Insolvency 2020

Last Updated November 19, 2020


Law and Practice


McDermott Will & Emery is a leading international law firm with more than 1,200 lawyers. With more than 20 locations, 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 German team of more than 15 lawyers acting for clients on restructuring, financial recovery and insolvencies of companies, often in an international context. McDermott Will & Emery advises companies and their management in distressed situations, both outside of and within insolvency proceedings. The firm also assists shareholders or creditors of companies in distressed situations and those experiencing insolvencies to help them assert and enforce their interests. The firm has strong expertise in assisting with cross-border mandates. Recently, it has assisted with complex international restructuring and insolvency issues, in particular in the automotive and retail industry.

With 19,400 corporate insolvencies in 2019, the ten-year decline continues, although only slightly (2018: 19,410 cases). The number of corporate insolvencies in 2019 will be at its lowest level for 25 years. 2019 also saw an increase in insolvencies of larger companies in Germany, although their share in the total insolvency volume still remains low. Companies with 51 to 100 employees account for a growing but still small proportion of insolvencies (2019: 1.1%; 2018: 0.9%) whereas companies with five or fewer employees continue to account for the largest share in insolvencies (81.7%).

Self-administrated insolvency proceedings (debtor-in-possession) are increasingly accepted and widespread. With the consent of both the creditors and the insolvency court, the company's management retains the power of disposal over the insolvency assets. Overall, however, their share in the total number of insolvencies remains low (2019: 1.4% of all corporate insolvencies). In the segment of companies over 50 employees, the share of self-administration is likely to be around one third, ie, this restructuring instrument is increasingly being used by larger companies.

Despite the massive economic slump in the wake of the COVID-19 pandemic, the number of insolvencies has not yet risen. On the contrary, in the first half of 2020 the number of corporate insolvencies fell by 8.2% year-on-year to 8,900 cases (H1 2019: 9,690), the main reason for this likely being the government contingency support measures, whether in the form of financial assistance or the suspension of the obligation to file for insolvency. However, it is assumed that the figures will rise sharply from the beginning of 2021.

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

The German Insolvency Act provides a uniform insolvency procedure for both individuals and companies. Insolvency proceedings may be initiated against any natural person or legal entity, excluding certain legal entities organised under public law, such as the German Federation or the German states.

As of today, German law does not provide for any formal proceedings for restructuring outside of and prior to the initiation of formal insolvency proceedings. This legal status in German law will change with the implementation of the European 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” presumably in January 2021. The European Directive on preventive restructuring frameworks aims at promoting crisis management at an early stage, before insolvency occurs. In a corporate crisis, companies shall be enabled to adopt a restructuring plan with the majority of the votes of the creditors involved before the obligation to file for insolvency occurs.

Up to now, in practice one had to make do with informal restructurings outside the formal insolvency framework. The downside of such restructurings, however, is the necessity that all participating stakeholders have to approve. In addition, the German Act on Notes from Entire Issues (Schuldverschreibungsgesetz) provides for regulations on the restructuring of certain bonds. As yet, there is no formal legal framework regarding out-of-court restructuring proceedings, therefore this chapter shall focus on the German Insolvency Law of companies.

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 a shareholders’ liquidation resolution (out-of-court) or in case of imminent illiquidity (drohende Zahlungsunfähigkeit) (in court), (see 2.3 Obligation to Commence Formal Insolvency Proceedings). In case of illiquidity (Zahlungsunfähigkeit) and over-indebtedness (Überschuldung) (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 at restructuring the debtor’s business. For further details of the German formal proceedings, see 6 Statutory Restructuring, Rehabilitation and Reorganisation Proceedings and 7 Statutory Insolvency and Liquidation Proceedings.

Once the European Directive on preventive restructuring frameworks has been implemented in German law (see 2.1 Overview of Laws and Statutory Regimes), legally regulated out-of-court restructuring proceedings which can be accessed prior to the occurrence of insolvency will be available.

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 (zahlungsunfähig) if it is unable to meet its payment obligations when due. Illiquidity is generally to be assumed if the debtor has suspended its payments. If the Company's liquidity gap of 10% or more cannot be eliminated within the (statutory) three-week period, insolvency is generally to be assumed. An exception to this assumption may apply if one can almost certainly (mit an Sicherheit grenzender Wahrscheinlichkeit) expect 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. 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 (Überschuldung) occurs when the debtor's assets no longer cover the 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), but not to individuals. 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 (the legislator is currently planning a reduction to a one-year period). 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, the question whether the company’s assets cover the existing liabilities needs to be verified, 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. All liabilities, even those not yet due, are to be taken into account.

Illiquidity and over-indebtedness lead to a mandatory application for insolvency. Managing directors of a private limited company and of a stock corporation (and of similar legal entities) are obliged to file for insolvency without undue delay but, in any case, no later than three weeks from the occurrence of Illiquidity or over-indebtedness. Non-compliance with the filing obligations can lead to a criminal liability and personal liability of the managing directors. For further details, please see 10 Duties and Personal Liability of Directors and Offices of Financially Troubled Companies.

Imminent Illiquidity (Section 18 German Insolvency Code)

A debtor is allowed, but not obliged to file for insolvency if illiquidity is imminent (drohende Zahlungsunfähigkeit), ie, if it is likely to be unable to meet its existing obligations to pay on the date of their maturity in the current and next fiscal year (the legislator is currently planning to determine a two-year period). Upon the implementation of provisions regarding out-of-court restructuring proceedings in German law (see 2.1 Overview of Laws and Statutory Regimes), debtors will most likely be enabled to commence such out-of-court restructuring proceedings after the occurrence of imminent illiquidity.

Apart from the debtor itself, 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 of insolvency proceedings and that the claim and the insolvency reason (illiquidity or over-indebtedness) have been substantiated. A creditor's application cannot be based on imminent illiquidity. A creditor’s application is effected by filing an application with the competent insolvency court and needs to be accompanied by substantiating proof of the creditor’s claim and the alleged insolvency reason.

To commence insolvency proceedings, the occurrence of an insolvency reason (see 2.3 Obligation to Commence Formal Insolvency Proceedings) is required.

German law provides for special rules in case of an insolvency of specifically regulated entities, for example insurance companies (German Insurance Supervision Act – Versicherungsaufsichtsgesetz) or financial institutions (in particular, Sections 46 et seq German Banking Act – Kreditwesengesetz).

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 an amendment of the Germany Insolvency Act in 2012, promoting self-administrated insolvency plan proceedings, providing more flexibility and higher certainty in the preparation of insolvency proceedings, the public perception of insolvency proceedings has improved to a certain extent so that it has become a more viable alternative instead of just being the last exit. Preceding consensual restructuring negotiations with the stakeholders are not mandatory before the commencement of insolvency proceedings.

Nevertheless, in most restructuring cases, the stakeholders still try to achieve an out-of-court solution first. Consequently, there is certain support by the stakeholders for out-of-court solutions and for measures required to avoid insolvency. The implementation of provisions regarding out-of-court restructuring proceedings in German law (see 2.1 Overview of Laws and Statutory Regimes) will most likely increase the efforts of the stakeholders to agree on out-of-court restructuring proceedings.

As of today, 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 the 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 and waiver agreements are concluded to avoid relevant repayment obligations of the debtor. In addition, lenders usually demand a restructuring opinion to be prepared by a restructuring expert, including a positive going concern prognosis as 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.

Typically, the existing lenders, most times on a super senior basis, will provide any new money. In addition, there are a number of funding providers specialised in these types of scenarios that provide 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 avoid any criminal acts and tort (based on the general rules) as in any other normal business activity.

German law does not provide for any kind of cram-down procedure for an out-of-court restructuring (this will change by the envisaged implementation of regulations regarding out-of-court restructuring proceedings (see 2.1 Overview of Laws and Statutory Regimes)). In general, it is necessary to achieve unanimous consent with all creditors that are to provide any kind of restructuring contribution. Exceptions are only applicable for bonds subject to the German Act on Notes from Entire Issues (Schuldverschreibungsgesetz), which allows majority decisions, and in cases agreed within the relevant loan or inter-creditor agreements.

In this context, it is common to have waiver provisions under the loan documentation, allowing majority decisions for certain aspects to avoid extraordinary termination. However, any haircut or deferral of repayment usually requires consent of all lenders.

In general, German law differentiates between moveable and immovable property and claims/rights, basically as follows:

Securities over Movable 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.
  • Global and Security Assignment (Globalzession/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 storage collateral assignments (Raumsicherungsübereignungen) which cover all present and future goods located in a specific location (eg, a warehouse) are customary.
  • 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 liability. 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 require notarisation under German law and must be 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. 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 evolvement of insolvency reasons.

After the opening of insolvency proceedings, secured creditors can claim their assets to be separated from the insolvency estate and handed over to them (Aussonderung) or preferential satisfaction (Absonderung), depending on the kind of security.

Creditors entitled to separation of their securities (Aussonderung) may pursue their claims outside the rules of the German Insolvency Act, ie, in regular civil proceedings without being subject to a stay of enforcement. In practice, only ownership rights, including basic retention-of-title rights, lead to a right of separation.

Most other securities lead to a right to preferential satisfaction. Creditors with a right to preferential satisfaction (Absonderung) may not enforce their security right in case of the debtor’s insolvency but need to claim their security right vis-à-vis the insolvency administrator. Claims of such secured creditors will be satisfied by preferential satisfaction, ie, out of the proceeds of the realisation of the secured asset.

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

According to German insolvency law, there are different types of creditors:

  • creditors entitled to the separation of their securities/assets (see 4.2 Rights and Remedies);
  • creditors with a right to preferential satisfaction (see 4.2 Rights and Remedies);
  • 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 arise 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 have filed their claims and have not been rejected are insolvency creditors. Insolvency creditors will receive a proportionate payment 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) - this also 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.

In Germany, most trade creditors are secured by retention-of-title rights. There is no special treatment of trade creditors. However, as trade creditors often have a retention-of-title right and continuing supply is crucial for the continuation of the business, in most cases the debtor and such creditors enter into agreements providing for security rights and the fulfilment of respective claims in order to maintain the business operations.

Due to the absence of provisions regarding out-of-court restructuring proceedings, unsecured creditors can disrupt restructuring efforts if their consent is required for the envisaged restructuring measures since the debtor is not entitled to intervene in the creditors’ rights. However, this will change upon the envisaged implementation of new rules on out-of-court-restructuring proceedings (see 2.1 Overview of Laws and Statutory Regimes).

During insolvency proceedings, unsecured creditors have creditors' participation rights and will be satisfied in the amount of the insolvency quota. As the majority of the creditors is decisive, they are not individually enabled to disrupt the proceedings.

Prior to the application for opening insolvency proceedings, German enforcement law applies where also pre-judgment attachments are possible.

Once a debtor has filed for insolvency, German enforcement law is replaced by German insolvency law, which introduces the principle of equal treatment of all creditors. If during the last month preceding the filing for insolvency, or after such application, an insolvency creditor acquires a security attaching to the debtor's property forming part of the insolvency estate by enforcement, such security shall become legally invalid when the insolvency proceedings are opened.

The costs of insolvency proceedings, including the insolvency administrator’s fees, have to be paid from the estate. Next in order are the preferential creditors for new money claims.

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.

Insolvency Plan Proceedings (Insolvenzplanverfahren)

An in-court restructuring option is the insolvency plan. Similar to regular insolvency proceedings, the insolvency plan underlies the overriding goal of the best possible satisfaction of all creditors. In practice, in order to achieve this goal, insolvency plans pursue further economic and legal objectives such as the debtor’s restructuring, 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 offer 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 laid out. This part also includes a comprehensive evaluation of the business, 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 stakeholders’ legal positions resulting from the plan. The content of the plan is flexible and individual to each debtor and can be realised 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.

Submitting a plan and following discussions

The debtor and/or the insolvency administrator prepare(s) and submit(s) 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 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 crammed-down under certain conditions according to the so-called prohibition of obstruction (Obstruktionsverbot). If the insolvency plan is approved it is binding for all creditors.

In practice, discussions about draft insolvency plans usually take place with important creditors and the court in advance to any filing in order to increase the chances of the creditors approving of the plan. 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.

Timing and objections

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 to itself as against the outcome of ordinary insolvency proceedings.

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

In regular insolvency proceedings, the court appoints an insolvency administrator who takes over the management and runs the business.

In self-administrated proceedings, the debtor’s management continues to run the business itself, supported and supervised by a creditors' trustee (Sachwalter) appointed by the insolvency court.

Creditors' Assembly and Committee

In all German insolvency proceedings – self-administrated or regular insolvency proceedings – creditors can exercise their influence in the creditors’ committee (Gläubigerausschuss) and the creditors’ assembly (Gläubigerversammlung).

A creditors’ committee (Gläubigerausschuss) is established in each major insolvency proceeding 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 include a representative for:

  • the creditors with a right to preferential satisfaction;
  • the insolvency creditors holding the highest claim;
  • a representative of the smaller creditors; and
  • 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).

Responsibilities and Rights

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 is 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 are 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 in 6.1 Statutory Process for a Financial Restructuring/Reorganisation, if a voting group rejects the presented insolvency plan this group can be crammed-down under certain conditions (Obstruktionsverbot):

A voting group shall be deemed to have consented if

  • the members of such 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 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 as laid down in the second bullet point above is given if under the plan:

  • no other creditor will receive economic values exceeding the full amount of his claim;
  • neither a creditor with a lower-ranking claim without a plan, compared to the creditors forming its 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 its group without a plan receives an advantage compared to such creditors.

For the group of shareholders, a reasonable participation as laid down in the second bullet point of the first list is given 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 off 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 2018, the German legislator created a new insolvency law for insolvencies of groups of companies. In general, the new law does not provide for a substantive consolidation of the assets of the individual group companies but rather sticks to the principle of "one company – one insolvency proceeding".

However, a uniform group jurisdiction has been created. The insolvency court may, upon application by a debtor belonging to a group (“Group Debtor”), declare itself competent for the insolvency proceedings relating to the other Group Debtors as well if there is a permissible reason for opening insolvency proceedings in respect of the debtor, and the debtor is not obviously of subordinate importance for the group as a whole. The court may refuse the request if a concentration of proceedings in the insolvency court is not in the common interest of the creditors. In principle, an insolvency administrator must be appointed for all Group Debtors in the interest of the creditors.

If there is no group court and no joint insolvency administrator, the new rules provide for cooperation between insolvency courts, insolvency administrators and creditors' committees as well as for the establishment of a group creditors’ committee. The individual insolvency courts are obliged to co-ordinate with each other, especially on the appointment of the insolvency administrator. This shall avoid any divergence of different local insolvency court jurisdictions. Furthermore, it offers the possibility to implement a co-ordinated plan. The German legislator’s intention was to orientate the proceedings towards the overarching restructuring goal with the overall interests of the group prevailing over individual debtors’ interests.

In substance, the co-ordinated plan shall be a cropped insolvency plan in which the constructive part has been omitted. The co-ordinated plan requires the approval of an appointed group creditors’ committee. The co-ordinated 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 Group Debtors and the capacity of the group, for the settlement of intra-group disputes and 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 for the satisfaction of the creditors’ claims is to sell certain assets (even outside the ordinary course of business) during insolvency proceedings, 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 assets particularly important for the insolvency proceedings) requires the consent of the creditors’ committee or, if not implemented, the creditors’ assembly.

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 by fulfilling the secured creditor’s claim (see 4.2 Rights and Remedies).

During insolvency 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 may only be used if the respective secured creditor approves this use; otherwise a second-ranking security will be created (to the extent possible).

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

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

In general, third parties’ liabilities cannot be released in insolvency proceedings without the consent of the respective creditor. Therefore, third parties’ liabilities and securities granted by third parties are sustained during insolvency proceedings unless agreed otherwise with the secured creditor.

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 right to set off arises after the opening of insolvency proceedings, the set-off is subject to restrictions. Accordingly, the set-off shall be prohibited, if:

  • the debtor's principal claim arose after the opening of the proceedings;
  • the creditor acquired its counterclaim from another creditor after the opening of the proceedings;
  • the creditor acquired the opportunity to set off its 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 a creditor has no right to set off at the opening of the insolvency proceedings because the claim is conditional, not yet due or not tied to a similar performance, set-off may only take place once this obstacle has been removed.

If the debtor fails significantly to comply with its payment obligations towards a creditor under the insolvency plan, the respective payment obligations will revive, even if they have been deferred/partially waived under the insolvency plan. Likewise, 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.

In the course of the fulfilment of the plan, the German Insolvency Act offers the possibility to implement a monitoring of the compliance with 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.

An equity owner can retain its ownership under an insolvency plan subject to the restrictions of such plan. However, the plan can provide for, eg, a debt-equity-swap. In practice, creditors will only adopt a plan if the equity owners themselves provide for restructuring contributions, in most cases.

Unless insolvency proceedings lead to an insolvency plan, the debtor will be liquidated. Liquidation proceedings are aimed at monetising the insolvent company’s assets and equally distributing the proceeds to the creditors (subject to preferential rights). The objective of liquidation 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, its management, or by a creditor subject to its legal interest in insolvency proceedings, taking into account prima facie evidence of the creditor's claim and the grounds for opening insolvency proceedings (see 2.4 Commencing Involuntary Proceedings). In the period between filing for insolvency and opening of insolvency proceedings (usually up to three months), the respective insolvency court examines the filing and the existence of insolvency reasons 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 creditors’ 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.

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. Within an asset deal, the purchaser acquires valuable assets with good title. No specific rules exist for a stalking horse or credit bid process.

See 6.3 Roles of Creditors.

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, 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 to this principle, foreign insolvency proceedings will not be recognised if this is incompatible with German public policy.

The opening of foreign insolvency proceedings is recognised (lex fori concursus). This does not apply if the courts of the state opening the proceedings do not have jurisdiction under German law, if such recognition leads to a result which is manifestly incompatible with fundamental principles of German law.

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. 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 proceedings.

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.

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 insolvency assets and distribute the proceeds among the creditors. The insolvency administrator may also conclude contracts for this purpose. In addition, the insolvency administrator prepares a list of all the debtor's creditors. He or she has to examine the debtor's economic situation and develop a plan for the further course of the insolvency proceedings (ie, continuation of business or liquidation). Furthermore, the insolvency administrator is responsible for enforcing claw-back claims. He or she will be liable for damages vis-à-vis all parties to the proceedings, if he or she wrongfully violates his or her duties.

Creditors' Trustee (Sachwalter)

In case of self-administrated proceedings, the debtor’s management maintains its power and is responsible for most of the tasks shifted to the insolvency administrator in regular proceedings. However, the management is supervised by the creditors’ trustee (Sachwalter). Among other things, the creditors' trustee has to examine the debtor's economic situation and monitor the management and expenses incurred by the debtor-in-possession. 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 “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 self-administration is ordered, a creditors' trustee shall be appointed instead of an insolvency administrator.

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 of business enterprises in Germany. 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 to only 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.

Filing for insolvency

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 their 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.

Furthermore, 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 agreements (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, subject to compliance of such payments with the duties of a prudent business man (burden of proof is with the managing director). 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 the 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.

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 a potential insolvency, this bears the risk for creditors that transactions close to the insolvency status are challenged 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 a creditor renders a repayment, it 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 the opening of insolvency proceedings may be contested 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 for the opening of insolvency proceedings or after such application, within the second or third month prior to the application for the opening of insolvency proceedings  the debtor having been illiquid on the date of the transaction  or within the second or third month prior to the application for the opening of insolvency proceedings  the creditor having been 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 by the debtor made 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 for the opening of insolvency proceedings or subsequent to such application, with the intention to disadvantage its creditors, may be contested if the other party was aware of the debtor's intention on the date of such transaction. An intention to disadvantage the creditors is presumed by law if the other party knew of the debtor's imminent insolvency, and 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 application for the opening of insolvency proceedings.
  • Up to ten years prior to insolvency application, shareholder security coverage (Section 135 I No 1, German Insolvency Act): if a shareholder has received a security or a guarantee for a shareholder loan from the debtor.
  • One year prior to insolvency application, shareholder loan coverage (Section 135 I No 2, German Insolvency Act): if a shareholder loan (or similar claim) has been repaid by the debtor.

Over the past decade, the German Federal Supreme Court has successively expanded the claw-back provisions. A possible defence 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 return (or with minor time delay only). Minor time delays are depending on the individual case, the maximum being 30 days between delivery and payment. This exception is not applicable for transactions which are made in the intention to dishonestly cause detriment to the creditors.

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

McDermott Will & Emery

Stadttor 1
40219 Düsseldorf

+49 211 30211 0

+49 211 30211 555
Author Business Card

Law and Practice


McDermott Will & Emery is a leading international law firm with more than 1,200 lawyers. With more than 20 locations, 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 German team of more than 15 lawyers acting for clients on restructuring, financial recovery and insolvencies of companies, often in an international context. McDermott Will & Emery advises companies and their management in distressed situations, both outside of and within insolvency proceedings. The firm also assists shareholders or creditors of companies in distressed situations and those experiencing insolvencies to help them assert and enforce their interests. The firm has strong expertise in assisting with cross-border mandates. Recently, it has assisted with complex international restructuring and insolvency issues, in particular in the automotive and retail industry.

Compare law and practice by selecting locations and topic(s)


Select Topic(s)

loading ...

Please select at least one chapter and one topic to use the compare functionality.