Use the Lexology Navigator tool to compare the answers in this article with those from other jurisdictions.

Legal framework

Legislation

What is the primary legislation governing insolvency and restructuring proceedings in your jurisdiction?

The primary legislation governing insolvency and restructuring proceedings are the Insolvency Code and the EU Regulation on Insolvency Proceedings (1346/2000).

Regulatory climate

On an international spectrum, is your jurisdiction more creditor or debtor friendly?

On an international spectrum, Germany is more creditor friendly, as the Insolvency Code explicitly states that insolvency proceedings aim first and foremost to satisfy collectively the debtor’s creditors.

Sector-specific regimes

Do any special regimes apply to corporate insolvencies in specific sectors (eg, insurance, pension funds)?

Special insolvency regimes apply to banks (the Act on Restructuring and Winding-up) and insurance undertakings (the Act on the Supervision of Insurance Undertakings).

Reform

Are any reforms to the legal framework envisaged?

Two reforms are envisaged at present. At a national level, the legislature seeks:

  • to reform the regulations on an insolvency administrator's right to contest voidable transactions in order to increase the legal certainty of contracts for creditors; and
  • to include new regulations on the coordination and harmonisation of group insolvency proceedings.

The respective laws were enacted on February 16 2017 and March 9 2017 by Parliament. The new law on group insolvency proceedings still needs to be approved by the Federal Council.

At an EU level, a new EU Regulation on Insolvency Proceedings was issued in 2015 and will come into force in June 2017. The regulation introduces the following changes, among others:

  • The scope of application will be extended to cover pre-insolvency restructurings and debtor-in-possession proceedings.
  • In order to protect further debtors’ creditors from so-called forum shopping, the debtor’s centre of main interests, which determines the local jurisdiction of an insolvency court, will be more clearly defined.
  • Insolvency courts and insolvency administrators will be subject to duties to cooperate and communicate in group insolvency proceedings.

Director and parent company liability

Liability

Under what circumstances can a director or parent company be held liable for a company’s insolvency?

Directors face civil and criminal liability if they fail to file for insolvency within three weeks from the company becoming illiquid or over-indebted. If the directors fail to file for insolvency within this timeframe, they are personally liable for any non-justified payments which they made after the company became illiquid or over-indebted (ie, insolvent trading). They are further liable for damages suffered by creditors that contracted with the company after it became illiquid or over-indebted and subsequently encountered losses.

Directors face further liability if they have conducted any criminal offences in connection with the insolvency (eg, fraud, bankruptcy or violation of bookkeeping duties).

Shareholders may face liability in connection with the company’s insolvency if:

  • they have withdrawn assets from the company;
  • the withdrawn assets were vital for the company’s existence;
  • the withdrawal was made for non-operational reasons; and
  • the withdrawal caused or deepened the company’s insolvency.

Further, if the company has no directors, the shareholders must file for insolvency no later than three weeks after the company has become illiquid or over-indebted.

Defences

What defences are available to a liable director or parent company?

The biggest liability threat for a director results from insolvent trading. Directors may claim in their defence that:

  • the company was not illiquid or over-indebted;
  • they were not and could not have been aware of its illiquidity or over-indebtedness; and
  • the payments were made with the care of a prudent businessperson.

This applies only where certain preconditions are met and legal advice should be obtained in each case.

The burden of proof for delayed filing and payments made lies with the insolvency administrator. The directors carry the burden of proof that any payment was made with the care of a prudent businessperson.

To the extent that a shareholder is held liable for a delayed filing for insolvency, the shareholder may show that:

  • the company had a managing director;
  • the filing was not delayed; or
  • the company’s illiquidity or over-indebtedness had not been recognisable, even if the necessary care was applied. 

Due diligence

What due diligence should be conducted to limit liability?

Directors should always ensure that they are sufficiently informed about their company's financial situation. If a company enters into a financial or operational crisis, directors' duties to monitor the company's finances (particularly its liquidity) include an obligation to closely monitor the company's finances. In order to prove that they have diligently monitored the company’s finances and that the company was not illiquid or over-indebted at a certain time, directors should keep records that sufficiently show that they acted with the care of a prudent businessperson. Directors should obtain legal advice to show that they acted with the necessary diligence.

Position of creditors

Forms of security

What are the main forms of security over moveable and immoveable property and how are they given legal effect?

The main forms of security over moveable assets are:

  • the security transfer of movable assets;
  • the assignment of receivables; and
  • a pledge of bank accounts.

There is no notarisation or registration requirement. However, the transfer of movable assets must comply with German legal requirements on the specification of assets to be transferred. Pledges must be notified to the debtor of the pledged claim.

The main form of security over immovable assets is the land charge, which requires notarisation and registration in the land register. 

Ranking of creditors

How are creditors’ claims ranked in insolvency proceedings?

The ranking of creditors' claims in insolvency proceedings is as follows:

  • creditors entitled to separation;
  • creditors entitled to preferential satisfaction (ie, secured creditors, limited to the value of the respective security);
  • estate creditors (ie, creditors whose claims arise after the opening of insolvency proceedings – in particular, due to acts of the insolvency administrator);
  • unsecured creditors; and
  • subordinated creditors.

Creditors that hold security are entitled to preferential satisfaction of their claim. The type of security held governs how and by whom it is enforced. As a general rule, the insolvency administrator realises all assets which are subject to security rights and in its possession. He or she is allowed to deduct a realisation fee of approximately 9% from the realisation proceeds. The remainder is paid out to the secured creditor. However, creditors holding a land charge remain entitled to realisation by way of a foreclosure sale or forced administration. Creditors with a right to preferential satisfaction participate in regular insolvency proceedings as unsecured creditors with respect to any shortfall.

Shareholders' claims for repayment of loans or equivalent claims are subordinated by the operation of law. 

Can this ranking be amended in any way?

A creditor cannot be given a better rank than that provided for by the German insolvency regime. However, a creditor may agree on a subordination of its claim behind regular insolvency creditors. This is often done by shareholders with respect to their claims for repayment of shareholder loans in order to avoid the company’s over-indebtedness. 

Foreign creditors

What is the status of foreign creditors in filing claims?

Under German insolvency law, foreign creditors have the same rights as German creditors. They can file their claims in the insolvency proceedings and get realisation proceeds from any security provided to them. However, the insolvency administrator may ask for foreign language documents supporting claims to be translated into German.

Unsecured creditors

Are any special remedies available to unsecured creditors?

No – unsecured creditors can file their claims with the schedule of creditors' claims. However, under certain circumstances, they may make direct damage claims against the insolvent company’s managing directors (eg, in the case of fraud). 

Debt recovery

By what legal means can creditors recover unpaid debts (other than through insolvency proceedings)?

If an insolvency proceeding is pending, a creditor can recover unpaid debts pursuant only to the rules of such procedure. If no insolvency proceeding is pending, a creditor can sue a debtor for payment. An alternative option is to apply for a payment order. If the debtor disputes the payment order, the creditor may apply for ordinary court proceedings. Once the creditor has obtained an enforceable judgment, it can seize the debtor’s assets.  

Is trade credit insurance commonly purchased in your jurisdiction?

Yes – trade credit insurance is commonly purchased in case of delivery of goods in a business-to-business relationship. 

Liquidation procedures

Eligibility

What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?

Insolvency proceedings may be commenced on the estate of companies with legal capacity or companies without legal personality (eg, general, private limited or private partnerships). Corporate bodies under public law are explicitly barred if the procedure concerns Germany, a federal state or any other corporate body under public law insofar as a federal state has decided (this applies to all states). German municipalities, therefore, cannot initiate insolvency proceedings.

German insolvency proceedings (ie, restructuring and liquidation procedures) are not initiated ex officio, but instead require a respective application – either by the debtor or one of its creditors. Filing an application is mandatory for the debtor if it is illiquid or over-indebted. Further, the debtor may file for insolvency if it is faced with impending illiquidity and creditors may file an application to open insolvency proceedings if the debtor is illiquid or over-indebted.

In general, ‘illiquidity’ means that a debtor can no longer meet at least 90% of its due and effectively demanded liabilities for more than three weeks. ‘Over-indebtedness’ means that a debtor has no positive going concern prognosis and its liabilities exceed the value of its assets (based on liquidation values). ‘Impending illiquidity’ means that the company will likely be unable to meet its payment obligations when they are due.

In case of imminent illiquidity under Section 18 of the Insolvency Code, a company’s managing directors may decide whether to file for insolvency. When it comes to insolvency or over-indebtedness, they must to do so under Section 15a of the Insolvency Code or they may be held liable.

Eligibility problems can arise with regard to whether a reason to commence insolvency proceedings exists. An important question – especially with respect to directors’ potential liability risks – is whether a reason to commence insolvency proceedings can be eliminated. These points must be evaluated on a case-by-case basis. 

Procedures

What are the primary procedures used to liquidate an insolvent company in your jurisdiction and what are the key features and requirements of each? Are there any structural or regulatory differences between voluntary liquidation and compulsory liquidation?

The insolvency proceedings to liquidate an insolvent company begin with an application to the court to open insolvency proceedings. This application may be filed by the debtor or one of its creditors.

While considering the application, the court may take provisional protective measures, such as appointing a provisional insolvency administrator and assigning a preliminary creditors' committee.

The insolvency proceedings will then be commenced by court order if there is a valid reason (ie, illiquidity, imminent illiquidity or over-indebtedness) and the assets are sufficient to cover the costs of the proceedings. The court designates an insolvency administrator at this time.

Two creditors' meetings will be held to decide whether the company will be continued or wound up (ie, the report meeting) and whether the filed claims are valid and correct in their amount and rank (ie, the verification meeting).

Once creditors rule to wind up the company, the insolvency administrator will start the process of realising the assets, which can last between several months to years depending on whether lawsuits must be filed to collect claims.

As soon as this process is completed, the insolvency administrator must hand in a final report to the court, which will summon a final creditors' assembly to discuss the insolvency administrator's final report (ie, the final meeting). The insolvency estate will then be distributed among the creditors (ie, the final distribution). Subsequently, the insolvency proceeding will be ended by court order.

Further, the court may order the so-called ‘debtor-in-possession’ proceeding. In this case, the managing directors of a company manage and dispose of the assets involved in insolvency proceedings under the scrutiny of a supervising trustee. A debtor-in-possession proceeding requires an application by the debtor and the absence of any disadvantages for creditors. This type of proceeding was established as an incentive for directors to initiate insolvency proceedings early; Chapter 11 of the US Bankruptcy Code was used as a model for this proceeding.

Under German law, a company can be voluntarily liquidated without carrying out insolvency proceedings. The main difference with the compulsory liquidation of an insolvent company is that a voluntary liquidation proceeding is available only where there is no mandatory ground for insolvency. The voluntary liquidation proceeding is administrated by the liquidators appointed by the company’s shareholders. 

How are liquidation procedures formally approved?

Insolvent liquidation proceedings are formally approved by court order and the creditors' assembly. The court orders the opening of the insolvency proceedings. The creditors' assembly is involved in the decisions on whether the business will be shut down and the assets liquidated. Court orders are published online.

What effects do liquidation procedures have on existing contracts?

Liquidation procedures have the following effect on existing (reciprocal) contracts:

  • If only a creditor has performed the contract, he or she merely has an insolvency claim.
  • If only the debtor has performed the contract, the creditor must meet its contractual obligation to the insolvency administrator.
  • In case of fully or partly unperformed contracts by both sides, the insolvency administrator may choose whether to perform such contract, excluding rental agreements or employment contracts. If the insolvency administrator chooses to perform the contract, the creditor will have a claim against the insolvency estate. There are several special provisions for certain types of contract.

What is the typical timeframe for completion of liquidation procedures?

The period of insolvency proceedings is not defined by law. Liquidation procedures typically last between three to seven years for medium or large-sized companies, depending on the scope of the proceeding and whether lawsuits are being filed. 

Role of liquidator

How is the liquidator appointed and what is the extent of his or her powers and responsibilities?

The liquidator (ie, the insolvency administrator) is appointed by the court. His or her primary responsibility is to preserve, manage and realise the insolvency estate. Thus, the insolvency administrator has the right to transfer the insolvency estate rather than the debtor. He or she also has the right to decide on unperformed contracts and contest voidable transactions, which may lead to legal disputes. The insolvency administrator may be held liable in the event of a breach of duty.

Court involvement

What is the extent of the court’s involvement in liquidation procedures?

The court will generally supervise insolvency proceedings. Thus, it commences and closes insolvency proceedings and appoints and controls the insolvency administrator.

Creditor involvement

What is the extent of creditors’ involvement in liquidation procedures and what actions are they prohibited from taking against the insolvent company in the course of the proceedings?

Insolvency proceedings primarily aim to satisfy the debtor’s creditors collectively. In case of insolvency, the debtor’s assets are economically reassigned to the creditors. German insolvency regulation allows them to monitor the insolvency administrator and participate in his or her actions through the creditors' assembly and the creditors' committee, but excludes their right to undertake individual enforcement measures.

The creditors' assembly serves as the creditors' supreme body (consisting of all creditors) and is thus part of all important decisions, including the approval of the liquidation process, the manner of realising the assets and the appointment of an insolvency administrator. 

The creditors' committee may be established by the court and from the first creditors' meeting by the creditors' assembly. The committee supports and monitors the insolvency administrator's actions. 

Director and shareholder involvement

What is the extent of directors’ and shareholders’ involvement in liquidation procedures?

Since only the insolvency administrator has the right to manage and transfer the insolvency estate, directors are not involved in (insolvent) liquidation procedures. However, directors have a duty of disclosure and cooperation.

Directors retain the right to manage and transfer the insolvency estate only in a debtor-in-possession proceeding.

As the debtor's assets are economically reassigned to the creditors, shareholders have no power. This also applies if the liquidation procedures are managed by a debtor in possession.

Stakeholders of an unincorporated body, such as a regular partnership, are personally liable for the partnership's (or other incorporated body's) obligations.

Restructuring procedures

Eligibility

What are the eligibility criteria for initiating restructuring procedures? Are any entities explicitly barred from initiating such procedures?

Insolvency proceedings may be commenced for the estate of companies with legal capacity or without legal personality (eg, general, private limited or private partnerships).

German insolvency proceedings (ie, restructuring and liquidation procedures) are not initiated ex officio, but require a respective application by the debtor or one of its creditors. Filing an application is mandatory for the debtor if it is illiquid or over-indebted. Further, the debtor may file for insolvency if its illiquidity is impending. Creditors may file for insolvency if the debtor is illiquid or over-indebted.

In general, ‘illiquidity’ means that the debtor cannot meet at least 90% of its due and effectively demanded liabilities for more than three weeks. ‘Over-indebtedness’ means that the debtor has no positive going concern prognosis and its liabilities exceed the value of its assets (based on liquidation values). ‘Impending illiquidity’ means that it is more likely that the debtor will be unable to meet its payment obligations when they fall due in the future.

The insolvency court may also order self-administration proceedings. In this case, the insolvent company's management is entitled to continue the company's business. It is controlled by a supervising trustee (who replaces the insolvency administrator). The self-administration procedure is available to any company subject to insolvency proceedings and must be requested by the debtor. Typically, self-administration proceedings aim at restructuring the company (either by way of an insolvency plan or an asset sale restructuring). However, the management can also liquidate the company in self-administration proceedings (if this is the best possible solution for the company's creditors).

If the debtor is over-indebted or illiquidity is impending it may request – in addition to self-administration – a special protective period when filing for insolvency. Such a protective period is an option in cases where the debtor's business can be restructured through an insolvency plan. The court-set protective period, which lasts at most three months, enables the debtor to prepare an insolvency plan. The protective period’s main advantage is that the debtor may give binding instructions to the court regarding the appointment of the preliminary supervising trustee. The court can deviate from the debtor's proposal only if it is obvious that the proposed trustee is insufficiently qualified. In most cases, the preliminary trustee will also be appointed as final trustee by the court due to practical reasons, when final debtor-in-possession proceedings are opened.

Procedures

What are the primary formal restructuring procedures available in your jurisdiction and what are the key features and requirements of each?

An insolvent company may be restructured through an insolvency plan proceeding or an asset deal during the regular insolvency proceeding. In case of an asset sale restructuring, an investor (usually by way of a special purpose vehicle) purchases the assets relevant to the continuation of the company's business from the insolvency administrator. According to mandatory law, the relevant employees also transfer to the buyer. The liabilities remain with the insolvent company or the insolvency estate. In case of an insolvency plan, the legal entity is restructured and survives the insolvency process.

How are restructuring plans formally approved?

After creditors have voted for the implementation of a proposed insolvency plan, it must be approved by the court. If the plan has been accepted by the creditors' meeting and approved by the insolvency court, it is binding on all creditors entitled to take part in the insolvency proceedings.

What effects do restructuring procedures have on existing contracts?

Restructuring procedures have no direct influence on existing contracts. According to German insolvency law, once insolvency proceedings are commenced by the court the insolvency administrator can decide whether existing contracts that have not been fully performed by the contracting parties will be fulfilled or terminated (there are certain exceptions for specific types of contract). Whether the insolvency administrator decides to fulfil or terminate a contract will depend on what is best for the body of creditors.

If the insolvent company's assets are sold to an investor by the insolvency administrator, existing contracts (excluding employment contracts) do not automatically transfer to the investor. Instead, the investor must discuss with the insolvent company's contracting parties bilaterally whether there is room for a transfer of the relevant contracts, having the effect that the contracting parties may try to renegotiate the conditions of contracts.

If an insolvent company is restructured by way of an insolvency plan, existing contracts (which have not been terminated by the insolvency administrator or by the operation of law) remain effective.

What is the typical timeframe for completion of restructuring procedures?

This depends on the complexity of the case at hand. Typically, the restructuring of an insolvent company can be completed within six to 12 months.

Court involvement

What is the extent of the court’s involvement in restructuring procedures?

If the insolvent company's assets are sold to an investor by the insolvency administrator, the court is not involved in the negotiation and completion of the asset deal.

In case of insolvency plan proceedings, the insolvency plan must be filed with the court by the debtor or the insolvency administrator. The insolvency court must reject the plan if it has no chance of being accepted by the creditors or does not comply with the regulations on the mandatory content of insolvency plans (eg, the structuring of creditor groups). At a later stage, an insolvency plan which has been accepted by the creditors' meeting must be approved by the insolvency court. The court will not approve the plan if its content or the plan proceedings were not in line with the legal requirements and the relevant breach cannot be remedied.

Creditor involvement

What is the extent of creditors’ involvement in restructuring procedures and what actions are they prohibited from taking against the company in the course of the proceedings?

Once an application for the opening of insolvency proceedings has been filed and the court has initiated preliminary insolvency proceedings, it must appoint a preliminary creditors' committee if the debtor's business is above a certain size, as defined by the Insolvency Code. The preliminary creditors' committee may propose a person to be appointed as preliminary insolvency administrator. If such a proposal is made unanimously it is, in principle, binding for the court. In case the creditors' committee cannot agree on one candidate, the court may appoint an administrator at its own discretion. The creditors' committee may set certain criteria for the court's decision by drawing a qualification profile.

If the insolvent company's assets are sold to an investor by the insolvency administrator, he or she must ask the creditors' committee or the creditors' meeting (if there is no creditors' committee in place) to consent to the deal. If the insolvency administrator does not ask the creditors for their consent or sells the business despite the creditors’ objections, the deal will still be effective. However, the insolvency administrator may be liable for damages or losses which the creditors may incur.

In case of a restructuring via insolvency plan proceedings, the creditors are involved in different stages of the proceeding. The creditors are not entitled to initiate insolvency plan proceedings by themselves. However, they may ask the insolvency administrator to propose an insolvency plan which aims at restructuring of the debtor. Once an insolvency plan has been filed with the court, the creditors' committee may comment on the plan. Subsequently, all creditors will be invited to vote on the insolvency plan. The insolvency plan may divide the creditors into different groups (eg, secured, unsecured and subordinated creditors). Employees must form a separate group if their claims are significant. The insolvency plan is accepted if a majority of creditors by value and number in the respective creditor groups vote for the plan. If the majority of creditor groups vote for the plan, the dissenting creditor groups can (under certain circumstances) be crammed down. Any agreement concluded by the insolvency administrator, the debtor or other person and the creditor providing for an advantage not envisaged under the plan regarding such creditor's voting behaviour or behaviour regarding the insolvency proceedings is void.

Under what conditions may dissenting creditors be crammed down?

The acceptance of an insolvency plan requires that a majority of creditors by value and number in the respective creditor groups (defined within the insolvency plan) vote for it. If the majority of creditor groups vote for the plan, the dissenting creditor groups can be crammed down. ‘Crammed down’ means that dissenting creditor groups are deemed to have accepted the plan through a court decision, provided that:

  • the creditors forming such groups suffer no loss under the insolvency plan compared to their situation in a (hypothetical) regular insolvency proceeding;
  • the creditors forming such groups participate to a reasonable extent in the economic value transferred to the parties under the plan; and
  • the majority of the voting groups have approved the plan with the necessary majorities.

Therefore, structuring and composing the different creditor groups may be of major importance.

Director and shareholder involvement

What is the extent of directors’ and shareholders’ involvement in restructuring procedures?

If the company's assets are sold by the insolvency administrator to an investor during a regular insolvency proceeding, the directors and shareholders are normally not involved at all, as the sole power of disposal transfers to the court appointed insolvency administrator when insolvency proceedings are opened. This will not apply if the insolvency court has ordered self-administration. In this case, the company's management continues to run the company's business controlled by a supervising trustee.

The same applies for an insolvency plan proceeding. However, the shareholders may be incorporated into the insolvency plan's regulations and form a separate group therein. The plan can stipulate any corporate action (eg, reductions or increases of share capital, contributions in kind or debt-to-equity swaps). However, debt-to-equity swaps may not be implemented against the relevant creditors’ will. Shareholders may object to such regulations within the plan but may – similar to the creditors – be outvoted by the application of cram-down rules.

Informal work-outs

Are informal work-outs available for distressed companies in your jurisdiction? If so, what are the advantages and disadvantages in comparison to formal proceedings?

If the mandatory insolvency grounds of illiquidity or over-indebtedness arise and cannot be remedied within three weeks, the company's management must file for insolvency. Informal workouts are no longer available. Before the existence of mandatory insolvency grounds, extrajudicial (informal) workouts are possible. Companies commonly try to find a mutual settlement with their main creditors (usually the banks), which aim to prolong loans or a haircut in order to prevent insolvency.

Such extrajudicial workouts create more flexibility for the parties involved, as there is no formal and strict procedure to be observed and the company may still have more financial room to manoeuvre than in an insolvency scenario. Conversely, informal voluntary restructurings do not have the benefit of a moratorium, cram down or other statutory protection. The obligation to file for insolvency within three weeks in the case of over-indebtedness or illiquidity may threaten the feasibility of voluntary restructuring.

Transaction avoidance

Setting aside transactions

What rules and procedures govern the setting aside of an insolvent company’s transactions? Who can challenge eligible transactions?

The insolvency administrator (or supervising trustee in self-administration) can challenge certain transactions and claw-back payments or transferred assets. Depending on the factual circumstances, transactions which date back a maximum of 10 years before the filing for insolvency may be challenged. However, the most critical and risky time period for transactions to be challenged is the three months before the filing for insolvency.

The Insolvency Code provides specific rules for contesting transactions which are subject to extensive legal disputes in many cases. Accordingly, a transaction is voidable and may therefore be set aside if:

  • it was made before the insolvency proceedings were commenced;
  • it was detrimental to the creditors; and
  • the criteria set by one of the voidability clauses under the Insolvency Code have been met.

In practice, the main categories of voidable transactions (irrespective of further requirements) are:

  • voidability of congruent or incongruent payment or provision of securities in fulfilment of an agreement within three months before filing for insolvency (or after filing);
  • payment on shareholder loans or equivalent claims within one year before filing for insolvency (or after filing);
  • debtor’s performances without consideration within four years before filing for insolvency (or after filing);
  • provision of securities for shareholder loans or equivalent claims within 10 years before filing for insolvency (or after filing); and
  • debtor’s acts deliberately discriminating creditors within 10 years before filing for insolvency (or after filing).

Under certain circumstances, transactions cannot be set aside if the debtor received immediate adequate consideration (the so-called ‘cash transaction’).

If a transaction is successfully challenged, the creditor must return the received payments or transferred assets to the insolvency estate.

In February 2017 Parliament enacted a long-discussed reform of the Insolvency Code which aimed to soften the law on voidable transactions. The effects of the reform remain to be seen.

Operating during insolvency

Criteria

Under what circumstances can a company continue to conduct business during an insolvency procedure?

Following a filing for insolvency, the insolvency court will immediately appoint a preliminary insolvency administrator. The preliminary insolvency administrator will (often together with the directors) keep operating the company's business if economically possible, reasonable and beneficial for the creditors.

On the commencement of the insolvency proceedings, the court appoints the final insolvency administrator who will then operate the company instead of the directors. The insolvency administrator will keep the business running if and to the extent that it is beneficial for the creditors.

A creditor can, in principle, trade normally with the preliminary insolvency administrator. However, certain precautions should be taken (eg, insisting on advance payments or security for any transaction or the creation of estate liabilities by court order). 

Stakeholder and court involvement

To what extent are relevant stakeholders (eg, creditors, directors, shareholders) and the courts involved in any business conducted during an insolvency procedure?

In regular insolvency proceedings, the insolvency administrator is the key decision maker regarding the continuous operation of the company and the disposal of assets.

After the commencement of insolvency proceedings, neither managing directors nor shareholders will play a significant role in the proceedings. The directors are usually kept on board for the preliminary proceedings and might be kept on board in the opened proceeding if they have relevant knowledge and are willing to cooperate. Shareholders have limited rights and play no active role in preliminary or commenced insolvency proceedings.

Creditors participate in proceedings through the creditors’ meetings. The creditors’ meeting is a supervisory and controlling body specific to insolvency proceedings. Its tasks include the receipt of reports from the insolvency administrator and approving matters of importance. An initial creditors' meeting is convened by the court within three months after the commencement of the insolvency proceedings. The creditors can theoretically appoint an alternative administrator in the first creditors' meeting. Creditors’ meeting resolutions require a simple majority by reference to the value of votes represented at the meeting (other than for the exchange of the insolvency administrator, where a majority in number and value of votes is required).

Further, if the company exceeds certain business thresholds, a preliminary creditor committee will be established to accompany the preliminary insolvency proceedings. After the commencement of the proceedings, the insolvency court will install a permanent creditors’ committee if required for the preliminary proceedings and all other substantial proceedings.

The insolvency administrator must obtain creditors' committee approval (or creditors' committee approval if no creditors' assembly exists) before executing certain important decisions (eg, the sale of the business or parts of the business, the entering into of substantial loan agreements or the filing of a substantial law suit).

In general, the same applies to debtor-in-possession proceedings, except that the directors remain in charge throughout the proceedings and are supervised by a trustee.

Financing

Can an insolvent company obtain further credit or take out additional secured loans during an insolvency procedure?

A company that is subject to insolvency proceedings can obtain further credit if the respective creditor is willing to provide it. If the loan has been granted after the opening of insolvency proceedings (or during preliminary proceedings and the court entitled the debtor or preliminary administrator to create estate liabilities), creditors of such loans are privileged ranked compared to former creditors. Securities may be provided from the company's assets if any unencumbered assets are available. 

Employees

Effect of insolvency on employees

How does a company’s insolvency affect employees and the company’s legal obligations to employees?

German labour law remains applicable in insolvency proceedings. The administrator assumes the position of employer from the opening of the insolvency proceedings. Employment contracts are not automatically terminated. Employee claims that arise before the commencement of the insolvency proceedings rank as unsecured claims, whereas claims arising after the opening of the proceedings rank as estate claims.

The Federal Employment Agency assumes financial responsibility for the employee salary claims arising within three months of the commencement of insolvency proceedings.

In general, the administrator must observe the requirements of the Employment Protection Act. However, there are special insolvency provisions that facilitate the dismissal of employees. The Insolvency Act also provides for regulations regarding the rights of the work council and redundancy plans during insolvency proceedings. Employee claims arising from a redundancy plan (where the work council has concluded such a plan with the administrator) are deemed to rank as estate creditors.

German law provides detailed provisions for the retention of employment contracts in case the debtor's business (or part thereof) is transferred through an asset sale. In general, these provisions – partly modified – also apply in insolvency proceedings. Where an insolvency administrator transfers a business after the commencement of insolvency proceedings, the transferee assumes only those liabilities that occurred after the commencement of insolvency proceedings, whereas the transferee is liable for all employees’ claims if the transfer took place before the proceedings were commenced.

In practice, employees are often transferred to newly created companies in insolvency scenarios provided that they consent to the transfer. These companies aim at retraining the transferred employees in order to make it easier to place them into new jobs.

Cross-border insolvency

Recognition of foreign proceedings

Under what circumstances will the courts in your jurisdiction recognise the validity of foreign insolvency proceedings?

Under the EU Insolvency Regulation (1346/2000), foreign insolvency proceedings are recognised by German courts without further requirements. Outside the regulation's scope, German international insolvency law applies, according to which foreign insolvency proceedings are recognised unless:

  • the courts of the state in which the proceedings have been commenced do not have jurisdiction in accordance with German law; or
  • the recognition of the foreign proceedings would lead to a result which conflicts with the major principles of German law – in particular, where the recognition would be incompatible with basic rights. 

Winding up foreign companies

What is the extent of the courts’ powers to order the winding up of foreign companies doing business in your jurisdiction?

If a foreign company is over-indebted or illiquid and a respective application has been filed by the company's management or one of the company's creditors, the German insolvency courts have the power to open insolvency proceedings on the estate of companies with legal capacity or other companies without legal personality (eg, general, private limited or private partnerships). In general, this rule applies to German and comparable foreign companies.

An additional prerequisite for the opening of German insolvency proceedings is that the German courts have international jurisdiction in the case at hand. Where the EU Insolvency Regulation is applicable, German courts will have international jurisdiction if the foreign company's centre of main interests is located in Germany. Outside the EU Insolvency Regulation's scope of application, the question of whether the company's centre of economic activity is located in Germany is a decisive factor.

If the foreign company's centre of main interests is located outside Germany, but the foreign company has an establishment in Germany, German courts can open secondary proceedings if the foreign company is insolvent and a respective application has been filed. Such secondary proceedings are limited to the foreign company’s Germany-based assets.

Centre of main interests

How is the centre of main interests determined in your jurisdiction?

As far as the EU Insolvency Regulation is applicable, the location of the registered office of a company or legal person is presumed to be the centre of main interests in the absence of proof to the contrary. This presumption may be rebutted only by objective elements which are determinable for a third party. There are two main theories on how centres of main interests should be determined. According to the mind of management theory, the decisive factor is where the company's head office functions are located. According to the business activity theory, decisive factors may be where the company’s:

  • office and production facilities are located;
  • employees are located; and
  • bank accounts are held.

The European Court of Justice seems to favour the business activity theory.

When determining the place of jurisdiction – outside the EU Insolvency Regulation's scope of application – the company's centre of economic activity is decisive. This term is similar to the centre of main interests used in the regulation (ie, the decisive factors are where the company’s office is located and employees work and bank accounts are held and where the company gets in contact with its customers).

Cross-border cooperation

What is the general approach of the courts in your jurisdiction to cooperating with foreign courts in managing cross-border insolvencies?

The German insolvency courts are not obliged to share information or cooperate with foreign courts. However, the German insolvency courts may (at their sole discretion) contact foreign courts in order to share relevant information and harmonise the different courts' general approaches without officially requesting judicial assistance. This applies not only if a foreign proceeding has already been recognised in Germany, but also where clarification is required as to whether foreign proceedings can or must be recognised. In June 2017 the reformed European Insolvency Regulation will come into force and will contain further provisions on cooperation in cross-border insolvencies.