Insolvency Management
for International Businesses
in Germany

Various economic risks can trigger significant business challenges, potentially escalating to insolvency. Once insolvency proceedings begin in Germany, control over the company typically shifts away from the board and management. These proceedings prioritise the interests of creditors, which may include breaking up the company and selling its assets. However, proactive pre-insolvency measures can help mitigate the risks and prevent the loss of control over the company. 

The range of options available relating to insolvency management depends on the severity of the economic crisis. Short-term ad hoc measures can often delay or avoid the need to file for insolvency when a business is on the brink of insolvency. Proven strategies include:

• Debt Waivers and Claim Deferments: Forgiveness or deferment of significant debts can immediately improve a company’s financial position. Often paired with debtor warrants, these arrangements ensure creditors may reclaim their claims if the debtor regains liquidity.
• Subordination Agreements: Subordination, where a creditor agrees their claim will be satisfied only after other creditors are paid, can help avert insolvency by reducing financial pressure. Subordinated claims are ranked lower in priority during insolvency proceedings and are rarely paid out, providing breathing space for the company.
• Letters of Comfort: A letter of comfort from a related entity reassures creditors, suppliers, and contractual partners by guaranteeing the company’s liabilities. This measure helps maintain trust and preserve the company’s operational relationships.

A more comprehensive analysis may identify strategic measures such as attracting new shareholders, issuing additional shares, or addressing structural corporate governance issues where time permits. However, these solutions typically require longer lead times and deeper operational adjustments.

Formal insolvency proceedings may become unavoidable in Germany if pre-insolvency or ad hoc measures are insufficient. In standard insolvency proceedings, restructuring is often secondary to liquidation aimed at maximising creditor satisfaction. Nevertheless, several mechanisms exist to allow the company to continue operations, even in insolvency:

• Debtor-in-Possession Management (Eigenverwaltung): The existing management retains control of the company under the supervision of an insolvency administrator, allowing for reorganisation while continuing operations.
• Debtor-in-Possession Management with Protective Shield Proceedings (Schutzschirmverfahren): This variant provides additional protection from creditors while management restructures the company.
• Transferred Reorganisation (Übertragende Sanierung): Here, an investor acquires the profitable parts of the company, enabling continued operations under new ownership. Meanwhile, the insolvency administrator liquidates the remaining corporate structure.

These instruments provide management and stakeholders with options to preserve value, sustain operations, and potentially recover the company’s financial health. They demonstrate that insolvency need not mean the end of the business, offering hope for a viable path forward.

Debtor-in-possession (DIP) management is a powerful restructuring tool that allows a company’s management to maintain operational control while under the supervision of an insolvency monitor. This ensures that entrepreneurial responsibility remains with the management team. However, unlike an insolvency administrator in standard insolvency proceedings, the insolvency monitor’s role is limited to overseeing business activities, ensuring legal compliance, and safeguarding creditor interests without offering advisory services. 

One key advantage of DIP management is its flexibility: transactions within the ordinary course of business can proceed without requiring the approval of the insolvency monitor. This approach incentivises companies to initiate insolvency proceedings early, avoiding the risk of liquidation or business breakup. At the same time, it retains the benefits of insolvency proceedings, such as wage guarantees for employees for up to three months and the ability to exit unfavourable contracts quickly. 

To access these benefits, companies must proactively apply for insolvency proceedings and request self-administration. Eligibility depends on proving an existing reason for insolvency and ensuring no circumstances could unfairly disadvantage creditors. Early action is essential for management to retain control and successfully implement restructuring plans. 

The protective shield procedure offers an enhanced form of DIP management, allowing companies to submit a restructuring plan to the court to ensure their continuation. This procedure provides several distinct advantages over standard self-administration. Notably, the company may propose its own insolvency monitor, and the court can grant protection against creditor enforcement actions while the restructuring plan is finalised. 

Management must present a viable restructuring plan within three months to qualify, detailing the steps for recovery and continuation of operations. However, drafting such a plan often poses challenges due to its complexity and the need for specialised expertise. An application for protective shield proceedings must be filed with the insolvency court alongside the self-administration request. Additionally, a certificate from a neutral expert—such as an auditor, tax advisor, or lawyer—is required to confirm that the company is at risk of insolvency but not yet insolvent and that restructuring efforts are not evidently futile. 

Asset transfer, commonly utilised during regular insolvency proceedings, involves selling the profitable parts of a company to an investor while liquidating the insolvent entity. This process often includes transferring employee expertise along with the assets. The proceeds from the sale and liquidation are used to satisfy creditors. In some cases, the original entrepreneur may repurchase valuable parts of the company if financially feasible. 

For the buyer, asset transfer offers the opportunity to continue the business under a new legal entity, free from the liabilities of the original company. This approach is particularly advantageous for businesses unable to restructure internally, offering an alternative to complete liquidation. 

The primary benefits of asset transfer include rapid execution—often completed within a few months—and the preservation of jobs, which can help shield the business from costly dismissal lawsuits or severance payments. However, the process can have drawbacks. Valuable divisions of the company may be sold below market value, and competitors may acquire assets if they present the highest bid. Ultimately, the insolvency administrator makes decisions in the creditors’ best interests, not necessarily aligning with the goals of the original company. 

Managing directors of limited liability companies in Germany and management board members face significant personal liability risks in the event of insolvency or over-indebtedness. Under German law, they are required to file for insolvency within three weeks of recognising such circumstances. Failure to do so can result in severe consequences, including:

• Civil liability: Directors may be held personally liable with their private assets for damages resulting from delayed or failed insolvency filings.
• Criminal penalties: These include professional bans and prison sentences of up to three years. In negligence cases, the penalty is reduced to a maximum of one year.

Timely action is critical to mitigate these risks and to comply with legal obligations.

Managing directors and board members may also be held liable for payment defaults resulting from failure to file or incorrect filing of insolvency proceedings. Damages include creditors’ claims for payments made assuming the insolvent company was still solvent.

Liability risks persist even if insolvency proceedings are filed correctly and on time. Payments made after the opening of insolvency proceedings that do not serve to maintain business operations—such as wages, rents, or payments for goods and services unrelated to current operations—can trigger personal liability. The acting director or board member must reimburse these payments using their private assets.

If no application for insolvency is filed within the statutory three-week period, all payments made during this time must be reimbursed in full. This rule aims to prevent the reduction of company assets, which could unfairly disadvantage creditors. The overarching goal of insolvency proceedings under the German Insolvency Code is to maximise the company’s value to ensure the best possible satisfaction of creditors. 

Strict measures are in place to protect creditors’ interests, underscoring the importance of professional legal advice and prompt action when financial difficulties arise. Managing directors and board members must act decisively to avoid personal liability and ensure compliance with legal requirements.