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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.

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