Germany: Focus Abroad: Corporate Insolvency In Germany

Last Updated: 24 September 2004
Article by Christian Staps

Five years after the new German Insolvency Code ( Insolvenzordnung) came into Insolvenzordnung force, German insolvency law is of considerable interest to both the national and international business communities. This is mainly due to the record number of corporate bankruptcies in recent years, including such spectacular cases as Kirch Media, Philipp Holzmann, Herlitz, Fairchild Dornier & Babcock Borsig. Corporate bankruptcies amounted to 26,600 cases in 1999. The number has increased to almost 39,500 cases in 2003 and amounts to about 19,300 in the first half of 2004. While stakeholders face the special challenges associated with corporate bankruptcy, investors in distressed assets are presented with unique opportunities. The following article provides an overview of German insolvency proceedings with a special emphasis on the restructuring instruments introduced by the Insolvency Code such as the plan of reorganization ("Insolvency Plan", Insolvenzplan) and self-admin- Insolvenzplan istration ( Eigenverwaltung). Eigenverwaltung

The Stages Of Insolvency Proceedings

Insolvency proceedings pursuant to the Insolvency Code are the only judicial proceedings available in Germany for the bankruptcy of corporations. The Insolvency Code came into force on January 1, 1999 and replaced the three separate legislative regimes previously in force, the Bankruptcy Act and the Composition Act for debtors situated in former West Germany and the Joint Execution Act for debtors located in former East Germany.

Insolvency proceedings commence upon a petition by the insolvent corporation or a creditor to the competent court, the "Insolvency Court" ( Insolvenzgericht). The German Insolvenzgericht Insolvency Code contains an insolvency prerequisite. The petition must show that the corporation is either unable to meet its payment obligations that have become due (illiquidity) or that its liabilities exceed the value of its assets (overindebtedness). The management of a corporation that meets either of these criteria is obliged to file for insolvency within a period of three weeks. The corporation (not the creditors) may also file a petition for insolvency once it establishes that it will be unable to meet existing payment obligations as and when they fall due in the future (imminent illiquidity).

Once the petition has been filed, the Insolvency Court is required to determine whether the corporation meets one or more of the above criteria for insolvency, and to take all measures that are necessary to protect the corporation’s estate. Such measures usually include the appointment of an interim administrator. The interim administrator is generally required to assist the Insolvency Court in determining whether one of the criteria of insolvency has been met and whether the value of the corporation’s estate is sufficient to cover the expected costs of insolvency proceedings.

When these matters have been determined, the Insolvency Court will enter an order formally opening insolvency proceedings. In this court order an insolvency administrator is normally appointed. This is usually the same person who was appointed as interim administrator. The administrator is in charge of the business and responsible for its management going forward, thus taking control away from the corporation’s managers. While an administrator is appointed in the vast majority of cases, the Insolvency Code allows the corporation’s management to apply for self-administration, meaning that the debtor is left in possession and is merely supervised by a creditors’ trustee. The court may only leave the debtor in possession if it is convinced that this will not disadvantage creditors. In practice, the courts have been very reluctant to enter an order of self-administration. The view is widely held that management which was not able to avert insolvency in the first place can hardly be deemed capable of coping with the crisis, once proceedings have commenced. However, there has been self-administration in some of the spectacular insolvency cases of the recent past involving groups of companies with international activities. The most prominent example is Kirch Media.

In its initial ruling, the court may also appoint a creditors’ committee which supports and supervises the administrator. In practice, it is common that a representative of each of the major groups of creditors is chosen ( e.g., banks, suppliers, g. employees). Moreover, the creditors will be asked to file their claims with the administrator within a certain period of time. The court will set dates for two creditors’ assemblies — an information hearing and an examination hearing. The information hearing is usually within six weeks, at the latest within three months, of the opening of insolvency proceedings.

At the information hearing the insolvency administrator reports on the corporation’s business situation and the causes of insolvency. He indicates whether it is possible to continue the corporation’s business in whole or in part, whether the adoption of an Insolvency Plan is feasible, and what effects would arise for the fulfillment of creditor claims. The creditors are called on to decide whether the court-appointed administrator should be retained or a new one elected. If the court has previously appointed a creditors’ committee, they will need to confirm its members or choose new ones. If no creditors’ committee was previously appointed, the creditors may elect one. They will also determine the further course that insolvency proceedings should take. Generally, creditors have the following options: (i) winding-up of the business; (ii) sale of the business as a going concern; or (iii) restructuring of the insolvent corporation by means of an Insolvency Plan. Creditors will frequently follow the administrator’s recommendation. In order for the creditors to make a decision, a resolution requiring a majority (calculated on the basis of sums of claims) of the creditors voting at the hearing must be passed.

At the examination hearing, the claims registered by the creditors are examined by the insolvency administrator with respect to amount and rank and either confirmed or denied.

Winding-Up Of The Business

The creditors will only choose to wind up (liquidate) the business if it cannot be sold as a going concern to an investor or restructured by means of an Insolvency Plan. Winding-up entails closing down the operations, laying off employees, terminating agreements of the corporation, and selling off any remaining assets. Funds obtained as a result of the sale of assets are distributed to creditors after the costs of the insolvency proceedings and the winding-up have been satisfied.

Sale Of The Business As A Going Concern

Under the laws in force prior to the Insolvency Code, it was in practice very difficult to reorganize a corporation, once it had become insolvent. The most common way of rescuing an insolvent business was for the administrator to sell it as a going concern by means of an asset deal to an investor. In the first years after the Insolvency Code’s enactment, such a sale remained the preferred instrument of administrators (and creditors) for dealing with the insolvency. It has the advantage of being a fairly simple means of realizing the value in the estate. It is in line with the German understanding that an insolvency procedure is less a means of protecting the corporate debtor from its creditors than a way of utilizing the estate’s assets efficiently to satisfy the creditors to the largest extent possible.

Even today, the sale of the insolvent corporation’s business as a going concern is the most common way of rescuing the business. Such a sale requires the approval of the creditors’ committee, or if a creditors’ committee has not been appointed, the approval of the creditors’ assembly. It can provide a number of advantages to an investor when compared to an ordinary acquisition outside of insolvency. In general, the debts of the business are left behind with the insolvent entity. Since the insolvency administrator has extensive powers of disavowing contracts unfulfilled as of the opening date, contracts that the investor wants to assume for business reasons are frequently renegotiated and more favorable terms agreed on. Most importantly, while employees are, in principle, assumed by the purchaser by opera tion of law, insolvency provides the opportunity to restructure the workforce and to negotiate terms with trade unions that would not be possible in an acquisition outside of insolvency. The purchase price paid by the investor is distributed by the administrator among the creditors in their order of priority. Once this has been completed, insolvency proceedings are terminated.

Restructuring By Means Of An Insolvency Plan

The creditors may instruct the insolvency administrator during the information hearing to draw up an Insolvency Plan. Only the administrator or the corporation’s management may propose a plan. The latter can submit a proposal as a prepackaged plan upon filing for insolvency. There are few rules about the contents of an Insolvency Plan, as it can be freely arranged and include all provisions that could be made in an individual contract. This can include, inter alia, waivers and alia deferrals of claims as well as restrictions of security rights. An Insolvency Plan usually provides for a reorganization of the insolvent corporation. It can also provide for a liquidation, although this can usually be achieved more readily without the plan. It divides the creditors into groups if creditors with varying legal positions are affected by it. The Insolvency Code provides that at least the following groups are established: secured creditors, if their rights are affected; ordinary creditors; and the different ranking groups of subordinated creditors, if their claims are not deemed to be waived.

In the event that an Insolvency Plan is proposed, the Insolvency Court will call a creditors’ assembly for a hearing during which the Insolvency Plan and the voting rights of the creditors (including the division into groups) will be discussed. The voting on the Insolvency Plan will follow this hearing. The creditors vote in their respective groups on the Insolvency Plan. The plan will only be accepted if all groups agree. In each group the majority of creditors must consent and the sum of their claims must constitute more than half of the sum of the claims of creditors voting in this group. The plan will be adopted without the consent of a group of creditors if the majority of groups have agreed and the Insolvency Court establishes that the creditors of the nonconsenting group are not disadvantaged by the plan, as compared to their position without the plan, and that they have a reasonable share in the economic outcome of the plan.

If creditors consent to the plan, it will be confirmed by the Insolvency Court and then become effective. The Insolvency Court will terminate insolvency proceedings and the different groups of creditors will be paid as provided for in the plan. The plan can also provide for post-approval supervision of the corporation if management is not intended to regain total control of its affairs immediately.

Conclusion

In the past, bankruptcy proceedings in Germany followed the course of the sale of the insolvent corporation’s business as a going concern or a winding-up of operations. However, since the enactment of the Insolvency Code, we are seeing an increasing number of insolvency plans adopted and debtors left in possession. This approach has proved valuable in large and complex insolvencies involving groups of companies, by combining the specific restructuring expertise of a reorganization specialist appointed to the board just prior to insolvency with the knowledge and experience of existing management. The Insolvency Code provides a flexible legal framework to cope with corporate insolvencies by allowing stakeholders to choose a solution that is best suited to deal with the particular circumstances of the insolvent company.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions