made during my traineeship. At that time, I was working for a lawyer in the field, so to speak. I realized relatively quickly that this business is not what I want to do all my life. If law, then always with reference to business administration. That was what one could do best in the industry - at that time it was still called bankruptcy trustee. I then applied for a training position as a bankruptcy lawyer in response to a box number advertisement in the NJW, i.e. the magazine "Neue Juristische Wochenschrift". Then I came to Achern and thought I would do that for two years. In the meantime, I've been in the job for 28 years.

In recent years, we have had quasi golden times. At the moment, this business has become somewhat more difficult for us, for example, due to the Corona-related suspension of the obligation to file for insolvency. How do you currently see your professional existence?

I had enough to do two, three months ago. During the last two years, I had some proceedings or some mandates that were quite time-consuming. Whether that's Condor, Bonita, or Pressmetall. And since these mandates - with the exception of Pressmetall, which is still ongoing - have been settled, it has become extremely quiet. On the one hand, this is certainly due to the suspension of the obligation to file for insolvency. But what is surprising is that after the suspension was lifted, there was no wave of insolvencies, as many had hoped, believed or feared. And there are no signs that this will change any time soon. There is obviously still enough money in the market. The banks are also keeping their feet still at the moment. Accordingly, the companies do not see any need to file for insolvency at the moment, although they might be obliged to do so, at least for restructuring reasons.

We have already fought through a number of proceedings together. From our side, strongly in the area of distressed M&A, where we help sell companies and find investors. You just mentioned the example of Pressmetall. There, we are increasingly in the role of providing support in the insolvency proceedings, also in terms of performance. On the one hand, we provide the CFO or CTO, and on the other hand, we take over the management of the company. We are noticing that our customers are increasingly focusing on performance management, i.e. production, quality management and quality assurance. Until an investor takes over, or even if no investor is found and it comes to production, the quality and also the delivery reliability for the customers must be maintained or kept high. Why is this so important? And what are the challenges, especially with regard to the employees?

A company does not get into insolvency without a reason. Often, it has had performance problems and has not eliminated them over the past months or even years. If you then come into a company as an insolvency administrator, you are not suddenly an expert in the field of casting, textile processing, textile finishing or automotive suppliers by virtue of the fact that you have been appointed as administrator. As an insolvency administrator, you have a certain legal toolbox that you can use. You may also have a certain amount of industry experience in one case or another, but you can't delve into the depths of production the way a specialist can. But I have the problems and I have a certain period of time to bridge the gap, for example through the insolvency money. This gives me the opportunity to work without personnel costs for the time being. However, as soon as I go into the opened proceedings and have to calculate under full costs again, this leads to the fact that the company, which was already loss-making before, then also works loss-making. In other words, there is a risk that I will destroy mass there. Justifiably, no creditor likes to see that.

It is never possible to predict exactly how quickly an M&A process will succeed, if it succeeds at all. So how long does the company have to carry on under its own responsibility? There is a risk that I will excessively use up the "bacon" that I have "eaten" during the preliminary insolvency proceedings. That's why it makes sense to have external experts on board from day one. They recognize relatively quickly where the company's problems lie. Where can and must you start to make the company profitable again? On the one hand, there are very short-term measures, while other measures only take effect on the time axis. In that case, I have to check whether the company will make it by then. Otherwise, as bitter as it is, I have to tell the creditors' committee or the creditor that we have to shut down the business. Because we can't operate profitably, nor will anyone finance our losses. That is one reason.

The other reason is that I have to ensure that the quality remains the same or perhaps even improves in the opened proceedings. After all, we had a completely different mandate together. There, neither the quality nor the timing from order entry to production was right. It took far too long and the customers were no longer prepared to accept that. However, the company was not able to shorten the production time because the employees had been working like this for 20 years. The fact that times have changed was not recognized there.

Let's focus on the topic of human capital: We already have various topics in human resources for healthy companies, but for companies in insolvency it is of course quite different again. What is your opinion on the topic of motivation, especially with regard to quality and quality assurance? What are the challenges?

We have the peculiarity that in a distressed M&A situation, insolvency or restructuring, we encounter employees who have noticed for weeks or months that something is going wrong. This naturally brings up fears. Worries about their jobs, fears about how to continue, how to finance their livelihood. Then the insolvency administrator arrives on the X deadline. First of all, all hopes and wishes are focused on this person. If this person does not deliver, everyone falls into an even deeper hole.

This means that, on the one hand, you have to look very closely at how you can motivate your employees. How can I ensure that they continue to perform, and at best even better than before? Which employees are necessary? Who can I rely on? Are people in certain positions because they were good with the old shareholder or managing director, but are a disaster in terms of expertise and content? It is crucial that I have someone who is constantly on site. To whom the employees can come at any time, because his office door is actually always open. It is important to collect feedback from the workforce. Because they often recognize where the problems are much sooner and better than senior employees. This requires tact and empathy, and the ability to inspire.

Since we have mentioned pressed metal: It becomes extreme, of course, in the situation where production takes place. There it is very difficult to motivate the employees. In other words, to avoid an exorbitantly high level of sick leave or to prevent production from being sabotaged. Interim managers need considerable skills for this.

That's right, it's a balancing act. We are in insolvency proceedings, so on the one hand we have a higher sick rate and less motivated employees. On the other hand, the customers, such as large OEMs or large companies from the automotive industry, want to stock up once again because it is obvious that the supplier will soon fail. So, in parallel, they are setting up a second, possibly third, supplier. In that case, what is the relationship, also via the creditors' committee, with the customers? How can you try to match the expectations with the possibilities of the company in insolvency?

An important feature in keeping customers happy - because that is ultimately what it is all about - is to supply them with at least the same, if not even better, quality and delivery reliability as outside of insolvency proceedings. After all, customers need the products, and they need them in the quality they are used to.

To stay with pressed metal: No car manufacturer is willing to pay for products of inferior quality. The parts may not be installed. Then the customer is gone faster than you can think. That's why quality and also adherence to delivery dates must not drop in insolvency. No manufacturer will permanently commission an insolvent company purely out of pity. Apart from that, this may also trigger claims for damages, which are mass liabilities after the opening of the proceedings. This can lead to insufficient assets. The creditors' committee asks, justifiably, why poor quality was produced. Why no measures were taken to avoid this. And this is exactly the task of the interim manager or a production manager. He or she ensures that the quality and time specifications are adhered to in production.

What skills or characteristics should an interim manager have?

An interim manager must be professionally good. He does not have much time to gain the trust of the employees. They must quickly notice and experience that he knows what he is talking about. Only then will they be willing to implement his suggestions and what he says. He must be empathetic. The employees are afraid for their future. He has to take that seriously. He has to motivate and take the employees along with him. And ultimately, he must also be willing to admit when he makes mistakes. In addition, he must be approachable, open and honest in his dealings with employees.

We have many customers in insolvency proceedings. Of course, we experience that often the very large clients also exercise a certain power in the creditors' committee and try to put their needs in the foreground. As an insolvency administrator, how do you manage, together with the interim managers, to serve all clients in roughly the same way?

That is an important point. In this respect, an Intermin manager needs a certain backbone in order to assert himself. He has to know what the individual customers want. At the beginning of a process, people usually pull at you from all sides: The big customers think they have special rights over the small customers. Also not to be underestimated are the mayor or the district administrator, who suddenly take an interest in the company, which they had never visited before, even though it has been on the market for 30 years. Possibly the next elections are just around the corner and 500 jobs are threatening to disappear. That's what you have to take care of.

Then there are the suppliers, who are angry because they suffer a breakdown but have to continue delivering. There are the employees, the unions and the works councils, who are of course all now, quite rightly, trying to assert their rights. Everyone is tugging and pulling at the interim manager and the administrator.

Last but not least, there are the banks that regularly want to know how things stand. They don't go to the creditors' committee because they have no interest in it, but they still want to be informed. And the creditors' committee is not always easy to look after either. Balancing all that. That is the task of the Intermin Managing Director, in addition to his professional skills and abilities.

In this respect, it is sometimes good when everything comes from a single source. What is your experience when the consultants come from one house compared to when an interim manager comes from a provider and then parallel consultants are provided who come from another house?

That can work well, but I prefer everything from a single source. Then I only have one contact person, the project manager. As soon as something doesn't suit me or something needs to be clarified, I discuss it with him directly. I don't have to go to another production manager and purchasing manager, because that's the project manager's job. I also don't want to "rule" into that. I expect the project manager to put the people into my company whose skills he is convinced of. And if it doesn't work out, I talk to him directly. It's no different in our field.

What argumentation makes it clear in the creditors' committee that such positions are to be filled externally? There would also be opportunities to pay for these positions on the basis of performance. From our point of view, the issues of delivery reliability and quality, i.e., the reduction of scrap, are also a metric. If we produce less scrap through classic management, the company naturally also has added value. What about the costs in the area of consulting?

The creditors' committees are becoming more cost-sensitive, that is true. You have to make it clear what the benefit of the consultant is and what the requirement profile is. I'm not going to bring in ten consultants to make mischief and burn money. The company is not in this position for nothing. If there are problems in production, I have to start there or the quality problems will continue in the process - with the result that at some point the mass insufficiency will occur.

Another argument is to decorate the "bride" first, so to speak, so that she can be sold at all. At the beginning of the process, perhaps no investor will get on board because there are so many problems that need to be solved. I have then, if necessary, also the possibility to make the enterprise so profitable that I can continue a period of one or two years more and more often in proceedings, because at the moment the market for a project is bad. But the way, it may improve. If I manage to run the company profitably, I don't have to stop business operations. Maybe then, two years after Corona, I will start a new sales process, which is unsuccessful at the present time. Understandably, every company is holding its money together right now and is therefore out of the question as a strategic investor for the time being.

We are noticing that these topics are increasingly coming our way. Do customers give you positive feedback in such proceedings, including praise from time to time? Or do people tend to assume that such issues will be dealt with and handled professionally as part of the insolvency proceedings, regardless of whether it's a matter of production or bridging the gap until a new investor is found?

Germans are usually quite sparing with praise. I don't think that's right, because people are also receptive to praise. If someone does something good, you have to say so. But I think that by now this whole restructuring industry has become so professionalized that it is also expected. It is no longer a unique selling point of Schulze & Braun, for example. Working with external consultants is actually common practice. Companies are expected to be managed as cost-neutrally as possible during this phase, if not to make a profit. Most people don't care how this is achieved.

I think we will manage a few more projects together and also expand the area of interim management more strongly at enomyc. Good interim managers are rare, because they have to be trained to also understand the topic of insolvency and not just be good at implementation.

That is a very important point. As an insolvency administrator, there is no time for training, especially in larger, more complex cases. Explaining the difference between mass debts, pre-insolvency, post-insolvency and offsetting 'yes or no' must not be a permanent condition. Interim managers must master the basic tools of the trade. This makes the job easier and is also a competitive advantage for them. Finding and keeping good people is no easy task, especially in the service sector.

Thank you very much for the interview and the open exchange!

Do you have questions about insolvency, distressed M&A or production, quality management and quality assurance, especially in the context of production? Then feel free to write directly to our experts.