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Process for insolvency proceedings

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Insolvency proceedings serve to uniformly satisfy insolvency creditors. They are bankruptcy proceedings, i.e., the entirety of the debtor’s assets are generally subject to confiscation by insolvency. The insolvency administrator secures and turns to account the assets and uniformly distributes them – after deducting legal costs and obligations incumbent on the assets – to the insolvency creditors whose pending claims have been specified in insolvency schedule.

To protect assets from further withdrawals, the administration rights and rights of disposition are transferred to the insolvency administrator once proceedings have been opened. This person then has the capacity of dominus litis. Furthermore, enforcement is no longer permitted against the estate once insolvency proceedings have been opened. Finally, the debtor’s claims may only be discharged to the insolvency administrator. If a creditor has set insolvency proceedings in motion, the consequences of opening proceedings apply to and against all creditors.

The German Insolvency Statute (Insolvenzordnung) primarily distinguishes between what’s known as standard insolvency proceedings and simplified insolvency proceedings (“consumer insolvency proceedings”). Standard insolvency proceedings apply to companies of all kinds and individual enterprises in simplified form, whilst consumer insolvency proceedings are generally used for private individuals (for more details, see below).

In standard insolvency proceedings, the person appointed is called the insolvency administrator; for simplified proceedings, this person is known as the trustee. You can recognise these different proceedings by the court file reference: IN is used for standard insolvency proceedings and IK for consumer insolvency proceedings.

Companies also have the option of reorganisation as part of debtor-in-possession proceedings. Since the law on further facilitating the restructuring of companies (ESUG) came into effect, preliminary debtor-in-possession proceedings as well as insolvency protection proceedings are now an option. Overall, self-administration has been bolstered.

 

Individual enforcement is the opposite of insolvency proceedings and involves each creditor seeking individual satisfaction from the debtor’s assets. For individual enforcement, each creditor acts only on their own behalf. The creditor must determine the assets it wishes to enforce. However, the debtor is not prevented from further access to its assets. The debtor is not monitored by a neutral third party.

Typical procedure for standard insolvency proceedings

As part of enforcement law, insolvency law is primarily a civil procedural right. Accordingly, a petition must be submitted for proceedings to be initiated (“principle of petition”). Insolvency proceedings are not permitted without an insolvency petition. This means no proceedings may be carried out ex officio. Strict differentiation is required for insolvency proceedings that have been initiated by petition from a public authority.

1. Insolvency petition

Petitioners may only be the debtor (“personal petition”) or a creditor (“third-party petitioners”). The petition must be based a condition for insolvency (see below). The insolvency petition must be made in writing.

2. 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.

3. 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.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. Safeguards may include ordering provisional insolvency administration, discontinuing compulsory enforcement, intercepting the debtor’s mail, etc.
  • 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.

4. Provisional (insolvency) administration

In addition to commissioning an expert report, the court has the option of ordering measures to safeguard the estate. In these cases, the court will typically appoint what is known as a provisional insolvency administrator. A provisional insolvency administrator is generally responsible for ensuring that the company operated by the debtor remains in business until a decision is made on whether to open insolvency proceedings. In particular, partial or complete corporate decommissioning would significantly impact the debtor’s rights because it would affect the debtor’s option to continue their original company until reaching a point where it may not even be clear that grounds for insolvency exist.

If in this context a general prohibition of disposals is imposed on the debtor, this would indicate the need for a so-called strong insolvency administrator. This administrator in this case would then receive the authority to manage and transfer the debtor’s property. If the court appoints a provisional insolvency administrator without imposing a general prohibition of disposals, the court must set out the specific duties of the so-called weak insolvency administrator.

Other steps that may be taken to safeguard the insolvency assets include:

  • imposing an order that the debtor’s disposition require the consent of the provisional insolvency administrator in order to become effective;
  • ordering a prohibition or provisional restriction on measures of execution against the debtor unless immovable assets are involved;
  • ordering provisional interception of the debtor’s mail.

5. Opening insolvency proceedings

The insolvency court opens insolvency proceedings by virtue of an order. On the date on which insolvency proceedings are opened, the administration rights and rights of disposition are transferred to the insolvency administrator. Pending proceedings are suspended by law. On the date on which insolvency proceedings are opened at the latest, the insolvency administrator shall execute obligations incumbent on the assets.

6. Reporting meeting (creditors’ assembly)

Should insolvency proceedings be opened, the reporting meeting (creditors’ assembly) is crucial to the continuance of the proceedings. The insolvency administrator reports on the debtor’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.

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.

7. Verification meeting

During the verification meeting, the insolvency administrator 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.

8. Settlement phase

During the settlement phase, the insolvency administrator 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;
  • several years of taxes need to be processed; or
  • creditors bring actions against the challenge to the claims lodged.

The insolvency administrator 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.

Special case: asset insufficiency

Asset insufficiency occurs when the insolvency administrator 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.

9. Final record and final meeting

Once all assets are turned to account and all registered insolvency claims have finally been verified, the insolvency administrator submits to the insolvency court a final record and final 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 insolvency administrator once again reports on the final insolvency proceedings.

10. 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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11. 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.

12. Discharge of residual debt, where applicable

For insolvency proceedings against natural persons, this may be followed by a procedure to discharge their residual debt. Once the discharge of residual debt has been granted, the debtor is disburdened from all obligations executed prior to opening proceedings. However, the process for discharging residual debt requires the implementation of insolvency proceedings. It is therefore not permitted if the insolvency proceedings are not opened (due to lack of assets) or are later discontinued due to lack of assets. Discharge of residual debt is only initiated for the debtor if the costs of the proceedings are covered. The law amending the Insolvency Statute, which came into effect on 01/12/2001, enables dismissal to be avoided by granting a deferment of legal costs. In this case, the legal costs are considered covered.

If there are no grounds for refusal, the court announces in a decision that you will be granted discharge of residual debt if you meet your legal obligations.

These legal obligations include but are not limited to you being in active employment or are engaged in seeking active employment, you surrendering half of any inherited assets to the trustee, you immediately inform the court or trustee of any change of residence and you not procuring any special advantages from any creditors.

Furthermore, you must inform the court and the trustee of any change of residence or employment on your own initiative.

Upon the expiry of the so-called six-year period of good conduct, the court decides whether it will now ultimately grant your discharge of residual debt. Prior to this decision, however, the court must hear from the insolvency creditors, the trustee and you, the debtor. If in this context neither the trustee nor any creditor files a petition for refusal, the court must grant the discharge of residual debt – regardless of whether and to what extent the creditors have been satisfied. The court must not establish such grounds for refusal ex officio.

However, the period of good conduct has been shortened under the new rules that came into effect on 01/07/2014

  • to three years (pursuant to Section 300 Paragraph 1 Sentence 2 InsO) if the debtor succeeds in paying at least 35% of the debts registered by creditors and all legal costs within this period;
  • or five years (pursuant to Section 300 Paragraph 1 Number 3 InsO) if the debtor has succeeded in at least paying off all legal costs (generally between around €1,500 and €3,000) within this period.

If you have now been granted discharge of residual debt by the court, you are now released from all obligations to creditors that have yet to be met. The same applies to creditors who have not registered their claims during the insolvency proceedings.

However, this does not include those claims that relate to any intentional illegal actions on your part, nor does it apply to penalties, fines, administrative fines or other penalty payments. Claims by creditors against co-debtors and guarantors are not included in the discharge of residual debt either.

The following claims have not been included in the granting of discharge of residual debt either since 01/07/2014:

  • obligations of the debtor’s resulting from illegal activities committed with intent, statutory maintenance payments that are in arrears, which the debtor has intentionally not paid in violation of their obligations, or obligations resulting from tax liabilities if the debtor has been convicted of a tax offence pursuant to Sections 370, 373 or 374 of the German Tax Code (Abgabenordnung); the creditor must provide notification of claims corresponding to the foregoing pursuant, stating their legal basis, pursuant to Section 174 Paragraph 2;
  • fines and equivalent obligations of the debtor’s in Section 39 Paragraph 1 Number 3;
  • liabilities from interest-free loans granted to the debtor to pay the costs of the insolvency proceedings.

However, if you are subsequently found to be in breach of your obligations and this results in significant interference with satisfying creditors, the court may revoke your discharge of residual debt. This requires a creditor to file a corresponding petition.

However, such revocation will not be considered solely as a result of any breach of obligations. Instead, such breach of obligations must be serious enough to have significantly interference with satisfying insolvency creditors. In addition, the creditor must have filed the petition for discharge of residual debt within one year as of the decision becoming final.

Since mid-2014, a new petition may be filed just five years after final refusal of discharge of residual debt (previously this was only possible after ten years).

 

 

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