Insolvency 2019 Second Edition

Last Updated November 20, 2019


Law and Practice


McDermott Will & Emery is a leading international law firm with more than 1,100 lawyers. With more than 20 locations on three continents, the firm's teams work across practices, industries and geographies to deliver highly effective legal solutions. German offices are located in Düsseldorf/Cologne, Munich and Frankfurt and there are more than 130 lawyers advising national and international clients. The firm has a team of 15 lawyers acting for clients on restructuring, financial recovery and insolvencies of companies, often in an international context. McDermott Will & Emery advise companies in distressed situations and their management regarding financial recovery and refinancing, both outside of and within insolvency proceedings. The firm also assists shareholders, creditors and business partners of companies in distressed situations and those experiencing insolvencies to help them assert, pursue and enforce their interests. The firm has a strong expertise assisting with cross-border mandates. Recently, it assisted with complex international restructuring and insolvency issues, in particular in the automotive and retail industry. The firm would like to extend thanks to Marc Oberhardt, a partner in the Düsseldorf office, for his contribution to this chapter.

In 2018, almost 20,000 companies filed for insolvency in Germany. According to current market observations the number of insolvencies of corporations will increase in 2019.

A statistical analysis showed that approximately 3.5% of all German insolvency proceedings between 2012 and 2017 were conducted as self-administration proceedings whereby especially larger companies made use of it. Approximately 28% of the self-administration proceedings were concluded with an insolvency plan.

Restructurings prior or outside of any formal insolvency proceeding are difficult to record statistically as they usually take place in secrecy. However, the 2019 restructuring practice in Germany shows a significant increase compared to previous years.

After the introduction of the insolvency law reform in 2012, there has been a significant shift in restructuring strategies as self-administration and insolvency plan procedures have been strengthened by the legislator and thereby have created new options, in particular for the debtor side. It is likely that the new EU Directive regarding a preventive restructuring framework will provide a further shift in strategies.

Otherwise, the recent years have been dominated by relatively easy access to liquidity and a reduced number of restructuring cases. However, given the current cooling down of the German economy, it can be expected that the number of cases will increase again. As German lenders have been comparably hesitant with respect to sale of claims in the past, the new banking regulations regarding non-performing loans and their resulting increasing costs for the lenders will affect the strategies in restructuring situations.

The main statutory regime governing the German insolvency law is the German Insolvency Act ("Insolvenzordnung", InsO) which entered into force on January 1, 1999. Since then, German Insolvency law has been undergoing a long-term and multi-stage reform process.

The reform process began with the Act for the Further Facilitation of the Restructuring of Companies ("Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen", ESUG) in 2012, aimed to improve the economic conditions for the restructuring of companies.

The Act to Improve Legal Certainty in the Event of Challenges under the Insolvency Code and the Act on Contestation (“Gesetz zur Verbesserung der Rechtssicherheit bei Anfechtungen nach der Insolvenzordnung und nach dem Anfechtungsgesetz”) followed in 2017.

In March 2019, the European Parliament passed, and in June 2019 the Council accepted, the Directive on “preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU”. The German government is obliged to implement this Directive by July 2021 within the limits of the various opening clauses. Therefore, a further major reform on German Insolvency Law is in progress to implement the legal framework for a pre-insolvency regime and is expected to enter into force in 2021.

The German Insolvency Act provides a uniform insolvency procedure for both individuals and companies. In the following, this chapter shall focus on the German Insolvency Law of companies.

Insolvency proceedings may be initiated against any natural or legal person, excluding certain legal persons organised under public law, such as the German Federation or the German states.

German law allows both voluntary and mandatory liquidation and restructuring proceedings. On a voluntary basis, only the debtor is able to initiate proceedings either by way of shareholders liquidation resolution (out-of-court) or in case of imminent illiquidity (in court), see 2.3 Obligation to Commence Formal Insolvency Proceedings). In case of illiquidity and over-indebtedness (see 2.3 Obligation to Commence Formal Insolvency Proceedings), the filing for insolvency is mandatory. Regular insolvency proceedings usually lead to the debtor’s liquidation. Insolvency plan proceedings and self-administration - both often combined - in practice aim to restructure the debtor’s business. For further details of the German formal proceedings, see 6 Statutory Restructurings, Rehabilitations and Reorganisations and 7 Statutory Insolvency and Liquidation Proceedings.

German law does not provide any formal proceedings for restructuring outside of and prior to the initiation of formal insolvency proceedings. This legal status in German law is assumed to be changed with the implementation of the European Directive’s preventive restructuring regime in 2021. Up to now, the practice helped itself with informal restructurings outside the formal insolvency framework. The downside of such restructurings is the necessity of all participating stakeholders approving.

In general, the German Insolvency Act provides three different reasons to file for insolvency proceedings.

Illiquidity (Section 17, German Insolvency Act)

A debtor is illiquid if he is unable to meet his payment obligations when due. Illiquidity is generally to be assumed if the debtor has suspended his payments. If the Company's liquidity gap of 10% or more cannot be eliminated within the (statutory) three weeks period, insolvency is generally to be assumed. An exception of this assumption may apply if it is to be expected almost certainly (mit an Sicherheit grenzender Wahrscheinlichkeit) that the liquidity gap will soon be completely or almost completely closed, and the creditors can be expected to wait in accordance with the specific circumstances of the individual case. The greater the gap between the actual liquidity gap and the 10% threshold, the higher requirements must be fulfilled to avoid illiquidity. There is no illiquidity in case of minor cash flow shortages and short-term payment problems which will be resolved within the period of three weeks.

Over-indebtedness (Section 19, German Insolvency Act)

Over-indebtedness occurs when the debtor's assets no longer cover existing liabilities, unless the going concern of the company is predominantly likely (überwiegend wahrscheinlich). Over-indebtedness applies only to private limited companies and stock corporations (and to similar legal entities), not to individual persons. Over-indebtedness will be determined in a two-step approach. In the first step, a business plan at least for the current and the next fiscal year is prepared. If it indicates that the going concern of the company is more likely than not (positive Fortführungsprognose) over-indebtedness is excluded. In case of a negative forecast (negative Fortführungsprognose), in the second step, it needs to be verified whether the company’s assets cover the existing liabilities, based on an over-indebtedness balance sheet. The balance sheet has to be prepared based on liquidation values to be determined in accordance with insolvency law standards. On the liabilities side, all liabilities, even those not yet due, are to be taken into account.

Illiquidity and over-indebtedness lead to a mandatory application for insolvency.

Imminent Illiquidity (Section 18, German Insolvency Code)

A debtor is allowed to, but not obliged to file for insolvency if illiquidity is imminent. Please note that imminent illiquidity and over-indebtedness usually occur simultaneously.

Managing directors of a private limited company and of a stock corporation (and of similar legal entities) are obliged to file an insolvency petition without undue delay but, in any case, no later than three weeks from the occurrence of circumstances providing reasons for a mandatory application to open insolvency proceedings. Non-compliance with the filing obligations can lead to a criminal offence by the managing director and personal liability. For further details please refer to 12 Duties and Personal Liability of Directors and Offices of Financially Troubled Companies.

See 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.

Besides the debtor themselves, a creditor may also initiate insolvency proceedings. A precondition for the admissibility of a creditor's application is that there is a legal interest in the opening and that the claim and the statutory reason for opening have been substantiated. The statutory reason for imminent illiquidity is not applicable for creditors. A creditor’s application is effected by filing an application with the competent insolvency court, and it needs to be accompanied by substantiating proof of the creditor’s claim and the underlying insolvency reason. In practice, creditor’s applications are rather uncommon as they may entail certain liability risks for the creditor.

There isn't a single definition of “insolvency” under the German Insolvency Act; instead, the three insolvency reasons covered in 2.3 Obligation to Commence Formal Insolvency Proceedings substantiate the term “insolvency”.

German law provides for special rules in case of an insolvency of specifically regulated entities, for example insurance companies (Section 88, German Insurance Supervision Act – "Versicherungsaufsichtsgesetz", VAG) or financial institutions (in particular, Sections 46 to 47, German Banking Act – "Kreditwesengesetz", KWG).

Traditionally, there was a clear preference for out-of-court restructurings as they are deemed to preserve higher values for all stakeholders, even though German law does not require mandatory consensual restructuring negotiations before the commencement of insolvency proceedings. However, due to the new legal framework introduced in 2012, providing more flexibility and higher certainty in preparation of insolvency proceedings, the threat of an insolvency has been reduced to a certain extent so that it has become a more viable alternative instead of just being the last exit. Nevertheless, in most restructuring cases, the stakeholders still try to achieve an out-of-court solution first. Consequently, there is certain support for this solution and for these measures being required to avoid insolvency until a detailed assessment of the financial situation and business prospects of the debtor is available.

There is no specific legal framework available under German law dealing with the process of an out-of-court restructuring. Therefore, the process depends on the specifics of the given case and the respective arrangements between the various stakeholders. In larger cases, it is rather common to have lender steering committees with representatives from all major lenders. The establishment of the steering committee and the appointment of its members is based on respective agreements between the lenders and the debtor. In case the debtor has issued a bond, usually a joint representative is appointed by majority of the bondholders in a respective bondholder meeting.

The members of the steering committee usually receive a compensation for their efforts to be paid by the debtor and depending on the amount of expected efforts.

To avoid an illiquidity during the negotiation phase, usually standstill agreements are required to avoid relevant repayment obligations of the debtor. In addition, a restructuring opinion has to be prepared by the debtor as a respective opinion including a positive going concern prognosis is a prerequisite for any prolongation or the provision of fresh money under a restructuring agreement. If fresh money is required to buy the time required for the preparation of the restructuring opinion and the negotiations of a restructuring agreement this can be provided as bridge financing.

Any new money will typically be provided by the existing lenders, most times on a super senior basis. In addition, there are a number of funding providers specialised for these types of scenarios, providing the fresh money tranches.

Creditors' duties in an out-of-court restructuring are rather limited, and there is no specific legal framework in that respect. The creditors have to act in good faith when entering into agreements and to avoid any criminal acts and tort (based on the general rules) as in any other normal business activity.

German law does not provide any kind of cram-down procedures for an out-of-court restructuring. In general, it is necessary to achieve unanimous consent with all creditors which shall provide any kind of restructuring contribution. Exceptions are only applicable for bonds being subject to the German Act on Notes from Entire Issues ("Schuldverschreibungsgesetz"), which allows majority decisions, and in cases agreed within the respective loan agreements.

In this context, it is not uncommon to have waiver provisions under the loan documentation allowing majority decisions to avoid extraordinary termination. However, any haircut or deferral of repayment usually requires consent of all lenders.

Under German law secured creditors can claim their assets to be separated from the insolvency estate and handed over to them (Aussonderung), or a preferential satisfaction (Absonderung), depending on the kind of security. In general, German law differentiates between moveable and immovable property and claims/rights, basically as follows:

Securities Over Moveable Property and Claims

  • Retention of title (Eigentumsvorbehalt): the seller retains the title to goods over the assets and the selling of them until receipt of the purchase price.
  • Pledge (Verpfändung): a pledge is a legal security of a claim by creating a lien on movable property, rights or claims in favour of the pledgee. It is a right in rem to satisfy a claim; in practice, receivables, moveables, and also bank accounts or share pledges are common securities.
  • Security Assignment (Sicherungsübereignung): a common form of security assignment are blanket assignments of claims (Globalzession) where all current and future claims against specified third parties are assigned to a lender (eg, a bank) as collateral as soon as they arise. In addition, so-called room collateral assignments (Raumsicherungsübereignungen) which cover all present and future goods located in a specific location (eg, a warehouse) are common.
  • Guarantee (Garantie) and surety (Bürgschaft): a guarantee or surety is a unilaterally binding contract by which a third person undertakes towards the creditor to take over responsibility for the fulfilment of the debtor’s claim. The main difference between these two forms of security is that the guarantee is abstract, whereas the surety is accessory to the secured claim.

The aforementioned securities do not need to be registered.

Securities Over Immovable Property

  • Land charge (Grundschuld): the main immovable security in Germany is the land charge. By means of a land charge a claim is secured by a right to a plot of land which can be enforced in the event of non-payment. It is not directly dependent on the existence of a claim to be secured and is therefore more flexible than a mortgage.
  • Mortgage (Hypothek): the mortgage is similar to the land charge but accessory to the individual secured claim.

Both land charge and mortgage are required to be notarised under German law and registered in the German land register.

If the debtor defaults on the payment of its secured obligations, security rights may be enforced in accordance with the underlying contract between the parties. In practice, secured creditors such as banks terminate their loan due to an event of default under the loan agreement, which often leads to the occurrence of insolvency reasons. In this case, as described under answer 4.1 Liens/Rights, depending on the content of the respective security, the secured creditor has a right to separation of the claim or preferential satisfaction within the insolvency process.

Creditors entitled to separation of their securities (Aussonderung, Section 47, German Insolvency Act) may pursue their claims outside the rules of the German Insolvency Act, ie, in normal civil proceedings. In practice, only the ownership in a property or the direct (not the extended) retention of title provide a right of separation. Most other securities fall under the following right to preferential satisfaction.

Creditors with a right to preferential satisfaction (Absonderung, Section 49 ff, German Insolvency Act) will be involved in any insolvency proceedings. Their legal position in the insolvency proceedings is characterised by the fundamental idea that creditors are not entitled to their original legal power over the object but have only a claim to the economic value embodied in the object due to the opening of the insolvency proceedings. Creditors entitled to preferential satisfaction have to be satisfied primarily from the proceeds of the realisation of the secured asset. Outside of an insolvency proceeding, a security can be realised on the basis of the respective security agreement and the legal specifics for that kind of security.

In the opening court order of insolvency proceedings, the creditors are requested to file their claims and a deadline for filing is set. The claim has to be lodged with the insolvency administrator. Claims lodged within the court’s verification meeting (Prüfungstermin) also have to include claims filed after expiry of the filing period. Even claims lodged after the verification meeting have to be considered, but only if any additional costs are assumed by the delayed creditor. Payments to secured creditors are often made towards the end of the insolvency proceedings, after a longer time period. In an out-of-court enforcement, payments may be attained significantly earlier.

For the lodging of a claim with the insolvency administrator receivables in foreign currency have to be converted to euros according to the market value at the time of the opening of the insolvency procedures.

Beyond this, there is no distinction between foreign and domestic creditors. Both are entitled to participate in German insolvency proceedings in the same way. Foreign creditors in possession of a foreign title would have to apply to a German court for recognition of their title before beginning any steps of enforcement.

See 4.2 Rights and Remedies. In addition, secured creditors of moveable assets are entitled to compensation if the assets are used in the business continuation in insolvency and suffer loss in value due to such use.

The ranking in a debtor’s insolvency is as follows:

  • creditors entitled to the separation of their securities/assets (see 4.2 Rights and Remedies); and
  • creditors with a right to preferential satisfaction (see 4.2 Rights and Remedies)

These only apply to the specific secured asset or proceeds thereof.

  • creditors to the estate (Massegläubiger): a liability incumbent on the assets (Masseverbindlichkeit) is a liability that is paid preferentially from the unsecured assets in the event of an insolvency. These are liabilities that arose after opening of the insolvency, such as claims resulting from court fees, costs of proceedings or contracts newly entered into or continued by the insolvency administrator;
  • insolvency creditors (Insolvenzgläubiger): all other (unsecured) creditors who filed their claims and have not been rejected are insolvency creditors. Insolvency creditors will receive a proportionate payment (very often not more than 3% to 5% of their original claim) upon termination of the insolvency proceedings;
  • subordinated creditors: claims for payment of interest accrued after the opening of insolvency proceedings, costs of individual creditors incurred due to their participation in the proceedings, claims for any repayment of shareholder loans or similar shareholder claims are subordinated by law (Section 39, German Insolvency Act). Furthermore, this applies to claims which were subordinated by individual agreement; and
  • shareholders: Besides the aforementioned shareholder loans, any theoretically remaining surplus out of the insolvency estate will be distributed to the shareholders.

German law only distinguishes between secured and unsecured creditors. There is no further special treatment of, eg, trade creditors within the unsecured creditors.

No special rights and remedies apply as no formal restructuring procedure exists under German law. In an insolvency, unsecured creditors have creditors' participation rights.

Prior to the application for opening insolvency proceedings, German enforcement law applies where also pre-judgment attachments are possible. In the moment of applying for the opening of insolvency, German enforcement law is replaced by German insolvency law which introduces the principle of equal treatment of all creditors. Furthermore, Section 88 of the German Insolvency Act, contains a so-called backlash lock (Rückschlagsperre). If during the last month preceding the application for opening insolvency proceedings, or after such application an insolvency creditor acquired by enforcement of a security attaching the debtor's property forming part of the insolvency estate, such security shall become legally invalid when the insolvency proceedings are opened.

See 4.3 Typical Timelines.

German law provides a statutory landlord’s lien (Vermieterpfandrecht) which gives a non-possessory statutory lien on the property of the tenant brought into the rented premises. In the lessee’s insolvency situation, such landlord’s lien provides a claim to preferential satisfaction (see 4.2 Rights and Remedies).

See 4.4 Foreign Security Creditors.

See 5.1 Differing Rights and Priorities.

The costs of insolvency proceedings have to be paid from the estate right after the secured creditors. Next in order are the preferential creditors for new money claims. Also, insolvency administrator fees are preferential claims against the estate.

There are no preferences for employee claims against the insolvency estate dating prior to the opening of the insolvency proceedings. Employees may claim insolvency compensation against the Federal Employment Agency for up to three months.

There are no priority claims for taxes, social security, etc, to the extent they belong to periods prior to the insolvency proceedings. If such claims are incurred by or with the consent of the (preliminary) insolvency administrator, such claims become preferential claims against the insolvency estate.

German law does not provide any proceedings similar to the US Chapter 11 or the British Scheme of Arrangement which are applicable outside any formal insolvency proceedings. However, there are proceedings within the legal framework of the German Insolvency Act designed for the restructuring of the business.

Insolvency Plan Proceedings (Insolvenzplanverfahren)

An in-court restructuring option is the insolvency plan (Section 217, German Insolvency Act). Similar to regular insolvency proceedings, the insolvency plan underlies the overriding goal of the best possible satisfaction of all creditors. In order to achieve this goal, in practice, insolvency plans pursue further economic and legal objectives such as the restructuring of the debtor, haircuts with the participating stakeholders, payment extensions, waivers, transfers of the business or parts thereof or other capital measures such as reductions or increases of the share capital, or debt equity swaps.

Plan proceedings provide a flexible restructuring of a business. An insolvency plan consists of a descriptive part in which the objectives of the insolvency plan and the status-quo information of the other parties are described. This part also includes a comprehensive evaluation of the business as well as an analysis of the reasons underlying the crisis and restructuring options. The purpose of the descriptive part is to enable the creditors affected by the insolvency plan to evaluate the legal consequences of the plan.

The second part of the plan - the constructive part - explains the alterations of the legal positions of the stakeholders resulting from the plan. The content of the plan is flexible and individual to each debtor and can be combined in a variety of ways. A fundamental requirement of an insolvency plan is that the creditors affected by the insolvency plan may not be placed in a worse position than they would be in regular insolvency proceedings. The content of the constructive part applies to and against all participants once the insolvency plan has been confirmed by the court. It also applies to creditors of the insolvency proceedings who have not filed their claims or who have objected to the insolvency plan.

The debtor and/or the insolvency administrator prepare and submit an insolvency plan to the insolvency court. The voting for the plan takes place in different creditor’s groups in a creditors' assembly. An insolvency plan is deemed to be approved if each group approved the plan with a (simple) majority of the heads and sum of claims.

Even if a group rejects the plan, this group can be cram-downed under certain conditions according to the so-called prohibition of obstruction (Obstruktionsverbot).

In practice, discussions about insolvency plan drafts usually take place with important creditors and the court in advance to any application for the insolvency plan in order to increase the chances of the creditors’ plan approval. After the approval of the insolvency plan by the majority of the creditors' groups, the insolvency court confirms the insolvency plan by court resolution. Only with the court’s decision, the plan gets legally binding and effective.

The timing of an insolvency plan depends on the complexity of the debtor and the envisaged restructuring. With proper planning (pre-packed plan) and co-operation of the insolvency court a time span of six to eight weeks after the opening of the insolvency proceedings is possible.

Creditors objecting to the insolvency plan in the creditors' assembly may appeal against the court approval within two weeks. Such appeal is only possible if the creditor claims that the insolvency plan is detrimental for such creditor as against the outcome of ordinary insolvency proceedings.

Since also the insolvency plan proceedings are formal insolvency proceedings, upon the opening of the proceedings the principle of equal treatment of creditors applies and a single enforcement is impossible. In the preliminary stage of the proceedings, the debtor can be protected by a court order prohibiting any enforcement actions by single creditors.

In combination with the self-administration, the debtor’s management continues to run the business itself, supported and supervised by a creditors' trustee (Sachwalter).

In all German insolvency proceedings – plan proceedings, self-administration or regular insolvency proceedings – creditors can exercise their influence in the creditors’ committee and the creditors’ assembly. In addition, a creditor has certain information rights.

A creditors’ committee (Gläubigerausschuss) is established in each major insolvency proceedings to represent the creditors. The creditors' committee usually consists of an uneven number of members, whereby in practice committees with three or five members predominate. The statute requires that each creditors' committee shall represent the creditors with a right to preferential satisfaction, the insolvency creditors holding the highest claim and a representative of the smaller creditors as well as an employee representative. Therefore, in practice creditors’ committees often include representatives of the following creditor groups: financial institutions, credit insurances, labour unions or works councils, the Federal Employment Agency and/or the Pension Protection Fund (Pensionssicherungsverein).

The main responsibilities of the creditors' committee include the participation in the selection of the insolvency administrator, the participation in the decision on the order for self-administration, the support and supervision of the insolvency administrator, the monitoring of monetary transactions and the consent to significant legal acts. Any decision of the creditors' committee shall be valid if the majority of members attended the meeting voting on such decision and approved such decision with the majority of voting members.

Besides the creditors’ committee the creditors’ assembly (Gläubigerversammlung) has extensive rights. The creditors' assembly shall be convened by the insolvency court. All creditors with a right to separate satisfaction, all insolvency creditors, the insolvency administrator, the members of the creditors' committee and the debtor shall be entitled to attend such meeting. The competencies of the creditors in the creditors' assembly are extensive. They may appoint creditors' representatives to the creditors' committee or dismiss and exchange members of the creditors' committee. They may also elect an insolvency administrator other than the insolvency administrator appointed by the insolvency court, demand comprehensive accountability from the insolvency administrator for all business transactions or give him specific instructions. In addition, the creditors may decide by majority vote on the closure or continuation of a business.

As already explained 6.1 Statutory Process for a Financial Restructuring/Reorganisation, if a voting group rejects the presented insolvency plan this group can be cram-downed under certain conditions according to the so-called prohibition of obstruction (Obstruktionsverbot):

A voting group shall be deemed to have consented if

  • the members of such a group are likely not to be placed at a disadvantage by the insolvency plan compared with their situation without such plan;
  • the members of such a group participate to a reasonable extent in the economic value devolving on the parties under the plan; and
  • the majority of the voting groups have backed the plan with the necessary majorities.

For the group of creditors, a reasonable participation for the purpose of the second bullet point above shall exist if under the plan:

  • no other creditor will receive economic values exceeding the full amount of its claim;
  • neither a creditor with a lower-ranking claim without a plan, compared with the creditors forming his group, nor the debtor nor a person holding the debtor's shares receives an economic value; and
  • no creditor to be satisfied on an equal footing with the creditors forming his group without a plan receives an advantage compared to such creditors.

For the group of shareholders, a reasonable participation for the purpose the second bullet point in the first list shall exist if under the plan:

  • no creditor receives economic benefits exceeding the full amount of its claim; and
  • no shareholder who would be equal in rank to the shareholders in the group if no plan were drawn up is better placed than they are.

The insolvency plan, as well as the insolvency proceedings, are also effective for dissenting creditors (majority principle).

There is no trading prohibition under German law. The new owner needs to notify the insolvency administrator about the trade to actively participate in the insolvency proceedings.

In its "Act to Facilitate the Handling of Group Insolvencies" (Gesetz zur Erleichterung der Bewältigung von Konzerninsolvenzen), the German legislator has created a new group insolvency law. In general, the new law does not contain a substantive consolidation of the assets of the individual group companies but rather sticks to the principle of "one company - one insolvency proceeding".

The new regulations provide for the co-operation of insolvency courts, insolvency administrators and creditors’ committees as well as the establishment of a group creditors’ committee. Any different insolvency courts are obliged to co-ordinate with each other, especially on the appointment of the insolvency administrator. This intendeds to avoid the divergence of different local insolvency court jurisdictions. Furthermore, it contains the possibility for the implementation of a co-ordination plan. The German legislator’s intention was to orientate the proceedings towards an overarching goal of restructuring in which the overall interests of the group shall prevail over individual debtor’s interests.

In substance, the co-ordination plan shall be a cropped insolvency plan in which the constructive part has been omitted. The co-ordination plan requires the approval of an appointed group creditors’ committee. The co-ordination plan may describe any measures which are relevant to the co-ordinated management of the group procedures. In particular, the plan may contain proposals to restore the economic capacity of the individual debtors belonging to the group and of the group, for the settlement of intra-group disputes and on contractual agreements between the insolvency administrators.

During insolvency proceedings, any use of the debtor's assets must serve the creditors' interests in the best possible way. If the creditors' assembly has not made a deviating decision, the insolvency administrator/the debtor-in-possession can continue to run the business and thus make use of the company’s assets as long as this is the most suitable option to satisfy the creditors' claims. If the best option is to sell certain assets (even outside the ordinary course of business), an insolvency administrator/the debtor-in-possession is entitled to do so (unless the asset is not owned by the debtor).

Creditors, who are entitled to preferential satisfaction (Absonderungsrecht, see 4.2 Rights and Remedies) due to security rights in assets to be sold, shall receive the sale proceeds (less a liquidation lump sum). However, individual creditors (even secured creditors) cannot prevent the sale of assets or enforce contractual consent requirements. Nevertheless, the sale of the whole business (and certain other acts particularly important for the insolvency proceedings) requires the consent of the creditors’ committee or, if not implemented, the creditors’ assembly.

Depending on whether the insolvency proceedings are conducted in self-administration or not, it is either the debtor, with the support of the creditors' trustee, or the insolvency administrator who execute a sale of assets. Within an asset deal, the purchaser acquires valuable assets with good title. Any transaction can be pre-negotiated prior to the proceedings but the insolvency administrator is not bound by such pre-negotiations, even if an agreement has been concluded between the purchaser and the debtor.

Usually, secured creditor liens, security liens and other claims may be released, but it depends on the nature of the secured creditor. See 4.2 Rights and Remedies.

Within the proceedings, insolvency estate loans (Massekredite) may be granted by preferential creditors such as credit institutions, state development banks, supplier or customers to maintain the business operations by ensuring the debtor’s liquidity. Unsecured assets can be used as security. Secured assets can only be used if the respective secured creditor approves this use or a second-ranking security will be effected (to the extent possible).

During insolvency proceedings, any filed creditor claim will be verified, valued and accepted or disputed by the insolvency administrator. In case of a dispute, the insolvency court decides upon a creditor's application. 

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

In general, agreements under German law have only an inter-parties effect. A third party that has a separate liability or has been granted a security cannot be released automatically; rather, the obligation continues to exist. The third party’s obligation ceases if all parties – including the third party – agree to such release or if, eg, the plan proceedings have the effect that the debtor pays the debt and the third party is released from its obligation.

German law preserves the right to set-off by force of law or on the basis of an agreement. If an insolvency creditor was entitled to set-off a claim on the date the insolvency proceedings were opened, this right shall remain unaffected by the proceedings. If the offsetting situation arises after the opening of insolvency proceedings, the set-off is subject to restrictions as set out in Section 96, German Insolvency Act. Accordingly, the set-off shall be prohibited, if:

  • the debtor's principal claim arose after the opening of the proceedings;
  • the creditor of the insolvency proceedings acquired their counterclaim from another creditor after the opening of the proceedings;
  • an insolvency creditor acquired the opportunity to set off their claim by a transaction subject to claw-back; or
  • the creditor has a claim which is to be settled from the debtor's insolvency-free assets.

If there is no set-off situation at the opening of the insolvency proceedings because the claim is conditional, not yet due or not directed to a similar performance, set-off may only take place once the obstacle has been removed.

In the course of the plan fulfilment, the German Insolvency Act provides the possibility to implement a monitoring of the plan. In this case, the insolvency administrator is responsible for the monitoring and informs the creditors’ committee or, if no such committee exists, the creditors as a whole about any non-fulfilment. The insolvency court itself has no means of initiating new insolvency proceedings based on any notification.

If the debtor fails significantly to comply with its payment obligations towards a creditor under the insolvency plan, a creditor may claim revival of its deferred/partially waived claim. Also, in case of a subsequent second insolvency, the creditors’ claims will revive if the insolvency plan has not been satisfied at that point in time.

An equity owner can retain its ownership under an insolvency plan, subject to the restrictions of such plan.

Insolvency proceedings are liquidation proceedings aimed to monetise the insolvent company’s assets and to distribute the proceeds equally to the creditors (subject to preferential rights). The objective of regular insolvency proceedings is to sell the debtor's assets and to distribute the proceeds (after deduction of costs and preferential rights) to all creditors equally. The sale can take place by either selling the business as a whole to an investor who will continue to run the business or by unwinding the business or selling the assets separately.

Insolvency proceedings can be initiated by the debtor itself, ie, their management, or by a creditor subject to their legal interest in insolvency proceedings, taking into account prima facie evidence of the creditor's claim and the grounds for opening insolvency proceedings. During the preliminary insolvency period (approximately three months), the respective insolvency court examines the filing and the insolvency grounds, as well as sufficiency to cover the costs of the proceedings. It usually orders several provisional measures to avoid any detriment to the financial status of the debtor, such as the designation of a preliminary insolvency administrator, the appointment of a creditor’s committee and the prohibition of individual enforcement actions. After this preliminary period, insolvency proceedings are opened by court order and the insolvency administrator is appointed and takes over the director’s right of management and disposition.

The shareholders of a company may also resolve a voluntary out-of-court liquidation with a three quarter majority vote. This kind of liquidation will take at least 12 months, does not follow a specific procedure and is not supervised by the court.

In regular insolvency proceedings, the insolvency administrator takes over the right to manage and transfer the insolvency estate and will execute a sale of assets. No specific rules exist for a stalking horse or credit bid process. 

See 6.15 Failure to Observe Terms of Agreed/Statutory Plan.

See 6.10 Priority New Money.

See 6.6 Use of a Restructuring Procedure to Reorganise a Corporate Group.

See 6.3 Roles of Creditors.

German insolvency law does not contain any special provisions for the debtor’s sale of assets during insolvency proceedings. However, any transfer of assets has to be made in accordance with the general objectives of the insolvency proceedings, especially to the benefit of the creditors. Furthermore, within the proceedings, the creditor’s assembly or the creditors' committee has to give its consent to the sale of the entire business. In case of a sale to a specifically related party, the creditors' assembly needs to approve such sale.

German insolvency proceedings are universal proceedings. Therefore, each proceeding relates to all of the debtor’s assets, regardless of whether existing in Germany or abroad, and to all of the debtor’s creditors regardless of their place of residence. Within the EU member states (except for Denmark) EU regulations (Regulation (EU) 2015/848) and for cases outside the EU German international insolvency law provide recognition mechanisms for foreign insolvency proceedings as foreign main or secondary proceedings.

For debtors located within the EU member states, the courts of the member state in which the debtor’s COMI is situated have jurisdiction to open the main insolvency proceedings. Generally, there is an automatic recognition of foreign insolvency proceedings and the German assets of the debtor will be subject to the foreign insolvency proceedings. As an exception of this principle, foreign insolvency proceedings will not be recognised if this is incompatible with German public policy.

In a case where the proceedings have commenced outside EU member states, pursuant to German international law, the courts of a non-EU member state would not have jurisdiction over the company; these proceedings cannot be recognised in Germany.

If a debtor’s COMI is located in a member state of the EU, the opening of secondary proceedings in Germany requires that the debtor has an establishment in Germany. Generally, this is also the case where insolvency proceedings of a non-EU member state are to be recognised in Germany. These secondary proceedings will only encompass the German assets of the debtor.

German law allows the co-operation between domestic and foreign courts so that courts are encouraged to ensure a co-operation regarding the registration of obligations in concurrent foreign proceedings. In practice, this co-ordination is often initiated by the insolvency administrators.

See 8.1 Recognition or Relief in Connection with Overseas Proceedings.

Foreign creditors are dealt with in the same way as all other creditors. See 4.4 Foreign Secured Creditors.

German Insolvency law recognises the insolvency administrator as the responsible person within formal insolvency proceedings and plan proceedings without self-administration. Furthermore, the creditors' trustee supervises the debtor in self-administration proceedings.

Insolvency Administrator

The insolvency administrator’s main task is to determine the insolvency assets and distribute the proceeds among the creditors. They may also conclude contracts for this purpose. In addition, they prepare a list of all the debtor's creditors. They have to examine the debtor's economic situation and develop a plan for the further course of the insolvency. The insolvency administrator is liable to damages for all parties to the proceedings if they wrongfully violate their duties.

Creditors' Trustee (Sachwalter)

Among other things, the creditors' trustee has to examine the debtor's economic situation and monitor the management and expenses by the debtor-in-possession. In addition, the creditors' trustee has to provide advice to the debtor during the restructuring process. If the creditors' trustee determines circumstances suggesting disadvantages to the creditors under the debtor's continued self-administration, they shall disclose these circumstances to the creditors’ committee and to the insolvency court immediately. If no creditors' committee has been appointed, the creditors' trustee shall instead inform the creditors.

There is no professional education for the profession “insolvency administrator”. Abstractly, it has to be a person with business knowledge, independent of the creditors and the debtor, whose abilities correspond both legally and economically to the respective tasks. Regularly, lawyers specialising in insolvency law are appointed as insolvency administrators. The access to the insolvency administrator office is not clearly regulated. The selection and appointment of the insolvency administrator is conducted by the competent insolvency court who identifies suitable persons, often by using access lists. In larger cases, the creditors' committee shall be consulted prior to the appointment and the court shall follow a unanimous vote of such creditors' committee in general.

In the event of the ordering of a self-administration, the creditors' trustee shall be appointed instead of an insolvency administrator.

In German restructuring proceedings, prior to formal insolvency proceedings, the debtor usually receives support from specialised attorneys and accountants, who develop a restructuring concept, and M&A advisors, if assets are planned to be sold. Furthermore, other stakeholders, typically financial institutions or bank consortiums, are represented by their own attorneys as well as major customers or suppliers who have special interests in the restructuring. Moreover, in larger cases, the managing directors, supervisory board members and the shareholders are usually represented by their own attorneys.

Within any formal proceedings, the representation by advisors depends on the form of the proceeding. In self-administration proceedings, there is no change to the described advisory needs. In regular insolvency proceedings or plan proceedings without self-administration, the debtor’s representation becomes no longer necessary since the insolvency administrator takes over the authority. The insolvency administrator may make use of advisors during the procedures. 

In general, the compensation of advisor's costs is depending on the individual arrangement between the parties. Usually, any lender consortium’s advisory costs are borne by the debtor. In most cases, the company also bears the advisory costs of its organs. 

This are not applicable our jurisdiction.

In general, each advisor owes their respective duties and responsibilities to their contractual party.

German Insolvency Law does not provide a frequently used insolvency mediation like, eg, the bankruptcy mediation in the USA. As in any other civil procedure, mediations and arbitrations are possible with the insolvency administrator in their capacity as authorised party for the debtor against other participants in the respective proceedings.

This is not applicable in our jurisdiction. See 11.1 Utilisation of Mediation or Arbitration.

This is not applicable in our jurisdiction. See 11.1 Utilisation of Mediation or Arbitration.

This is not applicable in our jurisdiction. See 11.1 Utilisation of Mediation or Arbitration.

This is not applicable in our jurisdiction. See 11.1 Utilisation of Mediation or Arbitration.

Duties of Managing Directors in a Corporate Crisis (Prior to/until Occurrence of Insolvency)

The following remarks relate to companies with limited liability, in particular Limited Liability Companies (GmbH) and stock corporations (AG), the most common legal types for business enterprises. Each type of company is subject to specific provisions concerning the duties of officers and directors. However, in the following, a general outline of such duties is provided. Please note that, in addition to the following main principles, there are further obligations to preserve the company's assets, the violation of which may lead to personal liability of managing directors.

As soon as managing directors gain knowledge of circumstances that indicate that the company is experiencing financial difficulties, the managing directors are required to ascertain the dimension of such difficulties and to monitor the financial status of the company permanently. A financial forecast must be drawn up (usually a 13-week liquidity forecast) in order to check whether liabilities already due or becoming due and payable during the forecast period will be settled.

If the equity of the company amounts only to half or less of the registered share capital, the managing directors are required to inform all shareholders by means of a shareholders’ meeting without undue delay. Non-compliance with this duty is a criminal offence. In addition, managing directors can be held personally liable vis-à-vis the company for any damage to the company which occurs due to such non-compliance.

If the company is illiquid or over-indebted, the managing directors are obliged to file for insolvency without undue delay, at the latest within three weeks. During the maximum period of three weeks, the managing directors shall negotiate with shareholders, banks, creditors and other stakeholders in order to encourage these parties to cure the insolvency grounds by means of contributions to the financial recovery of the company.

Managing directors who violate the obligation to file for insolvency negligently or intentionally may be punished with imprisonment for up to three years or a fine. In addition, managing directors are personally liable vis-à-vis the company for damages which occur due to the delayed filing for insolvency.

In addition, managing directors are personally liable vis-à-vis the company for unlawful capital repayments to shareholders. This does not apply if payments are made based on profit and loss transfer agreement (Beherrschungs- oder Gewinnabführungsvertrag) or are covered by a full repayment claim against the shareholder or are made to repay a shareholder loan.

Duties of Managing Directors After Occurrence of Insolvency

Managing directors are principally personally liable vis-à-vis the company for payments made to third parties out of the company’s estate after the occurrence of over-indebtedness or illiquidity. These payments include not only monetary payments but also further benefits, such as the delivery of goods, the assignment of rights or receipt of payments on a bank account with negative balance.

In addition, managing directors may also be held (criminally) responsible for the conclusion of new contracts (especially placing new orders for supply or for services), if the company is already illiquid or if there are doubts regarding the company’s ability to perform the contractual payments in the future (Eingehungsbetrug). If liabilities to creditors have been created after insolvency has already occurred, the managing directors may also be liable directly vis-à-vis the respective creditors.

Furthermore, managing directors may be liable under criminal law if they, for example, embezzle the company’s assets after the occurrence of (imminent) illiquidity or over-indebtedness.

Duties of Supervisory Board Members

If a supervisory board is implemented, supervisory board members are obliged to control and monitor the fulfilment of duties by the managing directors. Supervisory board members may be held liable vis-à-vis the company if they breach their duties.

In principle, managing directors are merely liable vis-à-vis the company. After the opening of insolvency proceedings, the insolvency administrator is responsible for pursuing respective claims of the company. However, if liabilities to creditors have been created after insolvency has already occurred, the managing directors may also be liable directly vis-à-vis the respective creditors.

In a corporate crisis and, in particular, in self-administered insolvency proceedings, it is common for a Chief Restructuring Officer to be appointed. It depends on the individual case whether the Chief Restructuring Officer becomes a full board member or acts as a representative. Furthermore, it is common for a company to seek the advice of professional legal and turnaround advisors.

The concept of shadow directorship does exist in German law. Shadow directors can be held liable in the same way as duly appointed managing directors. However, the requirements for creditors or shareholders to being qualified as shadow directors are quite high. In particular, German law requires a shadow director to act like a managing director and appear to act in such way to the general public.

In limited liability companies, shareholders are generally not liable to creditors. As a general rule, liability of shareholders only arises if they have violated tort or criminal law, have assumed contractual liability, or in case of profit and loss pooling agreements. The situation is different in partnerships where there is no limitation of liability and shareholders are liable for the fulfilment of liabilities of the company.

German law provides a whole regime of claw-back provisions. Within each formal insolvency proceeding, the insolvency administrator can challenge pre-insolvency transactions on that basis. The aim is to ensure the principle of equal treatment of all creditors in insolvency proceedings and to revoke any transactions and transfers of assets that took place to the detriment of the other creditors. In advance of any potential insolvency for creditors, this bears the risk that transactions close to the insolvency status are clawed back in later insolvency proceedings. If any creditor has knowledge about the difficult financial situation of its contractual partner, they need to act carefully in doing business with them.

As a consequence of the claw-back, the insolvency administrator claims for repayment. If the creditor rendered anything in return, they may claim compensation from the insolvency estate as an unsecured claim.

There are different look-back periods for different scenarios:

  • Up to three months prior to insolvency application, congruent coverage (Section 130, German Insolvency Act): payments of due obligations made within the last three months before the application for opening insolvency proceedings if the debtor was illiquid on the date of the transaction or if it was made after the application to open insolvency proceedings, and if the creditor was aware of the debtor's insolvency on the date of the transaction, or of the request to open insolvency proceedings.
  • Up to three months prior to insolvency application, incongruent coverage (Section 131, German Insolvency Act): legal transactions on the part of the debtor constituting a direct disadvantage to insolvency creditors may be contested if they were made during the last month prior to the application to open insolvency proceedings or after such application; within the second or third month prior to the request to open insolvency proceedings, and the debtor was illiquid on the date of the transaction or within the second or third month prior to the application to open insolvency proceedings, and the creditor was aware of the disadvantage to the insolvency creditors arising from such transaction on its date.
  • Four or ten years prior to insolvency application, wilful disadvantage coverage (Section 133, German Insolvency Act): a transaction made by the debtor during the last ten years (or four years if the legal act has granted or facilitated security or satisfaction to the creditor) prior to the application to open insolvency proceedings, or subsequent to such application, with the intention to disadvantage their creditors may be contested if the other party was aware of the debtor's intention on the date of such transaction. The intention to disadvantage the creditors is presumed by law if the other party knew of the debtor's imminent insolvency, and that the transaction constituted a disadvantage for the creditors.
  • Four years prior to insolvency application, gratuitous benefit coverage (Section 134, German Insolvency Act): a gratuitous benefit granted by the debtor may be contested unless it was made earlier than four years prior to the request to open insolvency proceedings.
  • One year prior to insolvency application, shareholder loan coverage (Section 135 I No 1, German Insolvency Act): if a shareholder loan (or similar claim) has been repaid by the debtor.
  • Up to ten years prior to insolvency application, shareholder security coverage (Section 135 I No 2, German Insolvency Act): if a shareholder has received a security or a guarantee for a shareholder loan from the debtor.

Over the past decade, the German Federal Supreme Court has successively expanded the claw-back provisions. A defence possibility and exception to the claw-back provisions is the exception for cash transactions (Section 142, German Insolvency Act). A cash transaction exists if a payment, service or delivery provided by a company threatened with insolvency is offset by an equivalent and prompt (or with minor time delay only) return. Minor time delays are depending on the individual case but as a maximum of 30 days between delivery and payment. This exception is not applicable for transactions, which were made in the intention to cause detriment to the creditors.

The insolvency administrator is entitled to claim for claw-back. Since all German restructuring and liquidation proceedings are formal insolvency proceedings, the claw-pack provisions apply to all formal proceedings.

Valuations are usually used in the context of restructuring negotiations and in relation to a potential transaction during the crisis. There is no strict legal requirement. However, in problematic cases valuations will be used to validate the commercial position of the respective stakeholders, or to mitigate liability risks for an insolvency administrator or the management, in case of a sale. In addition, in insolvency proceedings the assets of the debtor will be valued item by item on going concern and liquidation value basis by the insolvency administrator. Such valuation provides the bottom line for any kind of sale of the entire business which at least needs to achieve the liquidation value as minimum benefit for the creditors. Otherwise, an asset by asset sale needs to be executed.

Who initiates a valuation depends on the specifics of the relevant case. There is no general rule.

Under German law, there are only few precedence cases in relation to valuations in a restructuring or insolvency context as a valuation dispute (if any) will be settled out of court in most cases.

There are a number of valuation experts in the market, providing asset-by-asset valuations to be taken in an insolvency scenario as service provider for the insolvency administrator. These valuations will be made by market comparisons and based on the experience of the respective experts. As long as there is no pending litigation, the insolvency courts usually do not instruct their own valuations.

In case of sales of entire businesses, most often a standard M&A process will be initiated to achieve the best possible purchase price and thereby to mitigate liability risks of the insolvency administrator.

McDermott Will & Emery

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Law and Practice


McDermott Will & Emery is a leading international law firm with more than 1,100 lawyers. With more than 20 locations on three continents, the firm's teams work across practices, industries and geographies to deliver highly effective legal solutions. German offices are located in Düsseldorf/Cologne, Munich and Frankfurt and there are more than 130 lawyers advising national and international clients. The firm has a team of 15 lawyers acting for clients on restructuring, financial recovery and insolvencies of companies, often in an international context. McDermott Will & Emery advise companies in distressed situations and their management regarding financial recovery and refinancing, both outside of and within insolvency proceedings. The firm also assists shareholders, creditors and business partners of companies in distressed situations and those experiencing insolvencies to help them assert, pursue and enforce their interests. The firm has a strong expertise assisting with cross-border mandates. Recently, it assisted with complex international restructuring and insolvency issues, in particular in the automotive and retail industry. The firm would like to extend thanks to Marc Oberhardt, a partner in the Düsseldorf office, for his contribution to this chapter.

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