Lawyer for Insolvency Law: German Insolvency Proceedings

What does the insolvency procedure look like in Germany?

Insolvency proceedings aim at preventing creditors from realising their own claims through an individual compulsory enforcement procedure if the debtor is insolvent (§17ff. InsO). Therefore, a joint satisfaction of all creditors is to be guaranteed by dividing the debtor’s assets in a special procedure (§1 InsO). The insolvency proceedings are furthermore intended to release the debtor from his residual debts. Various parties are involved in the insolvency proceedings such as the debtor, the creditors, the insolvency court and the insolvency administrator. The German Insolvency Regulation distinguishes between two types of proceedings, the regular insolvency proceedings (corporate insolvency) and the consumer insolvency proceedings (private insolvency). While the former governs the insolvency of legal entities, the latter regulates insolvency of natural persons.

Entry into the insolvency proceedings: file for insolvency

Before the German insolvency proceedings begin, the debtor (via an own application) or the creditor (in form of an external application) must file an application (§13 I InsO). Such an application must include a valid ground for the commencement of proceedings of imminent or already occurring insolvency (§16 InsO). The competent insolvency court will examine the application and check all other conditions for the opening of the insolvency proceedings.

Opening of the insolvency application: expert opinion phase

Thus, if there is a valid reason for insolvency and if the procedural costs are covered, the German court will open the insolvency proceedings. Reasons for insolvency may be the (threat of) insolvency or the over-indebtedness of the debtor. To assess the financial situation of the debtor, an expert will be consulted.

The creditors’ meeting

At the request of the debtor, the insolvency administrator or the creditor, the insolvency court may order a creditors’ meeting. This meeting will be tasked with the support, as well as with the supervision of the insolvency administrator.

Security measures in provisional insolvency proceedings

Since the court’s decision to open the insolvency proceedings takes time, it may already order measures on a provisional basis in order 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 be continued until the moment of the decision to open insolvency proceedings is taken. Security measures can, for example, be imposed in the form of prohibiting the debtor to dispose his assets or prevent enforcement measures initiated against the debtor. In addition, the debtor will require the consent of the insolvency administrator for any business transactions. For the purpose of transparency, the insolvency court must publish the security measures imposed (§23 InsO).

Opening of the insolvency proceedings and reporting

If the insolvency court issues an opening order, insolvency proceedings will be opened and the debtor’s power of disposition over his assets is transferred to the insolvency administrator for the duration of the proceedings. During the report meeting, the insolvency administrator will inform the creditors about the debtor’s economic situation and the reasons for his financial situation. The essential question is whether the company will can be kept in operation and in which form the insolvency plan will succeed. In addition, the prospects of a financial recovery will be presented. Within the meeting, the creditors are awarded the possibility to assist in shaping the progress of the proceedings. They also have a say in whether or not it will be fruitful to keep the business or to close it down.

Examination date and liquidation phase

During the examination date, the court will examine the insolvency claims filed by the creditors which have been confirmed by the insolvency administrator. The administrator will inform the creditors of the final invoices at the closing meeting.In the liquidation phase, the insolvency administrator will distribute the assets and implements the resolutions of the creditors’ meeting. He will also inform the creditors about the relevant developments of the debtor’s financial situation during this period, which often lasts over several years.