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Insolvency procedures

Procedures
What are the main insolvency procedures applicable to companies in your jurisdiction?

  • Insolvency administration (“Insolvenzverwaltung“)
  • Self-administration under supervision (“Eigenverwaltung mit Sachwalter“)
  • Creditors protection scheme (“Schutzschirmverfahren“)

Insolvency administration – A court procedure in which an administrator takes control of the company. The directors of a limited liability company (GmbH and AG) that is cashflow or balance sheet insolvent must apply for insolvency administration. Where a limited liability company is likely to become cashflow insolvent its directors can voluntarily apply for insolvency administration.

The proceeding is flexible and can be used to achieve a range of outcomes for a distressed company from a restructuring to a liquidation of the company’s assets. It is frequently used in order to achieve a sale of the business of the company as a going concern. In order to protect the business and preserve its value, the company is protected by a statutory moratorium whilst in insolvency administration.

Self-administration under supervision – A court procedure in which the company’s management remains in control of the company subject to supervision by a procurator. This procedure can be applied for as part of the application for insolvency administration. It is frequently used in order to achieve a sale of the business of the company as a going concern or to ensure that key suppliers continue to sell to the company.

Creditors’ protection scheme – Only available to companies that are likely to become cashflow insolvent. This procedure allows the company to propose a restructuring plan to the creditors. Schemes can bind secured creditors. Creditors and members are divided into classes with similar interests. The scheme only becomes effective if approved by the relevant majority of each class and by the insolvency court.

Moratorium
Can a company obtain a moratorium whilst it prepares a restructuring plan?

Yes, the restructuring plan is prepared after the commencement of one of the three formal proceedings and the courts can (and regularly do) grant a moratorium in such circumstances.

Directors
To what extent do the directors of the company remain in control of its affairs during any of the above procedures?

In a creditor protection scheme or self-administration directors legally remain entitled to act for and on behalf of the company.

In an insolvency administration, however, the administrator takes over. During the first stage of the insolvency proceedings the directors remain in control of the company (although subject to supervision by a preliminary insolvency practitioner).

Timeline to commence liquidation
How quickly can a creditor generally commence the liquidation of an insolvent company, assuming an undisputed claim and no opposition from the company?

Two weeks to three months depending upon the case at hand and the process followed.

Overseas proceedings
Do your courts recognise insolvency proceedings commenced in the courts of another jurisdiction?

Yes – proceedings commenced in the courts of other EU member states will be automatically recognised under the EC insolvency regulation.

Insolvency proceedings commenced in the courts of countries that are not EU member statesare capable of being recognised by application to the German court, however, recognition will be denied where the foreign court does not have jurisdiction in accordance with German law or where recognition would be contrary to public policy, for instance where creditors of different nationalities are not treated equally under the foreign insolvency proceeding.

Position of creditors

Forms of security
What are the main forms of security over movable and immovable property?

Security over immovable property is taken by:

  • mortgage (Hypothek)
  • non-accessory land charge (Grundschuld)

Security over moveable property is taken by:

  • retention of title (Sicherungsübereignung)
  • assignment by way of security (Sicherungsabtretung)
  • possessory security such as pledges

Preferential status
Which classes of creditor are given preferential status? Are any classes subordinated?

Debts owed to secured creditors are preferred as are debts incurred after the commencement of insolvency proceedings. Generally, debts owed to the company’s shareholders are subordinated to debts owed to unsecured creditors.

Treatment of foreign creditors
Are foreign creditors treated equally to domestic creditors?

Yes.

Termination of contract by reason of insolvency
Are contract terms permitting termination of the contract by reason of insolvency valid?

Depends on nature of the contract. The terms will be invalid if they provide for automatic termination of a contract as are terms that deprive the insolvent party of the right to be paid sums that have fallen due prior to the commencement of insolvency. Inclusion of terms that provide for termination on insolvency are prohibited in certain contracts including leases of real estate and leases of chattels.

Retention of title
Are retention of title clauses effective?

In principle yes, provided that the retention of title clause is validly agreed upon by the parties and the goods in question can be properly identified. In general, the validity of the retention of title is subject to the law of the jurisdiction where the goods in question are situated.

Setting aside transactions

Transaction avoidance provisions
What are the main transaction avoidance provisions, and who can challenge transactions?

The insolvency administrator can challenge:

  • transactions at an undervalue (concluded in the four years prior to filing for insolvency)
  • preferences (given in the ten years prior to filing for insolvency)
  • transactions entered into in the three months prior to filing for insolvency
  • repayment of a shareholder loan (in the year prior to filing for insolvency)
  • provision of security for a shareholder loan (in the ten years prior to filing for insolvency)

Position of directors

Risks for directors
What are the risks facing the directors of an insolvent company?

Directors of a company that is (or is likely to become) insolvent on a cashflow or balance sheet (overindebtedness) basis have a duty to file for insolvency. Directors in breach of this duty can be held personally liable to make good all funds disbursed by the company after the date on which they should have filed for insolvency. 

Directors can also be criminally liable for fraud and other offences in relation to the insolvency of a company. On conviction, a director can be disqualified from acting as a director for five years.