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What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?
The Insolvency Code governs three types of judicial insolvency proceedings for enterprises:
- bankruptcy proceedings;
- restructuring proceedings with self administration; and
- restructuring proceedings without self administration.
Bankruptcy proceedings can be compared to (non-voluntary) liquidation proceedings.
The conditions to open any of the above proceedings are illiquidity or over-indebtedness.
A company is considered ‘illiquid’ if it is unable to pay all due debts in due time and is not in a position to acquire the necessary funds to satisfy its due liabilities within a reasonable period of time. Only matured liabilities are relevant. Liabilities not yet due and deferred or statutorily subordinated liabilities not yet payable need not be considered.
A company is considered ‘over-indebted’ if the company’s liabilities exceed its assets based on liquidation values and the company has a negative forecast for continued existence. In practice, assessment of the latter is usually the key challenge for debtors or their directors.
As soon as one of these insolvency conditions applies, the duty to file for insolvency for directors is triggered and the debtor (as well as creditors) can file for bankruptcy proceedings.
Rules on restructuring proceedings do not apply for banks, insurance companies and pension funds. Besides, entities are not explicitly barred from initiating insolvency proceedings.
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?
Insolvent liquidation proceedings (ie, bankruptcy proceedings) require the debtor’s insolvency (ie, illiquidity or over-indebtedness) and are initiated after application by the debtor or a creditor. If the debtor files an application, bankruptcy proceedings are usually opened very quickly (ie, within a few days). If a creditor files, the court must first assess whether the creditor is formally entitled to file and whether the debtor is indeed insolvent. This process may take weeks or even months.
If the above requirements are met and the debtor’s assets are sufficient to cover the costs of the proceedings, bankruptcy proceedings are formally opened by the court and an insolvency administrator is appointed. In such proceedings, the administrator is called the ‘Masseverwalter’ and merely acts as a liquidator.
There are no structural or legal differences between liquidation proceedings filed by the debtor or a creditor.
Insolvency administrators usually try to sell the whole (or main parts) of the debtor’s business as a going concern. If this is impossible, the business gets closed and the administrator sells the assets in bundles or piece by piece.
Proceedings may last for several months or several years, as the case may be. After all assets have been sold, a final court hearing is scheduled and the proceeds are distributed among the creditors (ie, the final distribution of the insolvency quota). The proceedings end by court order.
Other than restructuring proceedings, bankruptcy proceedings cannot be debtor-in-possession proceedings. Still, even if bankruptcy proceedings are opened, a debtor can file for a restructuring plan and thereby has the chance to restructure the business as a going concern, achieve a debt discharge of up to 80% and regain control.
Besides liquidation proceedings (ie, bankruptcy proceedings) based on insolvency law, there are corporate law rules providing for voluntary liquidation of a solvent debtor. Such are usually not relevant in an insolvency scenario.
How are liquidation procedures formally approved?
By court order.
Certain extraordinary measures within the proceedings (eg, the sale of the business or major assets such as real estate) must be approved by court and a formally appointed creditors’ committee.
What effects do liquidation procedures have on existing contracts?
Generally, contracts are not automatically terminated or amended by the opening of insolvency proceedings (ie, bankruptcy or restructuring proceedings). Still, there are special provisions in the Insolvency Code relevant to contracts:
- If both contract partners have fully performed their contractual obligations, contracts can in principle be affected only by an ex post challenge by the administrator (mainly under avoidance law);
- If mutually binding contracts have been fully or partly unperformed by both sides, the administrator may choose whether to be bound to the contract or withdraw from it. If the administrator decides to withdraw, damages suffered by the contracting partner can only be filed as insolvency claims. This general rule does not apply for lease or similar contracts and employment contracts;
- If a creditor (and not the debtor) has performed a contract, the creditor merely has an insolvency claim for its loss resulting from the non-performance by the debtor; and
- If the debtor (and not the creditor) has performed the contract, the insolvency administrator can claim contractual performance by the other party.
Special rules for lease and employment contracts
In case of long-term agreements such as lease or employment contracts (or similar contractual relationships), the Insolvency Code provides specific termination rules which are mostly in favour of the insolvent debtor. In terms of employment law, the code in certain circumstances provides for easier termination for both parties (ie, administrator and employees). This particularly helps the administrator if he or she wants to sell the business or valuable parts of it.
Rules on termination
Under certain circumstances, contracts which are essential for the ongoing business of the debtor may be protected from termination by the contractual partner for a specific period (ie, up to six months). Clauses which allow the contractual partner of the debtor to terminate a contract just because of the opening of insolvency proceedings (ie, ipso facto clauses) are void.
What is the typical timeframe for completion of liquidation procedures?
Proceedings may last for several months or several years. The timeframe depends on the complexity of the proceeding and whether the administrator can sell the business in full as a going concern or must sell assets separately. Potential lawsuits usually influence the timeframe.
Role of liquidator
How is the liquidator appointed and what is the extent of his or her powers and responsibilities?
The liquidator is appointed by the court out of a list of potential administrators. Administrators are usually lawyers; in most cases, the individual lawyer and not the law firm is appointed. There is no formal right of the debtor or creditors to influence the court’s selection. The administrator’s tasks include to evaluate, inventory and sell the debtor’s assets. The administrator must meet the objective standards of a professional expert. In his or her authority, the administrator can:
- close contracts;
- withdraw from or terminate contracts;
- negotiate settlements;
- sue contractual partners; and
- seek support by external experts.
A breach of the described duties may lead to personal liability.
What is the extent of the court’s involvement in liquidation procedures?
The court is competent for all main decisions and thus decides on:
- the opening of the proceeding;
- the appointment of the administrator and any creditors’ committee; and
- the end of the proceeding.
Besides, the court will supervise the proceeding and especially the actions of the administrator, and may need to take decisions or enact orders in this context. Certain measures (eg, sale or shutdown of business) must be formally approved by the court.
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?
Unsecured creditors can enforce their individual rights by filing their claims as insolvency claims and thereby participate in the insolvency quota. Creditors with a right to property over the assets of the debtor’s estate and secured creditors can claim preferential treatment limited to the owned property or the value of the security.
Creditors which have filed their insolvency claims can participate and vote in the creditors’ meetings and in court hearings and thereby contest claims filed by other creditors. Creditors are party to the proceedings, have formal access to the court files and can challenge certain court decisions in such capacity.
The creditors can further participate by the appointment of a creditors’ committee. This must be appointed by the court in complex proceedings and in case of the sale of the business. The committee supports and supervises the administrator, and must approve certain of his or her actions.
Director and shareholder involvement
What is the extent of directors’ and shareholders’ involvement in liquidation procedures?
As liquidation proceedings (unlike certain types of restructuring proceedings) are not debtor-in-possession proceedings, the directors may no longer manage the company. Still, they remain formally appointed and must cooperate and share relevant information with the administrator.
Shareholders do not lose their formal status as shareholders but may not give directives to the administrator or participate in court hearings (unless they are also creditors).
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