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Typical procedure for insolvency protection proceedings

The ESUG means that a new procedure has been established in Germany, known as insolvency protection proceedings (Section 270b InsO). These proceedings are modelled on the American Chapter 11 proceedings. The aim of insolvency protection proceedings is to further strengthen debtor-in-possession proceedings, thereby providing additional incentives for early reorganisation.

In the presence of imminent insolvency or overindebtedness alone, insolvency protection proceedings offer the debtor the chance to develop a restructuring plan whilst enjoying the protection of special debtor-in-possession proceedings. This plan would then be implemented as the insolvency plan once insolvency proceedings have been opened. This should bolster the debtor’s confidence. The debtor would then be prompted to file for insolvency as early as possible.

As part of these insolvency protection proceedings, the debtor does not lose control of their company. The debtor is only placed under the supervision of the insolvency court and an insolvency monitor, and is largely beyond the reach of creditors during a moratorium. Insolvency protection proceedings are judicial reorganisation proceedings.

1. Conditions of insolvency protection proceedings

Pursuant to Section 270b Paragraph 1 InsO, the initiation of insolvency protection proceedings requires

  • the debtor to have filed a petition to open proceedings;
  • that insolvency or overindebtedness be imminent;
  • the debtor to have filed a petition for debtor-in-possession proceedings;
  • that the reorganisation of the debtor’s organisation not manifestly lack the prospect of success; and
  • that the debtor to have filed a petition for the court to set a deadline for the submission of an insolvency plan.

2. Certification

When petitioning for insolvency, the debtor must enclose certification of a professional with experience in insolvency matters or a person with comparable qualifications. The debtor is responsible for providing a statement regarding imminent insolvency or overindebtedness and that the intended restructuring does not manifestly lack the prospect of success.

For this purpose, the debtor shall enclose certification, with grounds, provided by a tax advisor, accountant or lawyer experienced in insolvency matters or a person with comparable qualifications. This certification essentially constitutes the significant difference from the simple petition for self-administration.

Further requirements as to the form and content of this certification is not provided by the law. The only thing that is clear is that no comprehensive and therefore cost-intensive restructuring report is required since insolvency protection proceedings should also be accessible to small and medium-sized enterprises. In order to avoid rejection by the court, the insolvency-related and business qualifications of the attestor should be submitted to the court of the petitioner’s own initiative and should be substantially documented. Furthermore, the content of this certification must be extensive enough to allow the court of verify its plausibility.

You can find more information in the White Paper on Insolvency Protection Proceedings (Schutzschirmverfahren).

3. Decision by the shareholders’ meeting/annual general meeting

Because insolvency protection proceedings are only possible for imminent insolvency, there is often no obligation to submit a petition for insolvency, simply a right to petition for insolvency. Third-party managers in particular should therefore obtain a shareholder resolution prior to filing a petition for insolvency protection proceedings. This is also recommended for companies with multiple shareholders. Otherwise, the representative bodies are exposed to potential liability risks.

4. Primary creditor information

There is generally significant time pressure involved in implementing insolvency protection proceedings. Furthermore, successfully obtaining approval is dependent on major creditors. They should therefore be informed of this step in advance as a trust-building measure.

5. Insolvency petition

Petitioners for insolvency protection proceedings may only be the debtor himself. The debtor must enter a petition for self-administration. As part of insolvency protection proceedings, the debtor must likewise petition for the right to maintain the company under self-administration until proceedings are opened. Finally, the debtor must request a maximum period of three months to submit an insolvency plan.

The debtor may also request that they be entitled to execute obligations incumbent on the assets. While this question remains in dispute for provisional debtor-in-possession proceedings, the law explicitly provides for option of protection proceedings.

If enforcement has already been initiated against the debtor, the debtor may request that these enforcement measures be suspended.

The debtor may request the appointment of a specific insolvency monitor by the court. The court may only deviate from this request if the person suggested appears unsuitable to take this office. Insolvency monitors may not be the same person issuing the certification. It may be somewhat conceivable for the proposed insolvency monitor to have already taken an active role as part of the development of the debt restructuring plan. However, in most cases an agreement will likely be made regarding this insolvency monitor based on the requirement for independence (cf. Sections 274 Paragraph 1, 56 Paragraph 1 InsO).

Upon filing the petition for insolvency, the debtor must submit certification pursuant to Section 270 b InsO. The insolvency petition must be made in writing.

Pursuant to the provisions of the ESUG, the debtor must generally include a schedule of creditors and their claims to their petition. If the debtor has not yet halted its business operations, it must in particular notify the creditor with the

  • the highest claims (no. 1);
  • the highest secured claims (no. 2);
  • claims from the tax authorities (no. 3);
  • claims from the social security authorities (no. 4);
  • and liabilities from company pensions (no. 5).

With respect to the most recent financial year, the debtor must also provide information on

  • the total assets;
  • the revenues;
  • the average number of employees.

In addition, the schedule must be accompanied by a statement from the debtor’s representative indicating that the information is complete and accurate.

Not yet uniformly resolved is the question of the publication of the insolvency protection proceedings.

6. Appointing a provisional creditors’ committee, where applicable

The ESUG represents the first time a provisional creditors’ committee has been codified in law. In practice, this was already in place prior to the ESUG entering into force, especially for large proceedings, but had no legal basis.
The law distinguishes between mandatory, petitioned and optional creditors' committees (Section 22a InsO, Annex G 16 a).
A mandatory creditors' committee must be appointed if two of the three following criteria are met:

  • a minimum balance sheet total of 4,840,000 euros after deduction of an amount entered erroneously on the asset side within the meaning of Section 268 Paragraph (3) of the German Commercial Code (Handelsgesetzbuch [HGB]);
  • a minimum of 9,680,000 euros sales revenues in the twelve months prior to the balance sheet date;
  • at least fifty employees on an annual average.

The insolvency court should order a provisional creditors’ committee (petitioned creditors' committee) if both of the following conditions are met:

  • petition: entitled to petition are the debtor, the provisional insolvency administrator and each insolvency creditor, regardless of the amount of their claim;
  • designation of persons who may be considered for membership of the provisional creditors’ committee;
  • written declaration of consent by the persons named as future members of the creditors’ committee.

If the threshold values set out in Section 22(a) of the German Insolvency Statute are not met and no petition is registered for the appointment of a provisional creditors’ committee, it is nevertheless at the discretion of the court of insolvency to appoint a provisional creditors’ committee (optional creditors’ committee).

A provisional creditors' committee shall not be established if the debtor's business has been discontinued.

The provisional creditors’ committee is tasked with the following:

  • Support and monitor the provisional insolvency administrator’s execution of his office.
  • They have the right to participate in the appointment of a provisional administrator.

7. Reporting phase

The insolvency court reviews the admissibility of the insolvency petition for insolvency protection proceedings as well. If the criteria for admissibility are met, the court reviews whether proceedings may be opened. Proceedings may be opened if there are grounds for insolvency and the costs of the proceedings are covered.

  • Grounds for insolvency – inability to pay, overindebtedness, imminent insolvency

    The court now reviews whether grounds for insolvency exist. In particular, these include inability to pay and overindebtedness. Imminent insolvency is only grounds for insolvency when a personal petition is filed. During review, the court may make decisions based on its own expertise provided the documents provided are sufficient for such a decision. However, for standard insolvency proceedings (“corporate insolvency”, “IN proceedings”), an expert report is generally requested in advance.

    The court must also consider whether it must arrange to put safeguards in place until it reaches its final decision, a process that can take several weeks or even months.

  • Covering the costs of proceedings

    If there are grounds for insolvency and a sufficient claim has been determined, insolvency proceedings are opened unless this is rejected for lack of funds.

    The insolvency court generally relies upon an expert to review whether grounds for opening insolvency proceedings exist. This expert provides the insolvency court with a written report, which forms the basis on which the insolvency court decides on whether to open proceedings.

The provisional insolvency monitor is generally tasked preparing reports in provisional debtor-in-possession proceedings.

8. Debtor-in-possession insolvency protection proceedings

The amendments to the ESUG now gives debtor companies the option to engage in self-administration while already facing insolvency protection proceedings. This was previously only possible once the proceedings had been opened. The advantage to the company is that no loss of control occurs. The full rights to administration and disposition remain with the company. The interests of the creditors are protected by the fact that the company has been placed under the supervision of a provisional insolvency monitor. This generally does not develop externally for contractual parties during the provisional proceedings. These duties and responsibilities are limited to an internal monitoring, e.g., monitoring liquidity planning, monitoring order transactions, etc. The law designates the following competencies to the insolvency monitor, which may also be transferred accordingly to the provisional insolvency monitor:

  • The debtor may not enter into obligations exceeding the range of ordinary business without the insolvency monitor’s consent (Section 275 Paragraph 1 Sentence 1 InsO).
  • The debtor may not enter into obligations falling under the range of ordinary business if the insolvency monitor objects to such obligations (Section 275 Paragraph 1 Sentence 2 InsO).
  • The insolvency monitor may require the debtor to allow collection of all payments received only by the insolvency monitor and payments to be made by the insolvency monitor only (Section 275 Paragraph 2 InsO).
  • Pursuant to Section 276 InsO, the debtor must obtain the consent of the creditors’ committee for legal acts of considerable importance; if a provisional creditors’ committee has been appointed during the petition process, this provision shall already apply prior to the opening of proceedings.

If the debtor has petitioned this, they are entitled to execute obligations incumbent on the assets. This question is highly relevant in practice. If the company is entitled to execute obligations incumbent on the assets, deliveries and services may continue to be met prior to proceedings being opened and even after the date of opening. Otherwise, these payments must be effected prior to opening the proceedings.

Enforcement measures must be suspended upon the corresponding petition and decision of the insolvency court.

If the conditions for this are met, pre-financing for insolvency payments is possible, even as part of insolvency protection proceedings. It is therefore necessary pursuant to Section 188 Paragraph 4 of the German Social Security Code (Sozialgesetzbuch [SGB]) for the Employment Agency to consent to collective assignment of insolvency payment claims. This will be granted if on the balance of probabilities a significant proportion of jobs will be retained. The Agency will base its assessment of this requirement on

  • the numerical values stated in Section 112(a) of the German Works Council Constitution Act (Betriebsverfassungsgesetz [BetrVG])
  • and a forecast relating to the preservation of jobs, which the debtor-in-possession must produce as part of the insolvency protection proceedings.

If pre-financing for insolvency payments already forms part of the debtor’s liquidity planning, the existence of these requirements must be set out in the certification on which the restructuring plan is based. Moreover, obtaining a preliminary assessment of the Employment Agency is expedient.

<pHowever, if the obligations incumbent on the assets were to be triggered by pre-financing of insolvency payments, this would represent a significant impediment to the insolvency protection proceedings. With regard to the legal concept of Section 55 Paragraph 3 InsO, however, this mainly represents the fact that payments of insolvency benefits always constitute insolvency claims. This is especially true when a strong insolvency administrator is appointed. The debtor is placed in a similar position during insolvency protection proceedings, in which case nothing else counts in place of this.

However, the granting of insolvency benefits depends largely on the existence of an act of insolvency (cf. Section 270 b Paragraph 4 InsO). The granting of insolvency benefits is therefore precluded if the company can be reorganised without the court ordering proceedings to be opened or rejecting a petition for proceedings to be opened due to lack of assets.

If in the event of early termination of insolvency protection proceedings (see below), a provisional administrator will be appointed where there is no longer any concern of pre-financing for insolvency payments. However, this requires that this involves the same act of insolvency.
The debtor must submit the insolvency plan to the insolvency court by the specified deadline. If they do not do this, the process breaks down.

9. Termination of insolvency protection proceedings

The court must then lift the insolvency protection proceedings if

  • the reorganisation envisaged has become futile;
  • the provisional creditors’ committee has requested that the proceedings be terminated; or
  • a creditor with a right to separate satisfaction or an insolvency creditor has requested the proceedings be terminated and there are known circumstances that make it likely that the order would lead to significant disadvantages to the creditors; the petition is only permitted if no provisional creditors’ committee has been appointed and the circumstances claimed by the petitioner are credible.

In such cases, the insolvency court makes the decision whether to open insolvency proceedings.

10. Opening insolvency proceedings

The actual insolvency protection proceedings end once insolvency protection proceedings are opened. The insolvency court opens insolvency proceedings by virtue of an order. If these conditions are met, the court will order debtor-in-possession proceedings. Unlike with typical insolvency proceedings, the rights to administration and disposition remain with the company.

Otherwise, the rules of insolvency proceedings are largely applicable to debtor-in-possession proceedings. For example, pending proceedings are suspended by law. On the date on which insolvency proceedings are opened at the latest, the debtor company shall execute obligations incumbent on the assets.

11. Involvement of the supervisory board and shareholders' meeting

For debtor-in-possession proceedings, the legal personality or supervisory organs have no influence (Section 276a InsO). The supervisory board and shareholders' meeting are no longer involved in executive financial decisions. This monitoring is carried out solely by the insolvency monitor, the creditors’ committee and the creditors’ assembly. This allows the continuation of the business and the reorganisation to be separated from any corporate obligations. However, the right to dismiss and appoint new members of the executive board remains with the shareholders. However, the consent of the administrator's is required for this to enter into effectiveness.

12. Reporting meeting (creditors’ assembly)

Should insolvency proceedings be opened, the reporting meeting (creditors’ assembly) is crucial to the continuance of the proceedings. The executive board of the debtor company on the company’s financial situation and the causes of this during the reporting meeting. They must assess any prospects of maintaining the debtor’s enterprise as a whole or in part, indicate any possibility of drawing up an insolvency plan and describe the effects of each solution on the satisfaction of the creditors.

Likewise, the debtor company must compile the schedule of assets, the schedule of creditors and the balance sheet and submit these to their insolvency file. The schedules and the report to the creditors' assembly are submitted to the insolvency monitor in advance for review and comment.

The insolvency monitor responds to the debtor’s report and comments on the schedules. In particular, the insolvency monitor shall address the cooperation and requirements for self-administration. If necessary, the insolvency monitor shall propose a plan for reorganisation. The insolvency monitor shall verify such records and survey and give a written statement for each as to whether the result of his verification gives rise to objections.

During the reporting meeting, the creditors’ assembly decides whether the debtor’s enterprise should be closed down or temporarily continued on the basis of the insolvency administrator’s report. It may commission the administrator to draw up an insolvency plan and determine the plan’s objective for him. Furthermore, the creditors’ assembly must take decisions on all significant legal actions.

13. Verification meeting

For debtor-in-possession proceedings, verification of the insolvency claims is a matter for the insolvency monitor. During the verification meeting, the insolvency monitor enters every registered claim into a schedule for the court. If you are a creditor and have registered a claim before the deadline and have not heard anything from the administrator, the claim has been included in the insolvency schedule, Section 179 Paragraph 3 Sentence 3 InsO. The rule is quite simple: “No news is good news.”

Nevertheless, we make the insolvency schedule available to creditors in the protected area of our website. This schedule is generally updated in line with the semi-annual reporting requirement.

14. Voting meeting

The insolvency court shall docket a meeting to discuss the insolvency plan and the voting rights of the parties concerned and subsequently vote on the plan. This may be fixed for the same day docketed for the reporting meeting and verification meeting. In proceedings with large numbers of creditors, it is more practical to schedule the reporting meeting and verification meeting prior to the voting meeting, which will then be carried out separately.

The insolvency proceedings shall be terminated once the insolvency plan has been accepted. If the creditors reject the insolvency plan, the proceedings shall be conducted as standard insolvency proceedings from then on.

Voting is conducted in groups. The insolvency plan is accepted if the majority of the groups has approved the insolvency plan. In each group, acceptance of the insolvency plan by the creditors requires: the majority of creditors with voting rights to back the plan and the sum of claims held by creditors backing the plan exceeding half of the sum of claims held by creditors with voting rights. If the insolvency plan is adopted, the rules also apply to the creditors who voted against the plan or rejected it. The corrective measure for the creditors is the fact that this insolvency plan must not be any worse than liquidation.

The insolvency plan may be configured as a restructuring plan or a liquidation plan. Once the plan has been accepted, the regulatory arrangements must be implemented by the debtor.

15. Final record, reporting and final meeting

The final meeting shall be dispensed with once the insolvency plan has been accepted. In addition, a final record is usually not submitted. The insolvency plan may waive the obligation to produce financial reports.

16. Distribution

In contrast to standard distribution, the insolvency plan may provide for different arrangements.

17. Termination

The insolvency proceedings shall be terminated if the debtor has fulfilled the legal costs and the obligations incumbent on the assets executed as part of the proceedings.

 

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