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Bankruptcy - Germany

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TABLE OF CONTENTS

1. What are the different types and aims of insolvency proceedings? 1.
2. What are the conditions for opening each type of insolvency proceedings? 2.
3. What is the role of the various participants in each type of proceedings? 3.
4. What are the effects of the opening of proceedings? 4.
5. What are the specific rules related to certain categories of claims? 5.
6. What are the rules relating to detrimental acts? 6.
7. What are the conditions for the lodgement and admission of claims? 7.
8. What is the meaning of reorganisation proceedings? 8.
9. What are winding-up proceedings? 9.
10. What are the conditions for the closure of the proceedings? 10.

 

1. What are the different types and aims of insolvency proceedings?

The German Insolvency Regulations recognise only one standard insolvency proceeding. Its aim is the best possible, equal satisfaction of the creditors (first sentence of Section 1 of the German Insolvency Regulations (Insolvenzordnung - InsO)). Insolvency proceedings can be carried out in accordance with the statutory provisions relating to the administration, realisation and distribution of the insolvency assets (“regular insolvency proceedings”). The parties to the proceedings can however make other provisions in an insolvency scheme, particularly regarding the preservation of the company.

Insolvency proceedings are also intended to allow natural persons a financial fresh start. This is achieved by waiving any debts which have not yet been paid off after the conclusion of the insolvency proceedings (“discharge of remaining debts”).

2. What are the conditions for opening each type of insolvency proceedings?

Insolvency proceedings can be opened in respect of the assets of any legal entity or natural person, even if they are not entrepreneurially active (“consumers”).

It is necessary first of all to make an application to open the insolvency proceedings. This may be made by the debtor or by a creditor. Government departments cannot make an application. There is an obligation to make an application in the case of joint-stock companies, in the event of insolvency. If this obligation is not met, a claim for compensation by the creditors can be considered. The debtor may also make himself criminally liable.

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Grounds for opening insolvency proceedings are inability to make payment and/or over-indebtedness. Inability to make payment exists if a debtor is not in a position to meet the payment obligations which are due (Section 17(2) InsO). Over-indebtedness exists if the debtor’s assets no longer cover the existing obligations (see Section 18(2) InsO). The debtor’s assets must be valued on the basis that the business will be continued, if this is strongly likely in the circumstances. Imminent inability to make payment is also sufficient for an insolvency application by a debtor (Section 18(1) InsO).

In order to protect the court and the debtor against applications which are overhasty or which are made solely with the intention of causing damage, a creditor must, when making an application, present prima facie evidence that a ground for insolvency exists and that he owns a claim.

Finally, it is necessary for the financing of the insolvency proceedings to be secured. The application to open proceedings is therefore rejected if the debtor’s assets are unlikely to be sufficient to cover the costs of the proceedings (first sentence of Section 26(1) InsO).

If the conditions are met, the insolvency court makes an opening order which is made publicly known. Public notification takes place at the instigation of the court on the Internet (www.insolvenzbekanntmachungen.de Deutsch) or in a gazette designated for official notifications by the court. Draft legislation provides for public notification to take place exclusively on the Internet in future.

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3. What is the role of the various participants in each type of proceedings?

It is the duty of the insolvency court to accompany and monitor the procedural course of the insolvency proceedings. It must also be involved in a conciliating and mediating capacity in the negotiations of the parties to the proceedings and thus promote the goal of agreed conflict resolution. The central decisions in the insolvency proceedings that have been opened (realisation, liquidation, reorganisation and insolvency scheme) are left to the creditors. However, the court has special powers and duties at the opening stage of the proceedings. It decides at this point, inter alia, about opening the proceedings, about interim security measures and about the appointment of an insolvency administrator. The court is also responsible for supervising the insolvency administrator. However, it merely monitors whether his actions are just, not whether they are expedient, and it also cannot give any instructions.

The insolvency administrator is the central figure in the insolvency proceedings. Lawyers, businessmen, auditors or tax consultants can be considered in particular for this purpose. When the insolvency proceedings are opened, the insolvency administrator acquires the power to administer and dispose of the debtor’s assets. His main task is to separate the assets which he finds when the insolvency proceedings are opened from the items not belonging to the debtor. He must also transfer to the debtor’s assets those items which legally belong to the stock that has to be valued but which, at the time when the insolvency proceedings are opened, are not yet located among the debtor’s assets. These debtor’s assets determined in this manner constitute the “insolvency assets” (Section 35 InsO) from which the creditors are then satisfied. The insolvency administrator’s further duties include the following:

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  • payment of wages to the insolvency debtor’s employees
  • deciding on pending contractual relations (Section 103 InsO)
  • making a list of assets (first sentence of Section 153(1) InsO)
  • realising the insolvency assets (Section 159 InsO)
  • distributing the realisation proceeds (Section 187 InsO).

The Insolvency Regulations also give the creditors considerable influence over the insolvency proceedings. Provision is always made for the creditors’ meeting. Additionally, there is the possibility of appointing a creditors’ committee. While the creditors’ meeting is the basic organ of the self-administration by the creditors, the creditors’ committee is the central supervisory organ of the creditors and resembles a supervisory board in its function.

The creditors’ meeting is convened (first sentence of Section 74(1) InsO) and also conducted (Section 76(1) InsO) by the insolvency court. All preferential creditors, all insolvency creditors, the insolvency administrator and the insolvency debtor are entitled to take part (second sentence of Section 74(1) InsO). A resolution by the creditors’ meeting comes about if the total amount claimed by the assenting creditors is more than one half of the total amount claimed by the voting creditors (majority of totals).

The creditors’ meeting decides on the composition of the creditors’ committee (Section 68 InsO). If a creditors’ committee is appointed by the insolvency court even before the first creditors’ meeting, its composition is determined by Section 67(2) InsO. The creditors’ meeting has the right to dissolve a creditors’ committee which has been provisionally appointed in this manner.

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The significance of the creditors’ meeting is that it is for the meeting to decide on the continuation of the proceedings, and in particular it can decide how the assets are to be realised. Further duties of the creditors’ meeting or the creditors’ committee are as follows:

  • choosing a different insolvency administrator (Section 57(1) InsO)
  • monitoring the insolvency administrator (Sections 66, 79, 197(1)(1) InsO)
  • assenting to particularly significant legal acts by the insolvency administrator (Section 160(1) InsO)
  • involvement in the preparation and implementation of the insolvency scheme (Sections 218(2), 231(2), 232(1)(1), 233, 2nd sentence, 248(2), 258(2), third sentence, 261(2), second sentence, 262 InsO).

The insolvency debtor is the owner of the assets which are to be realised and against which the insolvency creditors’ claims (Sections 38, 39 InsO) are directed. He is in principle liable with his entire assets. Even when the insolvency proceedings are opened, he remains the owner of his assets and responsible for his obligations. However, the power to administer and dispose of his assets which are caught by the insolvency passes to the insolvency administrator (with the exception of self-administration, Sections 270 et seq. InsO). Additionally, the opening of the insolvency proceedings establishes numerous duties to provide information and to cooperate. At the same time, however, the insolvency debtor is also entitled to take part in the proceedings.

In order to bring the insolvency proceedings to a rapid conclusion, the decisions of the insolvency court are only subject to appeal in those cases in which the law provides for an immediate appeal (see Section 6(1) InsO). The immediate appeal may be lodged at the insolvency court or at the appeal court (meaning the Regional Court superior to the insolvency court), and shall be lodged in writing or for recording by the court office. It has no postponing effect; however, after it has been lodged, the appeal court and the insolvency judge may order the temporary suspension of enforcement.

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4. What are the effects of the opening of proceedings?

The opening of the insolvency proceedings causes the debtor’s right to administer and dispose of the assets constituting the insolvency assets to pass to the insolvency administrator (Section 80(1) InsO). This not only covers the assets belonging to the debtor at the time when the proceedings are opened but also the further assets acquired by him during the proceedings. Moveable items required by the debtor for his livelihood are not covered by this “seizure”. Employment income only forms part of the insolvency assets in as much as it exceeds the debtor’s minimum subsistence level.

In order to protect the insolvency assets, for example from interference by the debtor or by individual creditors, the insolvency administrator is obliged to take the insolvency assets into his possession immediately. If the debtor does not voluntarily give up the assets, the insolvency administrator can proceed against him by way of compulsory enforcement. The order to open the proceedings serves as an enforcement order. The insolvency administrator must also prepare a list of assets in which the items forming part of the assets are valued and set out beside the debtor’s commitments (Section 153 InsO). He is also obliged to draw up a list of creditors, in which the claims are specified and subordinate and preferential creditors are covered separately (Section 152 InsO).

As the aim of the insolvency proceedings is the equal satisfaction of all creditors, the opening of proceedings establishes a prohibition on individual compulsory enforcement. This means that the insolvency creditors cannot, for the duration of the proceedings, enforce either upon the insolvency assets or upon the debtor’s available assets.

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5. What are the specific rules related to certain categories of claims?

Preferential satisfaction must be given to the “asset creditors” (Section 53 InsO). These are the creditors whose claims have, after the opening of proceedings, been substantiated by the administrator in connection with the insolvency procedure (e.g. claims for wages by the employees still employed at the business or claims by a lawyer whom the insolvency administrator has instructed to bring proceedings asserting claims against the insolvency debtor). The reason for their preferential satisfaction is that the insolvency administrator can only properly carry out the proceedings if he is able to establish new obligations for which performance in full is guaranteed.

Creditors for whom items forming part of the insolvency assets have served as security have a claim to preferential satisfaction from the proceeds of those items. The proceeds achieved by the realisation of such an item shall be distributed to the creditor holding security up to the level of the secured claim. Any surplus shall accrue to the insolvency assets and be available to satisfy the remaining creditors. A right of separation of this kind is substantiated, inter alia, by charges on property, liens on moveable items or secured property (Sections 50, 51 InsO).

The insolvency creditors do not include those creditors who are entitled to preferential treatment (Section 47 InsO). The seizure only covers the debtor’s assets. If, at the time when the proceedings are opened, there are assets in his possession in respect of which a third party has an in rem or an in personam right, the third party can assert his right undiminished (“right of separation”). He can therefore bring a claim for delivery against the insolvency administrator outside the insolvency proceedings. Separation of assets is justified in particular by title and ordinary reservation of title, but also by a contractual claim for restitution (e.g. by a lessor against a lessee).

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6. What are the rules relating to detrimental acts?

The insolvency rescission laid down by Sections 129 et seq. InsO is intended to prevent the insolvency debtor from removing assets from seizure or individual creditors from procuring special advantages immediately before the opening of the insolvency proceedings. If the insolvency administrator declares rescission, the beneficiary of the rescinded act must make restitution of everything which has been removed from the assets of the insolvency debtor by the legal act which is liable to rescission. If this, by its nature, is not possible, he must pay compensation. Any counterclaims by the beneficiary shall revive once he has made restitution of what was acquired (Section 144 InsO).

It is necessary for the purposes of a rescission for the insolvency creditors to have been adversely affected by a legal act performed before the opening of the insolvency proceedings (Section 129 InsO) and for one of the grounds for rescission laid down in Sections 130-136 InsO to exist. The following in particular substantiate a ground for rescission:

  • unpaid services by the debtor unless they were performed more than four years before the application for the opening of the insolvency proceedings (Section 134 InsO);
  • legal acts performed by the debtor in the last ten years before the application to open proceedings with the intention of adversely affecting his creditors, if the party who benefited thereby was aware of the debtor’s intent (Section 133 InsO);
  • legal transactions performed by the debtor in the last three months before the application to open proceedings, if he was already incapable of making payment and the other party was aware of this (Section 132(1)(1) InsO);
  • legal acts whereby the insolvency creditor is granted security to which he was not entitled, if the act was performed in the last month before the application to open proceedings (Section 131(1)(1) InsO).

Criminal liability both on the part of the debtor and also the benefited creditor also arises in these cases (Sections 283-283d of the German Criminal Code (Strafgesetzbuch - StGB)).

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7. What are the conditions for the lodgement and admission of claims?

The insolvency claims are not taken into consideration automatically but only if and in so far as the insolvency creditor claims his right by lodging the insolvency claim. In its opening order, the insolvency court must invite the insolvency creditors to lodge their insolvency claims with the insolvency administrator within a period of not less than two weeks and not more than three months (first and second sentences of Section 28(1) InsO). This is not however an exclusion time limit. It is therefore also possible to lodge the insolvency claim even after the time limit expires (see the first sentence of Section 177(1) InsO).

Claims which have already been judicially established (documented claims) must be lodged in writing. At the time of the lodgement, the reason for the claim must be stated, i.e. the facts on which it is based. This is particularly important if the lodgement is intended to suspend the limitation period. Any documents showing the claim, such as contracts and invoices, must be attached (second sentence of Section 174(1) InsO).

The administrator enters the lodged claims in the insolvency table (first sentence of Section 175(1) InsO). After the time limit for lodging claims expires, the table is displayed in the insolvency court for inspection by the parties.

At the “examination hearing”, the insolvency court conducts a purely formal examination of the claims which have been lodged. The hearing date is set when the proceedings are opened. The insolvency creditors who have lodged a claim, the insolvency administrator and the insolvency debtor are invited to attend. The court does not undertake an objective examination of whether the claims that have been lodged are admitted but merely notes whether they are disputed by the insolvency administrator, by the insolvency debtor or by an insolvency creditor. The outcome of the examination is recorded in the insolvency table (Section 178(2) InsO).

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If neither the administrator nor a creditor opposes a claim, it is deemed to be established. It is taken into account without further action when the insolvency assets are distributed. The entry of the established claim in the table in the insolvency proceedings has the same effect as a final judgment (Section 178(3) InsO). In the event of an opposition, the creditor must attempt to prove the validity of the claim by way of proceedings for a declaration. If he succeeds in this, he should apply to the insolvency court for rectification of the table (Section 183(2) InsO). If the creditor already has a right which he has established against the debtor before the opening of the insolvency proceedings, the opposition is in principle irrelevant.

An opposition by the debtor against a lodged claim is irrelevant during the insolvency proceedings. However, if the debtor has not opposed a claim, the creditor may, on the basis of the insolvency table, instigate individual compulsory enforcement against the debtor after the conclusion of the insolvency proceedings (Section 201(2) InsO). In the event of an opposition by the debtor, the creditor is dependent on prior proceedings.

8. What is the meaning of reorganisation proceedings?

The creditors’ meeting decides on the course taken by the proceedings. It decides whether a business run by the debtor is to be closed down or temporarily continued. It can instruct the administrator to prepare an insolvency scheme and it may prescribe the objective of the scheme for him (Section 218(2) InsO). The debtor and the insolvency administrator are also entitled to submit an insolvency scheme (Section 218(1) InsO). In this insolvency scheme, arrangements which differ from the statutory provisions may be made, particularly regarding the maintenance of the business.

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The insolvency scheme consists of a descriptive section and a planning section. The descriptive section is intended to inform the parties and describes the measures which have been taken after the opening of the insolvency proceedings or which are still to be taken (Section 220 InsO). The planning section states how the rights of the parties are to be altered by the scheme (Section 221 InsO).

Although the creditors’ meeting does not itself have any right to take initiatives, it may instruct the administrator to prepare an insolvency scheme. After the scheme is submitted, it is initially examined by the court (Section 231 InsO). This is intended to prevent the parties having to concern themselves with an unlawful or hopeless insolvency scheme so that the insolvency proceedings are delayed. If the initial examination has a favourable outcome, the court forwards the scheme to the creditors’ committee, the debtor, the insolvency administrator and the works council for comments and sets a time limit for comments (Section 232 InsO). It then sets the hearing date for discussion and voting. The hearing date is made publicly known and the insolvency creditors who have lodged claims, the preferential creditors, the insolvency administrator, the debtor and the works council are specially invited to attend (Section 235(3) InsO). At that hearing, the parties present are firstly given the opportunity to comment on the provisions of the insolvency scheme. The creditors then vote on the scheme (Sections 243-246 InsO). Although the debtor must in principle assent to the scheme, opposition on his part is irrelevant if he is placed in no worse a position as a result of the scheme than he would be in if the scheme did not exist and if no insolvency creditor receives a commercial value which exceeds the full amount of his claim (Section 247(2) InsO). If the scheme is accepted by the necessary majority of the creditors, it is then confirmed by the insolvency court (Section 248(1) InsO).

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When the judicial confirmation becomes final, the effects laid down in the planning section of the insolvency scheme come into force in favour of and against all the parties (first sentence of Section 254(1) InsO). The insolvency court orders the closure of the insolvency proceedings (Section 258(1) InsO). The insolvency administrator and the members of the creditors’ committee are then functus officio, and the debtor is once again given the right to dispose freely of the insolvency assets (Section 259(1) InsO). After the closure of the insolvency proceedings, the former insolvency debtor is responsible for satisfying the insolvency claims laid down in the insolvency scheme. Provision may however also be made in the planning section of the insolvency scheme for the satisfaction of the claims to be monitored by the insolvency administrator (first sentence of Section 261(1) InsO).

9. What are winding-up proceedings?

If no insolvency scheme is submitted, the assets forming part of the insolvency assets are realised by the insolvency administrator so as to be able to convert the insolvency assets into funds and distribute those funds to the creditors. The insolvency administrator, in his lawful discretion, decides on the specific way in which the assets are to be realised, with the objective of achieving the maximum possible proceeds. It is possible for the debtor’s company or individual businesses of his to be sold as a whole or for the company to be broken up and for the individual items forming part of the assets to be sold in isolation.

The basis for the distribution of the proceeds by the insolvency administrator is a distribution list which he must draw up using the insolvency table (Section 175 InsO). This must contain all insolvency claims which are to be taken into account in the distribution. The proceeds are then distributed to the creditors pro rata the level of the insolvency claims.

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The distribution does not normally begin only when the realisation of the insolvency assets is finished. Instead, as soon as sufficient cash funds in the insolvency assets are available, “part payments” are made (first sentence of Section 187(2) InsO). The final distribution takes place once the realisation of the assets is finished (first sentence of Section 188 InsO). The consent of the insolvency court is required for this purpose (Section 196(2) InsO). If it is possible for all the insolvency claims to be settled in full, the insolvency administrator must hand over any remaining surplus to the insolvency debtor (first sentence of Section 199 InsO).

10. What are the conditions for the closure of the proceedings?

After the final distribution has been carried out, the insolvency proceedings are officially closed. The closure order is made publicly known. After the closure of the insolvency proceedings, the creditors can assert their remaining claims against the debtor without restriction. The situation is different if the debtor is a natural person and has applied to be granted a discharge of remaining debts. If such a discharge is granted, the creditors are finally prevented from enforcing their claims against the debtor (with the exception of the claims referred to in Section 302 InsO). With the closure of the insolvency proceedings, the debtor is in principle given back the power to administer and dispose of the assets which were previously subject to insolvency.

In proceedings relating to a scheme, the insolvency proceedings are closed as soon as the confirmation of the scheme is final (Section 258(I)(2) InsO).

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Last update: 07-06-2006

 
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