Lawyer for Insolvency Law: German 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 proceedings are furthermore 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, 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 those of natural persons.

Entry into Proceedings: Filing 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 one of the valid grounds 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 proceedings.

Opening of the Application: Expert Opinion Phase

Thus, if there is a valid reason for the claim and if the procedural costs are covered, the German court will open the proceedings. Reasons for the claim 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 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 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 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 continue until the moment of the decision to open proceedings is taken. Security measures can, for example, be imposed in the form of prohibiting the debtor from disposing their assets or prevent enforcement measures initiated against the debtor. In addition, the debtor will require the consent of the administrator for any business transactions. For the purpose of transparency, the court must publish the security measures imposed (§23 InsO).

Opening of the Insolvency Proceedings and Reporting

If the insolvency court issues an opening order, proceedings will be opened and the debtor’s power of disposition over his 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. In addition, 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 or not it will be fruitful to keep the business going or to close it down.

Examination Date and Liquidation Phase

During the examination date, the court will examine the claims filed by the creditors which have been confirmed by the administrator. The administrator will inform the creditors of the final invoices at the closing meeting. In the liquidation phase, the administrator will distribute the assets and implement 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 reflects several years.