Whether a company, its employees or business partners – insolvency is a tough test for all those affected. At the same time, however, insolvency proceedings harbour the opportunity for a fresh start. Unlike liquidation, which usually ends with the complete dissolution of the company, it initially aims to reorganise the company concerned. The primary purpose of this measure is to settle outstanding payments and thus ensure the company’s continued existence. This task requires a solid knowledge of German insolvency law and pre-insolvency reorganisation procedures.
In this context, the German law firm Schlun & Elseven Rechtsanwälte offers skilled and committed legal assistance. Whether your matter concerns the implementation of insolvency proceedings or the assertion of insolvency claims, our lawyers will support you with their expertise and extensive experience. If you have already been accused of delaying insolvency proceedings, we will provide you with the legal assistance you need to protect your rights and interests. Contact us today to benefit from our expertise.
Insolvency in Germany – Terminology and Legal Classification
Insolvency means the inability to fulfil one’s financial obligations to creditors. Insolvency is assumed if the debtor can pay less than 90% of their liabilities for at least three weeks and has stopped making payments. If the financial obligations can no longer be met or cannot be met for longer than the next 12 months, there is a risk of insolvency. The term insolvency is therefore used in connection with economic difficulties. In legal terms, a distinction is made between private insolvency, also known as consumer insolvency, and corporate insolvency. The most important legal sources regarding insolvency in Germany are the German Insolvency Code (InsO) and the German Act on the Contestation of Legal Transactions.
Private Insolvency
Self-employed individuals wishing to be exempted from residual debt must also file for insolvency. As in the case of a company’s insolvency, a petition must first be filed for a private individual’s insolvency. The debtor or the creditors can file the petition. In the case of private insolvency, a further petition can be filed to discharge residual debt (Section 286 InsO) and defer proceedings costs (Section 4a InsO). For the initiation of the proceedings, sufficient assets of the debtor must exist to cover the proceedings costs. If the private person intentionally or negligently makes incorrect statements or does not provide comprehensive information, this will also lead to liability.
Legal Support for Insolvency Proceedings in Germany
The aim of initiating insolvency proceedings is to clarify the debtor’s financial circumstances and achieve an equitable distribution between the creditors from the available assets. During the insolvency proceedings, the insolvency administrator or a trustee is appointed, an insolvency plan is drawn up, and the creditors’ claims are examined.
For creditors, insolvency proceedings offer the opportunity to enforce existing claims against the debtor and thus recover some or even all of their money. The debtor’s assets are usually divided according to a statutory quota, which varies in Germany depending on the availability of assets and the type of claim in question.
Insolvency proceedings offer the debtor the chance of a fresh financial start. As part of the proceedings, some of the existing debts can be cancelled.
Filing for Insolvency in Germany
Before insolvency proceedings in Germany begin, the debtor (via their own application) or the creditor (in the form of an external application) must file an application for insolvency (Section 13 I InsO). Such an application must include one of the valid grounds for the commencement of proceedings of imminent or already occurring insolvency (Section 16 InsO). The competent court will examine the application and check all other conditions for opening proceedings
Should a German company face bankruptcy, or the threat is apparent, it is obliged to file an insolvency petition with the responsible local court in Germany within three weeks at the latest (Section 2 InsO). Section 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 in Germany:
- Register of creditors,
- documents laying out income and assets,
- certificate of the failed out-of-court settlement.
The German District Court (“Amtsgericht”) will examine the application and determine whether the debtor is in a state of insolvency. If the application is admissible, the debtor will be invited to a hearing to obtain an accurate picture of the (imminent) insolvency and over-indebtedness. If the debtor has sufficient assets at the beginning of the procedure, the procedure will be opened (Section 26 InsO). Otherwise, 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.
As it takes time for the court to decide to open proceedings, measures to prevent the deterioration of the debtor’s assets may already be ordered on a provisional basis (Section 21 I InsO). For this purpose, a provisional insolvency administrator will be appointed. This measure is intended to ensure that the business will continue until the decision to open proceedings is taken. Security measures can, for example, be imposed by 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 (Section 23 InsO) for transparency.
When the proceedings are 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. During the meeting, creditors are given the opportunity to help shape the proceedings and to say whether it is worth keeping the business open or closing it down.
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 on protecting the enterprise’s future. There is no “one size fits all” restructuring plan; therefore, as a full-service law firm, our lawyers seek to provide tailored solutions to your company’s needs. Our German insolvency and restructuring team works alongside our legal experts in other fields, such as German employment law, commercial law and banking regulation, to provide our clients with a complete picture of their legal options.
Our lawyers support you in the planning and implementation of your corporate restructuring. We will continue to support your company afterwards, so that you are always legally on the safe side and can continue to run your business from a position of strength.
Practice Group: German Insolvency Law
Practice Group:
German Insolvency Law
Contact our German Insolvency Lawyers
Please use the form to tell our team of German insolvency lawyers about your legal matters. After receiving your request, we will make a short preliminary assessment based on the information provided and give you a cost estimation. You are then free to decide whether you want to instruct us.
