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1. Insolvency and restructuring procedures
1.1 – What are the main insolvency and restructuring procedures applicable to companies?
Insolvency administration (“Insolvenzverwaltung”) – a court procedure in which an administrator takes control of the company. The directors of a limited liability company (especially GmbH and AG) that is cash flow insolvent or (with certain additional criteria to be met) balance sheet insolvent (ie, illiquid or over-indebted) must apply for insolvency administration. Where a limited liability company is likely to become cash flow insolvent (imminent illiquidity), its directors can voluntarily apply for insolvency administration. The application can also be filed by a creditor but only on the grounds of illiquidity or over-indebtedness, ie not on the basis of an imminent illiquidity.
The proceedings are flexible and can be used to achieve a range of outcomes for a distressed company from a restructuring to a liquidation of the company’s assets. It is frequently used in order to achieve a sale of the business of the company as a going concern. In order to protect the business and preserve its value, the company is protected by a statutory moratorium whilst in insolvency administration.
Debtor-in-possession management/self-administration under supervision (“Eigenverwaltung”) – a court procedure in which the company’s management remains in control of the company subject to supervision by a procurator. This procedure can be applied for as part of the application for insolvency administration. It is frequently used in order to achieve a sale of the business of the company as a going concern or to ensure that key suppliers continue to sell to the company.
Protective Shield (“Schutzschirmverfahren”) – German insolvency law provides for a special procedure which can be described as a preliminary debtor’s protection scheme. It is still an insolvency and court-supervised process intended to allow the company to propose an insolvency plan to the creditors (see below for further details). This procedure is not permissible if the debtor files for the opening of insolvency proceedings on account of illiquidity, ie only in case of an over-indebtedness or where the imminent inability to pay arises only at some future point.
Insolvency plans – insolvency plan proceedings are not a separate form of insolvency proceedings but are available in all three types of proceedings described above. An insolvency plan will be structured in a way by which the creditors and members are divided into classes with similar interests. The insolvency plan can also bind secured creditors and only becomes effective if approved by the relevant majority of each class and by the competent insolvency court. The insolvency plan provides for significantly increased flexibility in distribution compared to the regular proceedings.
StaRUG restructuring proceedings – With effect as from 1 January 2021, Germany implemented the European Directive (EU) 2019/1023 on preventive restructuring frameworks by a new act on the stabilization and restructuring of enterprises (Unternehmensstabilisierungs- und -restrukturierungsgesetz – StaRUG). Under this act, companies in a status of imminent illiquidity (ie with cash flow illiquidity expected to occur within 24 months) are able to present a restructuring plan to their creditors. The restructuring plan and the voting procedure is in many aspects similar to the insolvency plan proceedings. However, it is not necessary to include all creditors in the plan, the debtor has more flexibility in the voting process and a majority of 75% of the claims in each group is necessary for the implementation of the restructuring plan.
Notwithstanding a restructuring under the StaRUG, out of court restructurings (ie pre-insolvency strategies) require unanimous approval of all stakeholders.
Voluntary solvent liquidation proceedings – in case of a voluntary solvent liquidation of a German limited liability company (especially GmbH and AG), the shareholders pass a resolution to liquidate the company. The resolution and the nomination of the company’s liquidator/s (generally: the former director/s) are filed with the commercial register. The creditors of the company are to be invited to inform the company of any potential claims. Not earlier than one year after the publication of the voluntary liquidation in the German Federal Gazette and only after all known creditors have been paid in full, the remaining assets of the company may be distributed among the shareholders. The completion of the liquidation is filed with the commercial register and the company is deleted from the register and thus ceases to exist. These proceedings are only available as long as the company is solvent.
1.2 – Can a company obtain a moratorium whilst it prepares a restructuring plan? If so, what is the effect of the moratorium?
In the course of StaRUG restructuring proceedings companies may benefit from a stay of individual enforcement actions if and to the extent that the moratorium will be necessary to support the negotiations of a restructuring plan. The protection period is in principle limited to three months. German insolvency filing obligations are suspended during the negotiation phase if the debtor has informed the restructuring court of the planned restructuring and has provided certain information on the status of the negotiations.
If a restructuring is intended to be implemented using an insolvency plan, the courts can (and regularly do) grant a moratorium as preliminary measure based on an application for the opening of insolvency proceedings. The moratorium prevents the enforcement of debt by a creditor and to a certain extent and for a certain time also a creditor taking possession on goods which are with the debtor.
1.3 – How long will it generally take for a creditor to achieve the liquidation of an insolvent company, assuming an undisputed claim and no opposition from the company?
Following an application to open insolvency proceedings (no matter if the application is filed by a creditor or the debtor), the insolvency court will at first order preliminary measures as part of the preliminary proceedings (see above). Final proceedings are then usually opened within two to three months from the application. An application by a creditor does, however, not necessarily lead to a liquidation of the company as a result of the insolvency proceedings. Rather, the company’s creditors in their entirety decide on the aim of the proceedings, eg, a liquidation or a (partial) restructuring of the debtor. There is no maximum time limit under German insolvency law for the duration of insolvency proceedings. The average duration of corporate insolvency proceedings is three to five years.
1.4 – Does your jurisdiction make use of a distressed sale process by which the business/assets of the company can be sold?
Yes. A distressed sales process is regularly set-up by the administration seeking to sell the assets by an APA (and shares in subsidiaries by an SPA). The process is typically run by a specialized M&A advisor. The APA/SPA are usually prepared during the preliminary phase of the proceedings and signed by the administrator once final proceedings have been opened.
2. Insolvency office-holders and courts
2.1 – Who can act as an insolvency office-holder?
The insolvency administrator, procurator or restructuring officer in case of a StaRUG proceeding must be a qualified natural person. The majority of insolvency office-holders are lawyers, while there are also some accountants and qualified tax advisors. Generally, the person must be listed with the competent insolvency or restructuring court which normally provides for additional criteria which must be met.
In case of a voluntary liquidation, the company’s former directors can be (and usually are) nominated to act as the company’s liquidators.
2.2 – Who decides the identity of the insolvency office-holder, and what restrictions apply?
The insolvency administrator or procurator is appointed by the competent judge at the insolvency court. Generally, the court will only appoint an officeholder who is listed with the court for the position of an insolvency administrator. The debtor may propose a certain person for the office as insolvency administrator but the court is generally free to decide the identity of the insolvency office-holder.
In case of a debtor’s protection scheme, the court may decide not to appoint the provisional procurator who was proposed by the debtor only if the proposed person is manifestly not suited for taking on the office. In case of a debtor-in-possession management/self-administration under supervision (“Eigenverwaltung”), there is usually a board of creditors which would make a proposal to the court. The court can reject this proposal only under certain circumstances.
During the first meeting of creditors subsequent to the appointment of the insolvency administrator, the creditors may elect a different person to replace the court-appointed administrator. The court may refuse the appointment only if the elected person is unqualified to assume such an office.
A restructuring officer is appointed by the competent judge at the restructuring court in charge for the StaRUG proceeding. When selecting a restructuring officer the restructuring court is generally obliged to consider proposals from the debtor, the creditors and the persons involved in the debtor.
2.3 – Are insolvency cases heard by specialist judges, or in the general commercial courts?
Insolvency cases are dealt with by specialist insolvency judges at the local courts (“Insolvenzabteilung des Amtsgerichts”), restructuring cases under StaRUG by specialist restructuring judges at the local courts (“Restrukturierungsabteilung des Amtsgerichts”). Often, the same persons will have the role of insolvency judge and restructuring judge at a certain court.
3. Position of directors
3.1 – To what extent do the directors of the company remain in control of its affairs during any of the procedures described above?
The directors of the company remain in control of its affairs during StaRUG restructuring proceedings. They are legally obliged to ensure that the debtor conducts the restructuring case with the diligence of a prudent and conscientious manager and protects the interests of all creditors. They are liable to the debtor for any breach of this duty in the amount of the loss incurred by the creditors, unless they are not responsible for the breach of duty.
In a debtor’s protection scheme or self-administration, directors generally remain entitled to act for and on behalf of the company under the supervision of the procurator.
In an insolvency administration, however, the administrator takes control of the company. During the first, preliminary stage of the insolvency proceedings, the directors legally remain in control of the company (although subject to supervision by a preliminary insolvency administrator).
3.2 – Are there circumstances in which directors are obliged to file for insolvency proceedings? If so, when do those circumstances arise?
If a limited liability company (especially GmbH or AG) is illiquid or over-indebted, the company’s directors are obliged by law to file for the opening of insolvency proceedings without undue delay but no later than within three weeks (in case of illiquidity) or six weeks (in case of over-indebtedness) from the company’s becoming insolvent. If the company is both illiquid and over-indebted, the maximum period of three weeks applies.
3.3 – What are the risks facing the directors of an insolvent company?
If a director of a limited liability company (especially GmbH or AG) is in breach of his statutory duty to file for insolvency (see above), he will be liable for any payments made after the date on which the company became illiquid or over-indebted. This prohibition to make payments also applies in case of payments to shareholders if such payments will lead to the illiquidity of the company. The company’s directors may also be liable in tort to creditors for damages which resulted from a delayed filing for insolvency.
Directors who intentionally do not file for insolvency in a correct or timely manner may be criminally liable. This offense may be punished by imprisonment of up to three years or by a fine. If, in such a case, a director does not act intentionally but negligently, he may be punished by imprisonment of up to one year or by a fine. On conviction, a director will be disqualified from acting as a director for five years.
4. Position of creditors
4.1 – What are the main forms of security over movable and immovable property?
Security over immovable property is taken by:
- mortgage (Hypothek)
- non-accessory land charge (Grundschuld)
Security over moveable property is taken by:
- retention of title (Eigentumsvorbehalt)
- assignment by way of security (Sicherungsabtretung/SicherungsĂĽbereignung)
- possessory security such as pledges or liens
4.2 – How does the opening of insolvency proceedings affect the rights of secured creditors?
In any type of insolvency proceedings there is an automatic stay on enforcement action by creditors (secured or otherwise) or the commencement or continuation of legal proceedings.
If a creditor is the owner of an object (eg, if he is the lessor of a machine or, in case of a sales contract, if he agreed on a simple retention of title with the debtor), the creditor is generally entitled to claim the return of the object from the insolvency administrator.
A creditor who is secured by a pledge or lien or by an assignment by way of security is entitled to claim separate satisfaction. Generally, the insolvency administrator will be entitled to realize the security (eg, by selling it) and must then distribute the proceeds of the realization to the secured creditor. Out of the proceeds, a cost contribution in an amount of 9% of the proceeds (in most cases) is kept for the estate.
4.3 – Where a debt owed to a secured creditor exceeds the value of the security, is the secured creditor entitled to claim for the shortfall?
Yes. A secured creditor who has realized his security may prove for the balance of his debt as if it were unsecured after deducting the amount realized. Further, if a secured creditor voluntarily surrenders his security for the general benefit of creditors, he may prove for his whole debt as if it were unsecured. With regard to the unsecured part of his claim, the creditor is generally entitled to the regular insolvency quota.
4.4 – Which classes of creditor are given preferential status? Are any classes subordinated?
Debts owed to secured creditors are factually preferred. Debts incurred by the insolvency administrator after the commencement of insolvency proceedings or by the debtor company itself in case of a debtor-in-possession proceeding are legally preferred. Generally, debts owed to the company’s shareholders or debts owed to creditors who declared a valid subordination of their debts are subordinated to debts owed to unsecured creditors.
4.5 – Is there a date by which creditors must make claims in the insolvency proceedings? If so, what are the consequences of failing to claim by that date?
In its decision to open final insolvency proceedings, the insolvency court will set a deadline (usually three weeks to two months from the opening) for creditors to file their claims with the insolvency schedule. Filing of claims is only possible after the insolvency court has made such decision to open final insolvency proceedings and appointed the insolvency administrator or procurator to whom the filing of claims then has to be addressed.
Claims can validly be filed after the deadline has lapsed but must be filed before the final distribution of proceeds at the end of the insolvency proceedings. Late filing usually results in a fee of the insolvency court of EUR 22.
4.6 – Are contractual rights of set-off and/or netting effective in insolvency?
Yes. A creditor who is also a debtor of the company in administration may have the benefit of a right of set off after the opening of the insolvency proceedings if he had that right already prior to the opening of the proceedings.
A creditor may not set off any pre-insolvency claims against claims by the debtor/insolvency estate which arose after the opening of the proceedings. The right of set off may also be excluded if the creditor has acquired the opportunity to set off a claim through an avoidable legal act.
4.7 – Are contract terms permitting termination of a contract by reason of insolvency (“ipso facto clauses”) effective?
This will depend on the nature of the contract. The terms will generally be invalid if they provide for an automatic termination of a contract, as are terms that deprive the insolvent party of the right to be paid sums that have fallen due prior to the commencement of insolvency. Inclusion of terms that provide for termination on insolvency are prohibited in certain contracts including leases of real estate and leases of chattels. As a general rule, such terms are prohibited which only refer to the insolvency situation.
4.8 – Are retention of title clauses enforceable and (if applicable) what are the main requirements for enforceability?
Yes, provided that the retention of title clause is validly agreed upon by the parties and incorporated into the contract and the goods in question can be properly identified. In general, the validity of the retention of title is subject to the law of the jurisdiction where the goods in question are situated.
4.9 – Are foreign creditors treated equally to domestic creditors?
Yes.
5. Setting aside transactions
5.1 – What are the main transaction avoidance provisions applicable to the proceedings referred to above?
The insolvency administrator can challenge:
- transactions at an undervalue (concluded in the four years prior to filing for insolvency)
- preferences (up to ten years prior to filing for insolvency)
- transactions entered into in the three months prior to filing for insolvency
- repayment of a shareholder loan (in the year prior to filing for insolvency)
- provision of security for a shareholder loan (in the ten years prior to filing for insolvency)
5.2 – Who is entitled to challenge transactions under these provisions?
Only the insolvency administrator or procurator.
6. Cross-border insolvency
6.1 – Do your courts recognize insolvency proceedings commenced in the courts of other jurisdictions?
Yes – proceedings commenced in the courts of other EU Member States (except Denmark) will be automatically recognized under the EU insolvency regulation.
Insolvency proceedings commenced in the courts of countries outside the scope of the EU insolvency regulation are capable of being recognized by application to the German court, however, recognition will be denied where the foreign court does not have jurisdiction in accordance with German law or where recognition would be contrary to public policy, for instance where creditors of different nationalities are not treated equally under the foreign insolvency proceeding.
6.2 – If so, what assistance can your courts provide, following recognition?
There is generally a wide range of assistance that a German court can grant and generally such assistance broadly extends to doing whatever the German court could have done in the case of a German insolvency proceeding subject to judicial discretion, unless a measure would be contrary to public policy.
6.3 – Is it possible to commence insolvency proceedings in relation to a foreign company?
Yes, if that company has its center of main interests or an establishment in Germany.
7. Other matters
7.1 – Please consider whether there is any other feature of your country’s insolvency regime of which a lender, investor or purchasers of distressed debts or businesses should be aware? For example, are there any mistakes that foreign creditors often make?
A purchaser of a distressed business should be mindful of the effects of a transfer of undertakings. If a business or part of a business (“organizational subunit”) passes to another owner by legal transaction, the latter succeeds to the rights and duties under the employment relationships existing at the time of transfer. That means that employment relationships are automatically transferred to the purchaser by law if the legal conditions are met, no matter if the purchaser agreed to take over these employment relationships. Each employee may, however, object in writing to the automatic transfer of the employment relationship within one month of receipt of notification on the transfer of undertakings. If the employee objects, the employment relationship remains with the debtor company.
As a consequence of a transfer of undertakings in an insolvency scenario, the purchaser will be generally liable for payment claims of the employees only to the extent that they arose and became due upon or after the final opening of the insolvency proceedings. However, it is especially important to note that claims for annual leave and social security contributions are transferred by law so that the liability for these claims transfers to the new employer (purchaser). It is therefore crucial to carefully look into this as part of the due diligence process. Furthermore, a termination of employees before a transfer is only possible under very limited circumstances and a termination by reason of the transfer of undertakings is not permissible.
7.2 – Are there any other stakeholders or entities (eg governmental or regulatory) which may influence the outcome of any restructuring?
Insolvency payments (“Insolvenzgeld”) and the prefinancing of insolvency payments are among the most important instruments of corporate restructuring through insolvency proceedings under German law.
In the event of insolvency, the insolvency payment from the Federal Agency for Employment (“Bundesagentur für Arbeit”) (sections 165-172 of the Third Book of the German Social Code (“Sozialgesetzbuch Drittes Buch” – SGB III)) replaces the outstanding salary in the amount of the net pay (section 167 para 1 SGB III) for the previous three months (section 165 para 1 sentence 1 SGB III). At the same time, the claim to remuneration, which is the basis for a claim to insolvency payment, is transferred to the Federal Employment Agency.
The prefinancing of insolvency payments can enable the preliminary insolvency administrator to continue operations factually free of labour costs during the opening proceedings. By relieving the subsequent assets of wage and salary claims during the insolvency payment period, the preliminary proceedings are often used to generate a financial cushion for the continuation of the business and further restructuring measures in the final insolvency proceedings. In particular, if there are no arrears at the time the application is filed and the three-months insolvency payment period can be used in full, there are considerable effects that support a restructuring.
The insolvency payments do not have to be refunded out of the estate once final insolvency proceedings have been opened. The claim of the employment agency may only be filed with the insolvency schedule. Consequently, the Federal Agency for Employment will typically be an important (unsecured) creditor with significant voting rights in the creditors’ meeting and will also regularly be represented in creditors’ committees.
7.3 – Are there currently any proposals for significant reform of your insolvency laws?
No.
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