What does Insolvency mean?
In simple terms, insolvency means the inability to pay one’s creditor. In legal terms, a company is insolvent if it is only able to pay less than 90% of its liabilities over a period of 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 basic legal sources governing the issue in Germany are the Insolvency Regulation (Insolvenzverordnung – InsO) and the Avoidance of Transactions Act.
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.
German Business: How can I file for a Company Insolvency?
If a German company faces bankruptcy or if the threat is apparent, it is under the 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, proceedings may be instituted 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 failed out-of-court settlement
The Local Court 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 in order for the court to obtain an accurate picture of the (imminent) insolvency and over-indebtedness. The proceedings will then be opened if there are sufficient assets of the debtor at the beginning of the proceedings (§26 InsO). Generally, assets in the amount of at least EUR 3,000 are sufficient. If this is not the case, the application will be rejected due to lack of sufficient 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.
What Constitutes a Delay in Insolvency in Germany?
If the managing director files for insolvency too late, or even not at all, this will result in personal liability. He will be personally responsible for actions that reduce the company’s assets, both within the internal relationship, as well as vis-à-vis his creditors (external relationship). Thus, the liability will be assumed for all corporate payments that did not result in any counter value. Moreover, if there is a delayed petition for bankruptcy, the managing director will also be liable towards creditors whose claims arose after the insolvency stage (new creditors), to the social insurance and to 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. It is therefore unavoidable for the managing director to regularly inspect the economic situation of the company in order to avoid the risk of a delayed petition. This is particularly relevant when considering that such a delayed petition in bankruptcy constitutes a criminal offence. The distinction between wilful intent and negligence will play an essential role when determining the penalty that will be imposed. In principle, in addition to a fine and imprisonment, the German court can impose a prohibition for the person concerned to act as managing director.
Register private insolvency
Private persons who are self-employed and wish to be exempted from residual debt must also file for insolvency. As in the case of the insolvency of a company, an application must first be filed for the proceedings to open. The petition can be filed by the debtor himself or by the creditors. In the case of private insolvency, an further petition can be filed for the discharge of residual debt (§286 InsO) and for the deferment of proceedings costs (§4a InsO). For the initiation of the proceedings, sufficient assets of the debtor must exist to cover the proceedings. If the private person intentionally or negligently makes incorrect statements, or does not provide comprehensive information, this will also lead to liability.