What is the primary legislation governing insolvency and restructuring proceedings in your jurisdiction?
Insolvency proceedings The initiation and conduct of insolvency proceedings are governed by the Insolvency Statute and, where applicable, the Code of Civil Procedure.
Restructuring The pre-insolvency restructuring of companies follows the rules of general company law (ie, the Stock Corporation Act and the Act on Limited Liability Companies). Germany has no specific (pre-insolvency) restructuring law.
On an international spectrum, is your jurisdiction more creditor or debtor friendly?
German insolvency law is creditor friendly. The major aim of German insolvency procedures is the joint satisfaction of a debtor's creditors by realising the debtor's assets and distributing the proceeds among the creditors.
Do any special regimes apply to corporate insolvencies in specific sectors (eg, insurance, pension funds)?
Banks As a reaction to the 2007 financial crisis, a number of standardised Europe-wide restructuring and liquidation regimes for banks were established and remain in place. Banks may now take pre-insolvency restructuring measures and the German banking supervisory authority Federal Financial Supervisory Authority (BaFin) may also take and order actions to improve the level of a bank's own funds.
If restructuring fails, only BaFin will be allowed to apply for the opening of insolvency proceedings, as reorganisation is at the heart of the process and should not be disturbed by a bank’s creditors.
Insurers When it comes to insurers, there are certain particularities regarding the procedures, reporting requirements and privileges of insurance creditors. An essential feature is that only the supervision authority and not insurers themselves or any other creditors – may request the opening of insolvency proceedings. The supervision authority can, right until the end, prevent insolvency proceedings by taking other actions, such as asset transfers, the frustration of contracts and the reduction of insurance payments. The satisfaction of insurance creditors in the amount of their share in the prescribed minimum security assets takes absolute precedence over the satisfaction of any other creditors.
An insurer's management must inform the supervision authority of the reasons for the insurer's insolvency. Failure to do so qualifies as an offence.
Funds The assets of open-end funds are classified as special funds and must be kept separate from the assets of a capital management company. If a capital management company becomes insolvent, the depository bank will arrange for the liquidation of the monies and their immediate payment to the shareholders. Because funds in Germany require state approval and are supervised by BaFin, this type of investment is very safe, even in the event of a fund's insolvency.
Are any reforms to the legal framework envisaged?
No insolvency law reforms are currently being planned. The Insolvency Statute was reviewed in April 2017 as part of a comprehensive law reform. No additional corporate law reforms regarding the (pre-insolvency) restructuring or reorganisation of companies are expected at present.
Director and parent company liability
Under what circumstances can a director or parent company be held liable for a company’s insolvency?
Director's liability Generally, a managing director is personally liable for breaching their duties under the Act on Limited Liability Companies. Such liability also extends to a director's deputies. However, the so-called ‘business judgement rule’ allows for the exculpation of directors. This rule will be applied if a director, when taking a certain action, could reasonably be assumed to have acted in the best interest of the company on the basis of adequate information. The same applies to directors of German stock corporations.
In addition to the above, directors are held liable for:
- any (negligent) reduction of assets if the filing for insolvency is delayed; and
- all payments made by the company after it becomes insolvent.
If a company has several managing directors, the responsibilities may be distributed among them. In this case, each director will be held responsible only for their area of responsibility. As a result, each director will have their own function in respect of which they will act on their own initiative, but also be held fully liable. Each director will have comprehensive monitoring and information duties with regard to the other directors' functions and will be held liable if they fail to meet these duties.
The liability of a managing director may also be limited by a shareholders' resolution approving such director's past actions. This resolution documents that business and corporate management have been deemed appropriate.
Parent company's liability As a rule, a parent company is not held liable for its subsidiaries' insolvency if the company has effectively paid up the stake in full. This does not apply if the subsidiary has paid the initial share capital contribution back to the parent company. Parent companies will be held liable if they have caused the subsidiary's insolvency by an intervention that leads to its winding up. Eventually, parent companies will be held liable in the event of their subsidiaries' insolvency if they have provided securities to third parties on behalf of the subsidiaries (especially through suretyship, cumulative assumption of debt and guarantee agreement).
What defences are available to a liable director or parent company?
Many insurers offer a pecuniary damage liability insurance to cover the internal and external liability risks, which is called directors and officers (D&O) insurance, like the ‘Anglo-Saxon model’ on which it is based. In most cases, this insurance is taken out by companies rather than members of corporate bodies themselves. In recent years, D&O insurance has become a standard insurance product and is taken out by almost all listed companies in Germany. But even in German limited liability companies, D&O insurance is playing an ever-increasing role.
Alongside D&O insurance policies, the exemption of directors from liability beyond insurance policies is becoming increasingly important. However, its legal basis and limits have not yet been fully clarified in Germany. In this context, there has been discussion of limiting the scope of liability of directors and of holding them liable only for grossly negligent breaches of duties rather than any negligent breach of duties. The possibility of a temporal limitation of a directors' liability (claims regularly become time-barred only after five years) is also being considered. Whether it is possible to limit the amount of directors' liability is also being discussed.
What due diligence should be conducted to limit liability?
Company directors must continually monitor their company’s solvency. In the case of a company's inability to pay or overindebtedness, directors generally have to file a petition for insolvency.
Generally, a parent company is not held liable for their subsidiaries' insolvency. The parent company therefore is generally not obliged to monitor its subsidiaries' insolvency.
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?
Suretyship A suretyship is a means to secure a loan by which a creditor wishes to protect itself against the insolvency of its debtor. Under a suretyship agreement, the surety undertakes to repay the debtor's debt to the creditor if the debtor fails to do so itself. Due to deal-specific nature of a suretyship, such suretyship secures only the primary debt for which it is granted and only the amount that is still outstanding. If the primary debt expires, the suretyship will automatically expire with it.
Guarantee A guarantee agreement is an undertaking of a third party (the guarantor) to guarantee a certain outcome and/or pay the damage that may be caused by a particular business decision. In contrast to a suretyship, a guarantee agreement is non-deal specific and therefore establishes a claim in its own right that is independent from the creation and continuation of the principal debt.
Mortgage A mortgage is a right in a real property to secure a monetary claim which is legally tied to the existence of this claim. If the claim expires, the mortgage will also expire.
Land charge A land charge is a right in a real property to secure a monetary claim, which in contrast to a mortgage is not legally tied to the continuation of a specific monetary claim. If the claim expires, the land charge will generally continue to be valid.
Lien The debtor can create a lien over a movable asset or a right in favour of the creditor in order to secure a claim. The creditor has the right to seek satisfaction of a secured claim from the encumbered asset. The creation of a lien requires that the creditor is in possession of the relevant asset (ie, that the creditor has effective control over it).
Collateral assignment Collateral assignment means that movable assets or rights are transferred to secure a creditor’s claim. In contrast to a lien, a creditor receives ownership in the asset or right while the asset or right itself remains within the debtor’s possession so that the debtor can continue to use it or may continue to collect any claims so assigned.
Ranking of creditors
How are creditors’ claims ranked in insolvency proceedings?
Creditors entitled to separate satisfaction may demand from the insolvency administrator the separation and recovery of assets held by the debtor but owned by the creditor (eg, leased objects or goods delivered under reservation of title). These items are not part of the insolvency estate.
Creditors entitled to separate satisfaction have had a security right created in a certain asset (eg, a lien or collateral transfer) to secure a monetary claim against the insolvency debtor prior to the insolvency event. If such asset is realised during an insolvency procedure, the proceeds will be used to primarily satisfy the claim of the entitled creditor, and only proceeds in excess of such a claim will be distributed to the ordinary insolvency creditors.
The debts incumbent on the estate will also be satisfied before the claims of the ordinary creditors. These include, for instance, insolvency administrator costs, court costs and costs for the continuation of business operations during the insolvency procedure.
After that, the claims of the ordinary creditors without any special rights will be satisfied. The remaining assets are distributed among them, mostly on a pro-rata basis. This means that all creditors will receive the same percentage of their claims (eg, 5% of the original value of the claim).
If there are still assets available after the satisfaction of all ordinary insolvency creditors, subordinated debts will also be paid. These include shareholder loans or claims that have the same economic effect as such loans. This is rare.
Can this ranking be amended in any way?
The creditors of an (insolvent) company generally have no means of improving their ranking. Rank improvements individually agreed in contracts between an insolvent company and a creditor are generally invalid because this would put the other creditors at a disadvantage and therefore violate the principle of equal creditor treatment. However, a contractual lowering of the rank may be agreed without any problem (subordination).
What is the status of foreign creditors in filing claims?
Foreign creditors have the same legal status as German insolvency creditors. The Insolvency Statute does not discriminate between creditors on the basis of their origin.
Are any special remedies available to unsecured creditors?
Generally, there are no special remedies available to unsecured insolvency creditors. Under German law, a retroactive securitisation of claims is normally deemed invalid.
By what legal means can creditors recover unpaid debts (other than through insolvency proceedings)?
As long as no insolvency proceedings have been opened for the debtor’s assets, each creditor, in principle, may try to enforce their claims against the debtor by levying execution. In order to do so, creditors need a court decision that they can enforce.
Is trade credit insurance commonly purchased in your jurisdiction?
Yes, trade credit insurance is commonly purchased. It protects the insured party against the loss of receivables from deliveries of goods or services.
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.
What are the eligibility criteria for initiating restructuring procedures? Are any entities explicitly barred from initiating such procedures?
Unless they are insolvent, private companies in Germany may be restructured in line with the general legal rules. Insolvent companies may be restructured as part of insolvency proceedings; this may require the agreement of the creditors' assembly.
What are the primary formal restructuring procedures available in your jurisdiction and what are the key features and requirements of each?
German law provides no formal restructuring procedure outside insolvency proceedings. Outside insolvency proceedings, the permissibility of restructuring measures depends on general (especially civil law) rules.
Companies that are (or are likely to become) insolvent may be reorganised during insolvency proceedings. The Insolvency Statute provides the following actions to successfully restructure a company:
- In so-called ‘regular insolvency proceedings’, the insolvency administrator is in charge of restructuring the insolvent company. In this case, the insolvent company will normally be reorganised through what is known as a reorganisation transfer (ie, by being sold to an investor through an asset deal). Such a reorganisation transfer generally leads to the termination of the insolvent company.
- In so-called ‘insolvency plan proceedings’, it is normally the insolvency administrator (sometimes together with the insolvent company) who is in charge of the restructuring. In this case, the insolvent company and the company's creditors may agree, on their own authority, which (especially corporate law) actions will be taken to reorganise the company (eg, a debt-to-equity swap). The insolvency plan usually aims at reducing the company's indebtedness while continuing to operate as the same legal entity. The conduct of an insolvency plan procedure mandatorily requires that creditors be put in a better position than they would have been after a regular insolvency procedure.
- In so-called ‘debtor in possession proceedings’ the debtor's old management will have full responsibility for managing the restructuring and will be monitored by an administrator appointed by the insolvency court. The old management may self-manage both the regular procedure and the insolvency plan procedure. The insolvent company must file a request for a self-managed procedure where no disadvantages for the creditors are to be expected.
When it comes to the restructuring of larger insolvent companies, the number of self-managed insolvency plan procedures is rising in Germany. This procedure is similar to the US Chapter 11 procedure and offers the highest level of flexibility to both the company and the company's creditors in the reorganisation process.
As a result of the financial crisis, an additional independent insolvency and reorganisation procedure has been created for (system-relevant) banks. However, to date, no bank in Germany has been restructured under this law.
How are restructuring plans formally approved?
The insolvency plan may be set up by the insolvency administrator and the insolvent company or jointly.
The insolvency court will dismiss the plan ex officio if:
- the provisions concerning the right to submit such a plan and the contents thereof have been violated;
- a plan submitted by the debtor clearly has no chance of being accepted by the parties involved or of being confirmed by the court; or
- the claims to which the parties involved are entitled according to the constructive part of a plan to be submitted by the debtor cannot be satisfied.
Unless it is dismissed by the insolvency court, the insolvency plan must be accepted by creditors in a voting meeting scheduled by the court. Subsequently, the acceptance (or rejection, where appropriate) will be confirmed by an order of the insolvency court.
What effects do restructuring procedures have on existing contracts?
In the event that a company is restructured outside insolvency proceedings, the restructuring has no impact on the existence of contracts. The general (in particular, civil law) provisions regarding the existence or termination of contract will be applicable. Notably, a restructuring outside insolvency proceedings does not give rise to special rights of termination on the part of the company to be restructured.
If a company is restructured within the scope of insolvency proceedings, the company’s insolvency administrator has, in general, the option of whether to fulfil the contracts concluded by the insolvent company prior to the opening of insolvency proceedings. Regarding certain contract types (in particular, lease agreements and employment relationships), the Insolvency Statute contains special regulations, including special termination provisions.
What is the typical timeframe for completion of restructuring procedures?
As a rule, restructuring proceedings take more than one year (and sometimes up to several years). Insolvency proceedings are rarely terminated within a few months. In general, the law does not provide for a minimum period regarding the restructuring of a company outside insolvency proceedings. The duration of such insolvency proceedings depends, in essence, on the nature and scope of the planning measures.
Where a company is restructured within the scope of insolvency proceedings, the average duration of these proceedings ranges between three and five years. The duration largely depends on the size of the insolvent company.
What is the extent of the court’s involvement in restructuring procedures?
In the event that a company is restructured outside insolvency proceedings, the effectiveness of restructuring measures, as a rule, does not depend on the consent of a court (different provisions may apply to corporate measures, where appropriate), insofar as the general provisions will apply. Further, the restructuring of a company is not monitored and controlled by a court.
In the event of a restructuring within the scope of regular insolvency proceedings, the insolvency administrator is subject to the control of the insolvency court. In the case of a debtor in possession procedures (carried out under the company's own management), the insolvency court instructs an insolvency monitor to oversee the insolvent company (notably with respect to compliance with insolvency law). If insolvency plan procedures are carried out for the purposes of a restructuring, the plan and its feasibility will be checked by the insolvency court. An insolvency plan requires court consent through a court order.
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?
If a company is restructured outside insolvency proceedings, the consent of the creditors is required in the event of a debt relief in particular. Such a waiver cannot be enforced outside insolvency proceedings. Other interferences with the rights of creditors require their consent. Creditors may continue to assert their claims in court and enforce them by means of forced execution within the scope of extra-judicial restructuring proceedings. Extra-judicial restructuring proceedings offer no possibility (other than on the basis of contractual agreements) to obtain protection against execution.
If the restructuring of a company takes place within the scope of insolvency proceedings, creditors may exert influence on the restructuring process within the scope of the creditors' assembly or committee. Essential measures within the scope of restructuring proceedings require the consent of the creditors' committee or assembly, if appropriate, including:
- a decision about continuing the business operations within the scope of the insolvency proceedings opened; and
- a vote about the acceptance of the insolvency plan and the measures provided for therein with regard to the restructuring of the company.
Enforcement measures by creditors on the assets of an insolvent company are, in general, inadmissible for the duration of insolvency proceedings. However, the creditors may file their claims with the insolvency administrator to have them registered in the insolvency schedule and will be satisfied from the insolvency assets in accordance with their quota.
Under what conditions may dissenting creditors be crammed down?
Provided that the necessary majorities exist, a negotiated insolvency plan may be confirmed as binding even for dissenting creditors or shareholders and lead to interference with their rights. However, the insolvency plan does not become effective towards parties not involved.
Director and shareholder involvement
What is the extent of directors’ and shareholders’ involvement in restructuring procedures?
In the case of a restructuring prior to insolvency, the company’s managing directors are responsible for the development and implementation of the restructuring measures. Corporate law measures, in particular, may require the consent or cooperation of the shareholders.
In the case of restructuring within the framework of insolvency proceedings, managing directors must file a (timely) request for insolvency. If the company has no managing directors, the shareholders (and the members of the supervisory board, if any) must file a request for insolvency. In the course of the opened insolvency proceedings, neither the managing directors nor the shareholders generally have a right of co-determination. The insolvency administrator has the sole right to manage and transfer the insolvency estate. A different regulation applies in the case of a debtor in possession procedures (carried out under the company's own management). In such a case, the right to manage and transfer the insolvency estate stays with the company's management (under the supervision of an insolvency monitor appointed by the insolvency court). In the insolvency plan procedure, the insolvency plan may also be prepared and presented by the insolvent company (ie, by the previous management). The insolvency plan bindingly sets out the measures to be implemented for the restructuring 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.
Are informal work-outs available for distressed companies in your jurisdiction? If so, what are the advantages and disadvantages in comparison to formal proceedings?
There is the possibility of an out-of-court recovery by concluding a settlement with the creditors of the company to be recovered. In this case, an agreement must be reached between the debtor and the creditors without court involvement. Such an arrangement constitutes a private law contract. Advantages compared to formal recovery proceedings include, among other things, that no court fees accrue and the company’s economic crisis is not made public. If the insolvency (or over-indebtedness) of the company to be recovered occurs during such an out-of-court recovery, the settlement negotiations must principally be concluded within three weeks from that date and the factual insolvency must be eliminated. A request for the opening of insolvency proceedings must be filed no later than three weeks after the occurrence of the insolvency, otherwise a delayed filing for insolvency may constitute a criminal offence.
Setting aside transactions
What rules and procedures govern the setting aside of an insolvent company’s transactions? Who can challenge eligible transactions?
The Insolvency Statute regulates the conditions under which the insolvency administrator of an insolvent company is entitled to challenge legal acts which were performed before the opening of the insolvency proceedings. An essential requirement is that the legal act has led to a disadvantage for the other creditors. Further requirements must be met (eg, awareness of insolvency, non-remuneration of the legal transaction or repayment of shareholder loans) to justify contestation of a legal transaction. Where there is a successful insolvency contestation, the party disputing contest must return what they have obtained because of the contested legal act. It will then be added to the insolvency assets. In return, the party disputing contest receives an ordinary insolvency claim in the respective amount. That is how equal treatment of creditors, which is a core principle of the Insolvency Law, is realised.
Only the insolvency administrator is entitled to challenge legal transactions in insolvency proceedings.
Operating during insolvency
Under what circumstances can a company continue to conduct business during an insolvency procedure?
In the filing-for-insolvency phase (ie, the period between a request for opening of insolvency proceedings and the opening of insolvency proceedings) the management of the insolvent company may continue to conduct business. If a preliminary insolvency administrator is appointed, the management's right to manage and transfer the insolvency estate is usually limited by court order, and all business activities of the insolvent company henceforth require the preliminary insolvency administrator's approval to become effective. The preliminary insolvency administrator is not entitled to discontinue the company's business operations during the insolvency proceedings; this decision remains solely with the management. However, because of the reservation of consent, the preliminary insolvency administrator can bring business operations to a standstill.
After the insolvency proceedings have been opened, the creditors' assembly decides in the report meeting (generally the first creditors' assembly after the opening of the insolvency proceedings) whether business will be temporarily continued. The decision of the creditor's assembly is binding for the insolvency administrator. Should the insolvency administrator wish to discontinue business earlier, they generally need the approval of the creditors' committee.
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?
The creditors of an insolvent company can exert significant influence on the insolvency proceedings in the creditors' assembly and as members of the creditor's committee. Particularly important legal acts by the insolvency administrator (eg, the sale of business operations, raising of loans and involvement in legal disputes) generally require the approval of the creditors' assembly.
In opened ordinary insolvency proceedings, the management of an insolvent company has no influence on the company’s fate; the right to manage and transfer the insolvency estate is vested in the insolvency administrator. A different regulation applies in the case of debtor in a possession procedure (carried out under the company's own management). In such case, the right to manage and transfer the insolvency estate remains with the insolvent company's management. This means that the management makes decisions like an insolvency administrator (it essentially has the same rights) – under the supervision of a court-appointed insolvency monitor – on the progress of the insolvency proceedings.
The shareholders of an insolvent company have no say within the scope of insolvency proceedings and, therefore, cannot exercise any influence. However, shareholders frequently have a factual influence on insolvency proceedings due to the fact that they intend to be involved as investors within the scope of restructuring.
Current court proceedings are interrupted by the opening of insolvency proceedings (this applies to both active and passive litigations). Thereafter, the court proceedings can be resumed pursuant to the Insolvency Statute. Ordinary insolvency creditors can assert their claims only pursuant to the provisions concerning insolvency proceedings (filing claims for registration in the insolvency schedule); the resumption of such proceedings is excluded.
Can an insolvent company obtain further credit or take out additional secured loans during an insolvency procedure?
Insolvent companies may raise loans – in particular, within the scope of insolvency proceedings if a lender agrees to do so. In particular, this includes so-called (genuine or non-genuine) ‘insolvency loans’, which are generally raised by the insolvency administrator to maintain company operations in order to ensure the restructuring of the insolvent company (regularly, by sale to an investor). As a rule, the raising of such loans requires the consent of the creditors' assembly.
An insolvent company may also raise collateralised loans if someone agrees to grant collateral. Such collateral (eg, a letter of comfort or a guarantee) is frequently provided by investors closely connected with the insolvent company that have a personal interest in achieving a restructuring success.
Effect of insolvency on employees
How does a company’s insolvency affect employees and the company’s legal obligations to employees?
During insolvency proceedings, the employment relationship between the insolvent company and the employee continues to exist in principle (with effect for the insolvency estate). The employee remains entitled to employment in compliance with their employment agreement.
However, the insolvency administrator can terminate employment with three months’ notice even if a longer notice period applies or an ordinary notice of termination is excluded by an employment or collective agreement. The general German provisions concerning protection against unfair dismissal apply; in the event that personal or other operational requirements are met, the employment relationship can be terminated by the insolvency administrator only if operational, person-related or conduct-related reasons are given which socially justify the termination. In the event that the insolvency administrator terminates an employment relationship using this shorter notice period, the employee is entitled to damages amounting to the loss of earnings until expiration of the ordinarily applicable notice period. However, this claim to damages exists only as a non-privileged ordinary insolvency claim.
Employee claims Remuneration claims by employees accruing after the opening of insolvency proceedings are considered debts incumbent on the estate and, in principle, must be settled in advance. Accordingly, they have to be paid in full (in the case of existing assets). Claims arising under an employment relationship accruing prior to the opening of insolvency proceedings can only be asserted as an ordinary non-privileged insolvency claim.
Further, employees may apply for insolvency payments (ie, insolvency substitute benefits) with the Employment Agency in the amount of the salaries not paid for the last three months prior to the opening of insolvency proceedings. In the event that the Employment Agency pays insolvency substitute benefits to the employees, an ordinary non-privileged insolvency claim by the Employment Agency accrues regarding the insolvent company in the same amount. Thus, the payment of insolvency substitute benefits does not result in a reduction of the insolvent company’s liabilities.
Recognition of foreign proceedings
Under what circumstances will the courts in your jurisdiction recognise the validity of foreign insolvency proceedings?
According to the European Court of Justice, German insolvency courts must not review the jurisdiction assumed by the court of another EU member state with respect to insolvency proceedings. In the event that a court in another EU member state issues a so-called ‘opening decision’ (ie, any decision the consequence of which is a divestment), this opening decision will automatically be recognised in Germany.
Foreign insolvency proceedings (eg, opening, execution or conduct and termination) are acknowledged in Germany in principle. Such recognition may only be denied if the court of the state in which the insolvency proceedings are opened has no jurisdiction according to German law or if such recognition means that the essential principle of German law is not in compliance with the decision. A mere deviation from German law is insufficient.
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?
The German insolvency courts may become active only if the debtor pursues an economic activity as a self-employed person in Germany. In this case, the foreign assets of the debtor are covered by the insolvency proceedings.
In the event of a cross-border case within the European Union, the court has jurisdiction in the territory of which the debtor has the centre of its main interest. With respect to companies, this is the place where they carry out their business activities.
Centre of main interests
How is the centre of main interests determined in your jurisdiction?
The jurisdiction of the German insolvency courts is determined by reference to the place where the debtor has its main centre of economic interest. With regard to companies and legal entities, it is assumed that the seat, as stipulated in the articles of association, forms the ‘main centre of interest’. As regards individuals, as a rule, their domicile is decisive. If the seat as stipulated in the articles of association and the administrative headquarters differ from each other, the administrative headquarters of the debtor's company is decisive (ie, where business decisions are passed and implemented into management actions). If the debtor's company has several branch offices, its headquarters form the legal basis for jurisdiction.
What is the general approach of the courts in your jurisdiction to cooperating with foreign courts in managing cross-border insolvencies?
In the event that the requirements for the recognition of foreign insolvency proceedings are met or it has been clarified that the requirements will be met, the German insolvency court can cooperate with foreign insolvency courts – in particular, it may provide information which is relevant to the foreign proceedings.
In this case, cooperation is left to the discretion of the respective court and only the efficient handling of cross-border insolvency proceedings will serve as a benchmark.