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Typical procedure for self-administration proceedings

Self-administration is an institution that has rarely been applied in practice in the past. The appointment of an insolvency administrator will be dispensed with for self-administration. The ESUG aims to strengthen self-administration. This should result in the creation of a greater incentive for early petitioning for insolvency. The option for provisional self-administration was also created.

1. Requirements for self-administration

Self-administration may be ordered as part of standard insolvency proceedings and insolvency plan procedure, but may not be ordered as part of consumer insolvency proceedings (Section 312 Paragraph 2 InsO). An order for self-administration requires

  • a corresponding petition to be filed by the debtor (Section 270 Paragraph 2 Number 1 InsO); and
  • that there are no known circumstances that would lead to the order being disadvantageous for the creditors (Section 270 Paragraph 2 Number 2 InsO).

Legislators have reversed the rule-exception relationship with the ESUG. While the debtor was required to prove that no disadvantages were associated with self-administration prior to the ESUG, this is now assumed in principle.

Following a ruling by the Local Court of Cologne (decision dated 01/06/2012; 73 IN 125/12), self-administration may not be an end in itself, including under the reformulation of Section 270 InsO. Instead, the debtor’s application for such must still be judged on the fact that the creditors, whose satisfaction is the ultimate aim of an insolvency proceeding, have placed their trust in the debtor’s management.

If a provisional creditors’ committee is appointed, it must be heard as part of the petition for self-administration.

2. Insolvency petition

Petitioners for debtor-in-possession proceedings may only be the debtor himself. The debtor must enter a petition for self-administration. The new rules under the ESUG also give the debtor the option to maintain the company under self-administration until proceedings are opened. Furthermore, provisional self-administration must be petitioned by the debtor. The petition must be based a condition for insolvency (see below). 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.

3. 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.

4. Reporting phase

Once the insolvency petition has been received, the insolvency court reviews the admissibility of the insolvency petition. 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.

5. Provisional self-administration

The amendments to the ESUG now gives debtor companies the option to engage in self-administration while already facing provisional 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.

It is disputed whether the debtor company has the right to execute obligations incumbent on the assets for provisional debtor-in-possession proceedings. 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.

This legal question is answered differently by different case law. A Federal Supreme Court decision is pending.

This although the Supreme Court has declared in its ruling dated 07/02/2013 (ref.: IX ZB 43/12) that an appeal against the rejection of a petition to execute obligations incumbent on the assets is not permitted. However, the petition was rejected all because of the inadmissibility of the appeal. The Supreme Court has not made any substantive ruling on whether obligations incumbent on the assets may be executed in provisional debtor-in-possession proceedings pursuant to Section 270 a InsO.

6. Opening insolvency proceedings

The insolvency court opens insolvency proceedings by virtue of an order. 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.

7. 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. The administrator 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 company’s report the insolvency monitor’s comments. 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.

8. 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.

9. Settlement phase

During the settlement phase, the debtor implements the decisions of the creditors' meeting, turns to account the available assets and revises the insolvency table. Depending on the size of the proceedings and the specific circumstances involved, this phase may take anywhere from six months to several years. The duration of this process depends in particular on whether immovable assets are involved, accounts receivable must be recovered in the dispute, special assets and challenges against insolvency must be pursued through the courts (by the insolvency monitor), several years of taxes need to be processed or creditors bring actions against the challenge to the claims lodged.

The debtor is required to submit an interim report on the further developments in the insolvency case at regular six-month intervals. We provide these reports as a special service for creditors in the protected area of our website for download.

10. Special case: asset insufficiency

Asset insufficiency btor can no longer fulfil the reasonable obligations incumbent on the assets, i.e., the typical and reasonable obligations faced once insolvency proceedings are opened. The insolvency administrator reports the occurrence of asset insufficiency to the court. The occurrence of asset insufficiency is published online. Creditors of the assets also receive notification of such. Once the lack of assets has been reported, the following distribution sequence must be followed for the obligations incumbent on the assets:

  • the costs of the insolvency proceedings;
  • obligations incumbent on the assets that became legally effective after notification of the insufficiency of the assets without falling under the costs of the proceedings;
  • the other obligations incumbent on the assets, including lastly the maintenance granted pursuant to Sections 100 and 101 Paragraph 1 Sentence 3.

11. Subsequent order or termination of self-administration

Self-administration may be initiated by the first creditors’ assembly in proceedings that have already been opened upon approval by the voting and total majority. Self-administration that has already been ordered may be terminated pursuant to the ESUG rules if

  • so decided by the majority of the creditors’ assembly and the majority of the voting creditors (Section 272 Paragraph 1 Number 1 InsO);
  • so decided by a creditor with a right to separate satisfaction or by an insolvency creditor, and can establish that the party making the request risks being placed at a significant disadvantage on account of the debtor-in-possession management (Section 272 Paragraph 1 Number 2 InsO).

12. 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.

13. Final record, reporting and final meeting

Once all assets are turned to account and all registered insolvency claims have finally been verified, the debtor submits to the insolvency court a final record and final account. The insolvency monitor shall comment on the debtor’s statement of account.

If the insolvency court has no more questions, the insolvency court schedules a final meeting. For smaller insolvency proceedings, this may be by written procedure. During the final meeting, the debtor once again reports on the final insolvency proceedings. The insolvency monitor shall comment on this.

14. Distribution

After the final meeting, the insolvency court authorises final distribution in accordance with the distribution schedule submitted unless any objections are raised against this. The statutory distribution sequence is as follows:

Rank Type of claim Comments
1 Legal costs Legal costs include the court costs incurred as well as the fees for insolvency administration
2 Obligations incumbent upon the assets Obligations incumbent on the assets are obligations the insolvency administrator has identified once proceedings have been opened. These obligations must be satisfied in advance, i.e. before the insolvency obligation but after the legal costs. Holders of obligations incumbent on the assets therefore cannot rely “solely” on the rate.
3 Insolvency claims or insolvency obligations (Section 38 InsO) Insolvency obligations are those obligations that are already in place at such time as insolvency proceedings are opened. These are claims by creditors with well-founded claims against the debtor on the date on which the insolvency proceedings were opened, regardless of whether these claims are civil in their legal nature or represent claims under public law (e.g., tax returns).
4 Lower-ranking insolvency claims

Lower-ranking insolvency claims must be satisfied in the following order, and according to the proportion of their amounts if ranking with equal status:

  1. the interest and penalties for late payment accruing on the claims of the insolvency creditors from the opening of the insolvency proceedings;
  2. the costs incurred by individual insolvency creditors due to their participation in the proceedings;
  3. fines, regulatory fines, coercive fines and administrative fines, as well as such incidental legal consequences of a criminal or administrative offence binding the debtor to pay money;
  4. claims to the debtor's gratuitous performance of a consideration;
  5. claims for restitution of a loan replacing equity capital or claims resulting from legal transactions corresponding in economic terms to such a loan.
 

Ranking of claims

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15. Termination

Once final distribution has been carried out, the insolvency court decides on the termination of the insolvency proceedings. For companies, particularly where insolvency proceedings on the assets of a GmbH or GmbH & Co. KG is involved, the insolvency proceedings will be terminated. Only for insolvency proceedings concerning the assets of individuals will this be followed by the period of good conduct.

 

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