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What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?
Any private company may be liquidated. The liquidation of a German limited liability company requires compliance with a number of formalities, which is checked by the registry court. Any liquidation leading to the company’s removal from the commercial register requires its dissolution. As a rule, a company is dissolved by resolution of the shareholders' meeting.
Such dissolution will not terminate the company. Rather, it is followed by the liquidation phase aiming at satisfying the company's creditors by distributing the remaining assets among the shareholders and removing the company from the commercial register.
There are similar rules for the dissolution of a limited partnership and a partnership under the Civil Code.
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?
Once a company is insolvent, voluntary liquidation is no longer an option. At such point, it is mandatory to file a petition for insolvency with the insolvency court in order to liquidate the company. Once insolvency proceedings are opened, the liquidation of the company will mainly follow the rules set out in the Insolvency Statute. In such case, the liquidation is (usually) carried out by the insolvency administrator. The creditors may file their claims with the insolvency administrator within a certain time for registration in the insolvency schedule.
If the insolvency court rejects a request for insolvency because the debtor's assets will probably be insufficient to cover the costs of the proceedings, this will automatically lead to the company’s dissolution. In this case, the company will be liquidated in accordance with the relevant corporate law rules. Normally, the company's managing director will be appointed as the liquidator.
How are liquidation procedures formally approved?
Voluntary liquidation requires no formal court approval. In contrast to insolvency proceedings, liquidation does not require a request to be filed with the court.
What effects do liquidation procedures have on existing contracts?
During voluntary liquidation, the liquidator must terminate all of the company’s:
- active business;
- contracts and sell all receivables, stocks and assets in order to pay its debts.
The company may be terminated only when there are no debts left. Existing contracts may only be terminated in accordance with the general rules of law or by mutual agreement of the parties.
In insolvency procedures, the insolvency administrator may generally choose whether to fulfil contracts signed by the insolvent company prior to the company's insolvency. However, the Insolvency Statute contains specific rules for certain types of agreements (especially rental agreements and employment contracts), including special termination requirements.
What is the typical timeframe for completion of liquidation procedures?
The statutory minimum duration of a voluntary liquidation is one year. However, these usually last longer, depending on the amount of work involved in the process.
Average insolvency procedures take three to five years. Their duration depends on the size of the insolvent company.
Role of liquidator
How is the liquidator appointed and what is the extent of his or her powers and responsibilities?
Appointment of the liquidator
In a voluntary liquidation procedure, the liquidation will generally be carried out by the managing director as the liquidator. In such cases, no formal appointment is required.
However, a company's articles of association or a shareholders' resolution may transfer this function to another person. The liquidator may be appointed by a court decision only as an exception.
In compulsory insolvency proceedings, the court appoints an insolvency administrator. The insolvency administrator – in contrast to a liquidator – is not a representative of the insolvent company, but an ex officio party to the proceeding.
Responsibilities/tasks of the liquidators
Liquidators take the place of the managing director and take over the representation of the company in and out of court. While doing so, the liquidator is bound by the purpose of the liquidation and the company's articles of association and the instructions of the shareholders' meeting.
Other responsibilities include:
- the notification of the dissolution to the commercial registry;
- the notification of the dissolution to the creditors;
- the termination of all pending business; and
- the fulfilment of the company's obligations.
This includes, in particular, the company's tax obligations. The liquidator will be held personally liable via their private assets for the fulfilment of the liquidator's duties.
The insolvency administrator must realise the insolvency assets as quickly as possible and distribute the proceeds to the creditors. If the insolvency administrator culpably breaches their duties when doing so, the insolvency administrator will be held liable for the damage occurred with their private assets.
What is the extent of the court’s involvement in liquidation procedures?
In certain cases, the court may order voluntary liquidation. However, this is an exception to the rule and liquidation is largely left to the liquidators.
Insolvency procedures are a different matter. Here, an insolvency petition must be filed with the insolvency court. The insolvency court will then appoint the insolvency administrator. During the entire insolvency procedure, the insolvency administrator will be monitored by the insolvency court. This is meant to ensure that the insolvency administrator properly meets their responsibilities.
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?
The involvement of creditors in the liquidation procedures is limited. The creditors may notify their outstanding claims to the liquidator. If these claims are not (or cannot be) satisfied, the creditors may take court action and perhaps file a petition for the opening of insolvency proceedings over the debtor’s assets.
However, once insolvency proceedings have been opened, the creditors may only file their claims with the insolvency administrator for registration in the insolvency schedule in these proceedings. It will be impossible to collect the receivables in any other way.
Director and shareholder involvement
What is the extent of directors’ and shareholders’ involvement in liquidation procedures?
In the case of liquidation prior to insolvency, managing directors are generally responsible for the liquidation as liquidators. Corporate law measures, in particular, may require the consent or cooperation of the shareholders.
In the case of liquidation within the framework of insolvency proceedings, managing directors must file a timely request for insolvency. If the company has no managing director, shareholders (and members of the supervisory board, if any) must file a request for insolvency. In the course of the opened insolvency proceedings, neither the managing director nor the shareholders generally have a right of co-determination. The insolvency administrator has the sole right to manage and transfer the insolvency estate. In the case of an insolvency plan procedure, the insolvency plan may also be prepared and presented by the insolvent company (ie, the previous management). The insolvency plan bindingly sets out the measures to be implemented for the liquidation of the company. In addition to the creditors, the insolvent company (ie, the previous management) and the shareholders also vote on the acceptance of the insolvency plan.