Generally, insolvency means the inability to pay one’s creditors. In legal terms, a company is insolvent if it can only pay less than 90% of its liabilities for at least three weeks and therefore has ceased the payments. If the management realises that it cannot meet its financial obligations anymore, or not longer than throughout the next 12 months, the threat of insolvency is apparent. The primary legal sources governing the issue in Germany are the Insolvency Regulation (Insolvenzverordnung – InsO) and the Avoidance of Transactions Act.
The legal team at Schlun & Elseven Rechtsanwälte advise and represent clients in all German insolvency matters. The conduct of insolvency proceedings for companies in Germany and the assertion of insolvency claims are part of our daily tasks in this field. Our legal team consists of experts in the area with many years of experience, and we can be relied upon during difficult times to provide you with the straightforward advice you need.
The Insolvency Procedure in Germany
Insolvency proceedings aim at preventing creditors from realising their claims through an individual compulsory enforcement procedure if the debtor is insolvent (§17ff. InsO). Therefore, the joint satisfaction of all creditors is sought by dividing the debtor’s assets in a particular procedure (§1 InsO). The proceedings are intended to release the debtor from their residual debts. Various parties are involved in the insolvency proceedings, such as the debtor, the creditors, the insolvency court and the insolvency administrator (hereinafter “the Administrator”). The German Insolvency Regulation distinguishes between two types of proceedings, regular insolvency proceedings (corporate insolvency) and consumer insolvency proceedings (private insolvency). While the former governs the insolvency of legal entities, the latter regulates those of natural persons.
Entry into Proceedings: Filing for Insolvency
Before the German insolvency proceedings begin, the debtor (via their own application) or the creditor (in the form of an external application) must file an application for insolvency (§13 I InsO). Such an application must include one of the valid grounds for the commencement of proceedings of imminent or already occurring insolvency (§16 InsO). The competent court will examine the application and check all other conditions for the opening of proceedings.
Opening of the Application: Expert Opinion Phase
If there is a valid reason for the claim and the procedural costs are covered, the court will open the proceedings. Reasons for the claim may be insolvency, the threat of it or the over-indebtedness of the debtor. An expert will be consulted to assess the debtor’s financial situation.
The Creditors’ Meeting
The insolvency court may order a creditors ‘ meeting at the debtor, the administrator or the creditor’s request. This meeting will be tasked with the support, as well as with the supervision of the administrator.
Security measures in Provisional Proceedings
Since the court’s decision to open the proceedings takes time, it may already order measures on a provisional basis to prevent a deterioration of the debtor’s assets (§21 I InsO). For this purpose, a provisional insolvency administrator will be appointed. This measure is intended to ensure that the business concerned will continue until the decision to open proceedings is taken. Security measures can, for example, be imposed in the form of prohibiting the debtor from disposing of their assets or preventing enforcement measures initiated against the debtor. Additionally, the debtor will require the administrator’s consent for any business transactions. The court must publish the security measures imposed (§23 InsO) for transparency reasons.
Opening of the Insolvency Proceedings and Reporting
If the court issues an opening order, proceedings will be opened. The debtor’s power of disposition over their assets is transferred to the administrator for the duration of the proceedings. During the report meeting, the administrator will inform the creditors about the debtor’s economic situation and the reasons for their financial situation. The essential question is whether the company can be kept in operation and in which form the insolvency plan will succeed. Additionally, the prospects of a financial recovery will be presented. Within the meeting, the creditors are given the possibility of assisting in shaping the progress of the proceedings. They also have a say in whether it will be fruitful to keep the business going or close it down.
Examination Date and Liquidation Phase
During the examination date, the court will examine the claims filed by the creditors, which the administrator has confirmed. The administrator will inform the creditors of the final invoices at the closing meeting. The administrator will distribute the assets in the liquidation phase and implement the creditors’ meeting resolutions. They will also inform the creditors about the relevant developments of the debtor’s financial situation during this period.
Corporate Restructuring
At Schlun & Elseven Rechtsanwälte, we advise our clients about their corporate restructuring options. When a company faces insolvency issues, our lawyers advise them regarding how to protect the enterprise’s future. There is no “one size fits all” restructuring plan, and therefore, as a full-service law firm, our lawyers seek to provide tailored solutions fitted to your company’s needs. Our insolvency and restructuring team works alongside our legal experts in other fields, such as employment law, commercial law and banking regulation, to provide our clients with a complete picture of their legal options.
Our lawyers are available to plan the restructuring course and provide legal guidance regarding fulfilling that plan. Should disputes arise, our team will oversee them, whether in court or by other means of mediation and negotiation. Our legal team will work tirelessly throughout the lengthy process. Following a successful restructuring, we will remain at our corporate partners’ service as they seek to continue operations from a position of strength.
Creditor Support: Legal Assistance
At Schlun & Elseven Rechtsanwälte, our team of German insolvency law experts support creditors involved in the insolvency process. Our lawyers are very familiar with insolvency law in Germany and will guide you through the entire process. We will ensure that your interests, as a creditor, are kept central to the proceedings. We support and represent secured and unsecured creditors, groups of creditors and other parties involved in these matters. Our team focuses on using our broad legal understanding and industry insights to provide you with creative and practical solutions suited to your company’s characteristics and relationship as a creditor.
Our lawyers will advise you on matters such as whether to enter into “pool agreements” with other secured creditors as a way of reducing the inherent complexity and potentially accelerating the process. As a secured creditor, we will analyse the nature of the security right and determine the best course of action to take. Furthermore, we assist unsecured creditors in filing their non-preferential insolvency claims, support them in cases where their application has been rejected and advise them on any other options available to them.
Criminal Law: Insolvency Disputes
At Schlun & Elseven Rechtsanwälte, our law firm consists of insolvency and criminal defence lawyers who will defend your company in matters about criminal insolvency law. Such cases can arise in events such as delays in filing for insolvency (§ 15a InsO), accusations of fraud (under § 263 StGB) or embezzlement (§ 246 StGB) and other reasons. Our lawyers will closely examine your case, assess the evidence in the matter, and use their knowledge of German insolvency law, German criminal law, corporate law and other legal fields to determine the best course of action for your case.
What constitutes “a delay” in insolvency?
If the managing director files for insolvency too late, or even not at all, this will result in personal liability. They will be personally responsible for actions that reduce the company’s assets, both within the internal relationship and vis-à-vis their creditors (external relationship). Thus, the liability will be assumed for all corporate payments that did not result in any counter value. Moreover, suppose there is a delayed petition for bankruptcy. In that case, the managing director will also be liable towards creditors whose claims arose after the insolvency stage (new creditors) to the social insurance and the tax office.
In Germany, a distinction is made between negligent and intentional delay. While intent presupposes knowledge and intention, the violating duties of care are sufficient for negligence. Therefore, it is unavoidable for the managing director to regularly inspect the company’s economic situation to avoid the risk of a delayed petition. This distinction is particularly relevant when considering that such a delayed petition in bankruptcy constitutes a criminal offence. In principle, in addition to a fine and imprisonment, the German court can prohibit the person concerned to act as managing director.
Filing for Insolvency in Germany
Suppose a German company faces bankruptcy, or the threat is apparent. In that case, it is obliged to file an insolvency petition with the responsible local court within three weeks at the latest (§ 2 InsO). However, in practice, the company’s managing director often does not have three weeks for this application, as this is only the upper limit. § 15 InsO stipulates that the application must be filed without culpable hesitation, but no later than three weeks after illiquidity. If the deadline is not met, creditors may institute proceedings against the debtor. In the case of existent insolvency, the application can only be filed by the managing director or the liquidators. On the other hand, if there is a threat of insolvency, the application cannot be made by the creditor but only by the debtor.
The following documents are required for the insolvency application.
- Register of creditors
- Documents laying out income and assets
- Certificate of the failed out-of-court settlement
The District Court (“das Amtsgericht”) will examine the application and determine whether the debtor is in fact in a state of insolvency. If the application is admissible, the debtor will be invited to a hearing for the court to obtain an accurate picture of the (imminent) insolvency and over-indebtedness. The proceedings will then be opened if the debtor has sufficient assets at the beginning of the proceedings (§26 InsO). Generally, assets in the amount of at least EUR 3,000 are adequate. If this is not the case, the application will be rejected due to inadequate credit. The obligation to file for bankruptcy also applies if the company is sold, as this does not release the former managing director from their duty.