Insolvency Law

What does „insolvency“ mean?

Insolvency proceedings under the German Insolvency Code (InsO) provide for the collective satisfaction of creditors, principally through realisation of the insolvency estate or an insolvency plan. They do not guarantee payment in full or identical treatment of every type of claim. Natural persons may obtain a discharge of residual debt if the statutory requirements are met.

How do regular insolvency proceedings work?

Regular insolvency proceedings apply in particular to companies and currently self-employed individuals. Formerly self-employed individuals may qualify for consumer insolvency proceedings if they have fewer than 20 creditors when filing and no claims arising from employment relationships exist against them (§ 304 InsO). Other formerly self-employed individuals fall under the regular procedure.

A company and its shareholders are separate legal persons. Personal liability of shareholders requires a separate legal basis; insolvency does not automatically transfer the company’s obligations to its shareholders or vice versa.

Initial application

The implementation of the insolvency proceedings initially requires a corresponding request to the competent insolvency court ((§ 13 InsO), either from

• The creditor (external application)
• Or from the debtor himself (personal application)

An insolvency procedure is not initiated independently by the court. Generally, each creditor can submit an application for the start of an insolvency procedure for the following reasons (§14 InsO):

• has a legal interest in opening insolvency proceedings
• the creditor substantiates its claim
• the creditor substantiates a statutory ground for opening proceedings

There is no legal interest, if the position of the application for insolvency serves only to exert pressure on the debtor.

A creditor’s application requires a statutory ground for opening proceedings, such as inability to pay under § 17 InsO or, for a relevant entity, over-indebtedness under § 19 InsO. The latter concerns the debtor entity, not merely one of its shareholders. The creditor must substantiate its claim and the ground for opening proceedings; an unsuccessful enforcement attempt may be relevant evidence but is not the only possible evidence.

 If an external application does not comply with these conditions, the insolvency court can claim the possibility of either remedying the deficiency or withdrawing the insolvency application. Generally, each debtor can lodge an application for insolvency proceedings directly by the insolvency court.

In addition to the initial application of the

• Insolvency (§ 17 InsO)
• Over-indebtedness ( §19 InsO)

You can also consider filing an application for

• Impending insolvency (§18 InsO)

A particular prima facie evidence for an initial application is usually not required, but a ground for commencement should be presented conclusively and comprehensively within the framework of the individual application.

Exception applies in case a GmbH has several managing directors. It is necessary that either all the managing directors submit the opening of the insolvency procedure or the grounds for commencement have to be made credible by the managing director.

If the individual application does not satisfy the conditions indicated, the debtor also receives the possibility of remedying his deficiencies from the insolvency court. If the debtor does not comply, the application is considered inadmissible and the insolvency procedure will be rejected.

The insolvency ordinance only offers the possibility to submit an application for insolvency. Particular obligations exist for:

• Managing directors and other persons subject to § 15a InsO must file without culpable delay, at the latest three weeks after inability to pay or six weeks after over-indebtedness arises. These are maximum periods, not automatic waiting periods. Payment-related liability is governed in particular by § 15b InsO.
• Board members of associations covered by § 42(2) BGB have a separate filing duty; the exceptions in § 15a(7) InsO must be observed.

Other obligation applies in this case. If a person decides to omit the actual bankruptcy of the company, the former may be liable to prosecution and may be subject to personal liability. For private individuals, there is no legal obligation to file insolvency. However, it is definitely recommended to apply for bankruptcy in order to obtain a residual debt´s relief (Section 287 (1) InsO).

Initial insolvency procedure

The insolvency court will firstly check the admissibility of the claim, before taking any decision on an initial application from a creditor or a debtor. If an admissible application is submitted by a creditor, the debtor will be subsequently questioned (§ 14. Abs. 2 InsO). At the same time, the debtor will be informed about any relevant fact regarding the insolvency proceeding; as far as concerned a private individual, he can only obtain residual debts´relief if he personally applies for the opening of the insolvency procedure against his assets (§ 20 para InsO). If the insolvency court does not provide sufficient information, it is still possible for the debtor to apply for a request of residual debt discharge. If the initial application is admissible, the insolvency court is obliged to comply with the law: the insolvency court determines ex officio all relevant circumstances.

At this stage will be examined whether there is an already existent application and if the costs for the implementation of the procedure are covered. For this purpose, the insolvency court can decide to hear witnesses and convene experts to clarify the facts (§ 5 InsO).  In order to prevent disadvantageous changes in the debtor´s assets, the insolvency court may order a security measure.  This is usually required, for example, if assets (bank deposits, land ownership or other capitals) are still available, the insolvent company has not closed and employees are still employed; a temporary insolvency administrator is usually appointed in these cases.

This also makes it possible to secure employees' wage demands. These are usually secured by the insolvency allowance of the Federal Agency for Labor (BA). In the case of wage arrears from the last three months prior to the opening of the insolvency proceedings, the Federal Agency for Labour will pay the insolvency allowances in net amount.

Insolvency benefit depends on a qualifying insolvency event under § 165 SGB III. These include opening of proceedings, rejection for insufficient assets and, under the statutory conditions, complete cessation of operations. Advance payment and pre-financing have separate requirements. Opening proceedings requires a statutory ground and coverage or permitted deferral of procedural costs; the debtor’s awareness is not an additional general condition.

The costs of the procedure depend on the individual proceeding. If sufficient assets are still available, the procedure can be opened. If the funds are not sufficient to meet the expected expenses of the procedure, the insolvency application will be rejected for lack of funds (§ 26 InsO).

In the case of private individual a rejection for lack of assets is not possible, if the costs of the proceedings will be deferred to the debtor (§ 26 para. 1 s. 2 InsO i.V.m §4a InsO).

Opening of an insolvency procedure

If there are enough reasons to open an insolvency procedure and the costs of the proceedings are covered (or will be deferred), the insolvency proceedings will be carried out on the assets of the debtor (§ 27 InsO). An insolvency administrator will be nominated and he will be responsible for the assets of the debtor (§ 80 para. 1 InsO). One of the main tasks of the insolvency administrator is to manage the insolvency estate; this can be carried out by liquidation, for example, or by reorganization of the company.

Those insolvency creditors, who, at the time of opening of the insolvency procedure, had assets requirements against the debtor (§ 38 InsO), report their claim to the insolvency administrator on the insolvency table.  The day of examination (§176 InsO), the declared claims will be analyzed and, if no objection is made, the claim will be recorded on the insolvency table (§ 178 InsO). These claims will be then taken through the further procedure.

The creditors will receive the so-called insolvency dividend after the reutilization of the debt-relevant assets, on the basis of their claims, so far as the assets to be recovered will be available. The creditor will be therefore compensated with at least a partial portion of his claim.

Other creditor positions, including rights to segregation, separate satisfaction and claims against the estate, follow different rules. A security interest or priority does not invariably guarantee full recovery; asset value, ranking and statutory deductions may affect the outcome.

If the purpose of the insolvency proceedings is achieved, the procedure will be set aside (§ 200 InsO).

Following termination, unpaid claims are subject to the applicable rules, including any insolvency plan and discharge of residual debt. Discharge for natural persons requires an application and compliance with the statutory requirements; certain liabilities remain excluded. Whether a legal entity is dissolved and deleted depends on the applicable company and insolvency rules.

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• Standard insolvency proceedings;
• Avoidance of transactions in insolvency;
• Consumer insolvency proceeding;
• Insolvency notices
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• Insolvency Law Hannover
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• Insolvency application.