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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?
The main forms of security over moveable assets are:
- the security transfer of movable assets;
- the assignment of receivables; and
- a pledge of bank accounts.
There is no notarisation or registration requirement. However, the transfer of movable assets must comply with German legal requirements on the specification of assets to be transferred. Pledges must be notified to the debtor of the pledged claim.
The main form of security over immovable assets is the land charge, which requires notarisation and registration in the land register.
Ranking of creditors
How are creditors’ claims ranked in insolvency proceedings?
The ranking of creditors' claims in insolvency proceedings is as follows:
- creditors entitled to separation;
- creditors entitled to preferential satisfaction (ie, secured creditors, limited to the value of the respective security);
- estate creditors (ie, creditors whose claims arise after the opening of insolvency proceedings – in particular, due to acts of the insolvency administrator);
- unsecured creditors; and
- subordinated creditors.
Creditors that hold security are entitled to preferential satisfaction of their claim. The type of security held governs how and by whom it is enforced. As a general rule, the insolvency administrator realises all assets which are subject to security rights and in its possession. He or she is allowed to deduct a realisation fee of approximately 9% from the realisation proceeds. The remainder is paid out to the secured creditor. However, creditors holding a land charge remain entitled to realisation by way of a foreclosure sale or forced administration. Creditors with a right to preferential satisfaction participate in regular insolvency proceedings as unsecured creditors with respect to any shortfall.
Shareholders' claims for repayment of loans or equivalent claims are subordinated by the operation of law.
Can this ranking be amended in any way?
A creditor cannot be given a better rank than that provided for by the German insolvency regime. However, a creditor may agree on a subordination of its claim behind regular insolvency creditors. This is often done by shareholders with respect to their claims for repayment of shareholder loans in order to avoid the company’s over-indebtedness.
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