With 15,841 corporate insolvencies in 2020, the downward trend of recent years gained further momentum (18,749 in 2019). The total number of corporate insolvencies in 2020 not only decreased by 15.5% compared to 2019, but moreover will be at the lowest level since the German Insolvency Act (Insolvenzordnung) came into force in 1999. Although a major wave of corporate insolvencies had been expected at the outbreak of the COVID-19 pandemic as result of long-lasting lockdowns and a massive decline of sales and revenues across a broad range of sectors, this proved not to be the case. The government contingency support measures in the form of financial assistance and the suspension of the obligation to file for insolvency cushioned the negative effects of the lockdowns. An end to this trend is not yet in sight; on the contrary, a year-on-year decline of 19.7% has been recorded by the German Federal Statistical Office for the first quarter of 2021.
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 (in 2020, 2.4% of all corporate insolvencies). Nevertheless, insolvency claims in self-administrated insolvency proceedings account for almost a quarter of the total insolvency claims, ie, this restructuring instrument is increasingly being used in larger cases.
Since the German Corporate Stabilization and Restructuring Act (Unternehmensstabilisierungs- und –restrukturierungsgesetz) came into force at the beginning of 2021, German law finally provides for a formal out-of-court restructuring. By now, it is possible for debtors whose illiquidity is imminent to restructure even before insolvency occurs based on a stabilisation and restructuring framework, which provides for the possibility of a restructuring plan and other accompanying measures. However, due to the novelty of the law, comparatively few such restructuring proceedings have taken place to date.
German law provides for both formal proceedings for restructuring outside of and prior to the initiation of formal insolvency proceedings and the formal insolvency proceedings itself. While formal out-of-court restructuring proceedings are governed by the German Corporate Stabilization and Restructuring Act, the main statutory regime governing the German insolvency law is the German Insolvency Act which entered into force on 1 January 1999.
Out-of-Court Restructuring Law
The German Corporate Stabilization and Restructuring Act served essentially to implement 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”. Basically, it enables distressed corporations, which are not yet obliged to file for insolvency proceedings, to restructure via a stabilisation and restructuring framework, which provides for the possibility of a restructuring plan and other accompanying measures, eg, a moratorium.
Due to the requirement of a three-quarters majority regarding the affected stakeholders’ approval of the restructuring plan and the possibility of a cross-class cram-down, restructuring via a restructuring plan will now relief the corporation from the necessity to reach unanimous consent of all affected stakeholders. This need for unanimity was and is one of the downsides of informal out-of-court restructurings in Germany. In addition to the restructuring of the legal entity, German law also allows for the restructuring of certain bonds based on the German Act on Notes from Entire Issues (Schuldverschreibungsgesetz).
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.
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 based on general corporate law) or in case of imminent illiquidity (drohende Zahlungsunfähigkeit) (out-of-court based on the German Corporate Stabilization and Restructuring Act and in court based on the German Insolvency Act) (see 2.3 Obligation to Commence Formal Insolvency Proceedings).
In the 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. Restructuring plan proceedings as well as 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.
In general, the German Insolvency Act provides three different reasons to file for insolvency proceedings.
Illiquidity (Section 17 of the 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 of the 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 for the upcoming 12 months 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, 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. See 10. Duties and Personal Liability of Directors and Officers 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. To determine the debtor’s ability to pay on time, a 24-months forecast period is to be taken as a basis. In addition, the enactment of the German Corporate Stabilization and Restructuring Act has created a further possibility for the debtor to act in the event of imminent illiquidity. The debtor is now able to take certain judicial measures, eg, a moratorium, and to restructure itself based on a restructuring plan.
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, eg, insurance companies (German Insurance Supervision Act – Versicherungsaufsichtsgesetz) or financial institutions (Sections 46 et seq of the 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 German 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. Such options that were already available to the stakeholders before 2021 have been supplemented since the enactment of the German Corporate Stabilization and Restructuring Act by further measures, eg a moratorium and restructuring plan, which are intended to further strengthen out-of-court restructurings.
In case a corporate crisis occurs, which does not lead to the illiquidity or over-indebtedness of the debtor and hence the obligation to immediately file for insolvency proceedings, the debtor is free to choose between various informal measures provided by general rules and the formal measures provided under the German Corporate Stabilization and Restructuring Act. Insofar as the debtor is not willing or able to take measures under the German Corporate Stabilization and Restructuring Act, 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 number 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.
If, on the other hand, the debtor opts for formal proceedings under the German Corporate Stabilization and Restructuring Act, it is able to restructure under the regime of a court-confirmed restructuring plan and further measures supplementing the restructuring such as a moratorium.
Typically, in informal out-of-court restructuring scenarios 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. In case the new financing (neue Finanzierung) is granted in execution of a court-confirmed restructuring plan, certain privileges, eg a far-reaching exclusion of the right to contest such financing in subsequent insolvency proceedings, apply.
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.
While informal out-of-court restructurings require the consent of all affected stakeholders, formal out-of-court financial restructurings can be accomplished and effectuated over the dissent of minority creditors and owners to some extent via a restructuring plan. To become binding on all affected stakeholders, such restructuring plan generally requires the approval of the relevant stakeholder groups as well as the confirmation of the competent restructuring court, provided the plan was not adopted unanimously.
For the purpose of voting, the relevant stakeholder groups are classified by the debtor according to objective criteria and then have to vote separately on the plan. For the plan to be adopted the group members approving the plan must hold at least three quarters of the voting rights in each group. However, a cross-class cram-down is possible under certain prerequisites. Further exceptions are applicable for bonds subject to the German Act on Notes from Entire Issues, 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 outside of restructuring plan proceedings 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
The aforementioned securities do not need to be registered.
Securities over Immovable Property
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.
Once a formal out-of-court restructuring has been initiated, secured creditor rights, remedies and liens may be suspended by court order. Generally, the duration of such suspension is limited to a maximum of three months but can be prolonged or reordered, subject to the discretion of the court.
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, financers of out-of-court restructurings granting new financing (neue Finanzierung) as part of a court-confirmed restructuring plan enjoy special procedural protections to some extent; especially the right to contest such financing in subsequent insolvency proceedings is widely excluded. Furthermore, 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.
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.
Creditor rights may be affected by restructuring plan proceedings. In the event of a moratorium, the restructuring court has the power to suspend those rights temporarily. Furthermore, the relevant claims may also become subject to a court-approved restructuring plan and thus be extinguished. However, affected unsecured creditors (as well as affected secured creditors) are able to prevent the restructuring plan from coming into force, provided their respective stakeholder group does not reach the required majority of 75% and the requirements of a cross-class cram-down are not met.
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.
German enforcement law generally provides for pre-judgment attachments. However, those attachments may be affected by formal restructuring plan and insolvency proceedings.
In the event of initiated restructuring plan proceedings, the restructuring court may order that measures of enforcement against the debtor are prohibited or temporarily suspended (Vollstreckungssperre).
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.
With the beginning of 2021, the legislator added an option for formal pre-insolvency financial restructuring to the legal landscape in Germany. Now, German restructuring and insolvency law provides for both pre-insolvency financial restructuring via a restructuring plan pursuant to the German Corporate Stabilization and Restructuring Act and insolvency plan proceedings pursuant to the German Insolvency Act.
Restructuring Plan Proceedings (Restrukturierungsplanverfahren)
Provided the debtor is not yet facing illiquidity or over-indebtedness but imminent illiquidity, it may opt for restructuring plan proceedings by notification of the restructuring project to the restructuring court. Restructuring plan proceedings aim for a sustainable restructuring and reorganisation of the debtor’s finances. For this purpose, the restructuring plan may deal with debt equity swaps, haircuts with stakeholders (excluding wages, company pension entitlements, claims arising from intentional torts as well as criminal and administrative fines and penalties) and even haircuts with creditors secured by intercompany third-party securities, just to name a few.
The restructuring plan mainly consists of two parts, a descriptive (Darstellender Teil) and a constructive part (Gestaltender Teil). While the descriptive part presents the basis and the effects of the restructuring plan and contains all information relevant for the decision of the affected stakeholders on the approval of the plan and for its confirmation by the court, including the causes of the crisis and the measures to be taken to manage the crisis, the constructive part specifies how the legal position of the affected stakeholders is to be changed by the plan. Once the plan received confirmation by the competent restructuring court, the effects specified in the constructive part come into effect for all affected stakeholders, regardless of whether they voted against the plan or did not participate in the vote, although they were properly involved in the voting process.
Submitting a plan and following discussions
In principle, the preparation of the restructuring plan falls within the debtor's scope of responsibility, nevertheless, there is the possibility of a plan co-ordination procedure by the restructuring court. The final plan needs approval by the affected stakeholders and confirmation by the court. For this reason, the affected stakeholders are divided into different groups. Following classification, the restructuring plan is voted on within the individual groups, with the plan being deemed to have been accepted by the relevant group if at least 75% vote in favour of the plan, calculated not by head count but by the sum of claims, share of capital, etc.
Should the plan lack the approval of all groups of affected stakeholders, the dissenting group can be crammed-down under certain conditions. Upon confirmation by the court, the plan gets legally binding and effective.
Since the restructuring plan proceedings are quite new, best practices have not yet emerged. It remains to be seen whether, in addition to the involvement of major creditors, the judicial plan coordination procedure will be increasingly used in practice.
Timing and objections
It is too early to make reliable statements as to whether the timing of a restructuring plan will develop similarly to the timing of an insolvency plan, for which empirical values are already available (see below). To the extent that such timing has already been published, it appears to be similar.
Subject to certain prerequisites, eg, voting against the restructuring plan, any affected stakeholder has the right of immediate appeal against the judicial decision confirming the restructuring plan. Whereas, in the event of court’s refusal to confirm the restructuring plan, the debtor shall have the right of immediate appeal.
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.
The position of the company depends on the particular proceedings taken by it.
Restructuring Plan Proceedings
In restructuring plan proceedings, the company may continue its ordinary business. However, a moratorium can be ordered by the court on the debtor’s request. Although, incumbent management continues to manage the company, the court may appoint an independent restructuring officer (Restrukturierungsbeauftragter) to support and supervise incumbent management subject to certain conditions. Eligibility for appointment requires a natural person qualified as attorney, public accountant, tax consultant or similar paired with in depth restructuring experience (for new financing see 3.3 New Money).
Insolvency Plan 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.
The role of creditors is largely determined by the nature of the proceedings chosen.
Restructuring Plan Proceedings
Creditors are put into separate groups for the purpose of voting on the final restructuring plan. This classification shall be made by the debtor on the basis of objective criteria. To the extent the relevant stakeholders are affected, however, groups must at least be formed for the holders of rights to preferential satisfaction, restructuring creditors, subordinated restructuring creditors, shareholders and creditors from intracompany third-party securities. Within each group, equal rights are to be offered to all affected stakeholders.
In comprehensive restructuring plan proceedings, it is up to the discretion of the court as to whether establish a creditors' advisory council (Gläubigerbeirat) or not. If established, members of the council are entitled to claim compensation and expenses.
The members of the creditors' advisory council support and supervise incumbent management.
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:
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 them 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 restructuring or insolvency plan this group can be crammed-down under certain conditions. However, differences in detail arise depending on the type of proceedings.
Restructuring Plan Proceedings
A voting group shall be deemed to have consented if:
For the group of affected creditors, a reasonable participation as laid down in the second bullet point above is given if under the plan:
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:
The restructuring plan is also effective for dissenting creditors (majority principle).
Insolvency Plan Proceedings
On the cram-down rules, the provisions on the insolvency plan proceedings are basically comparable to those on the restructuring plan proceedings and differ only in details. 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 of the claims 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. Meanwhile, comparable provisions exist for restructuring plan proceedings. 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.
In the course of a formal out-of-court restructuring process, management must safeguard the interests of the creditors as a whole. Such restructurings may furthermore restrict the company’s use of its assets. For example, if the company during a moratorium collects receivables assigned as security or sells or processes movable assets in respect of which rights to separate or preferential satisfaction exist, the proceeds thereby obtained shall be distributed to the beneficiary or held in safe custody in a distinguishable manner.
Insolvency proceedings also give rise to special regulations in this respect. 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). For new financing during restructuring plan proceedings, see 3.3 New Money.
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-party liabilities cannot be released in insolvency proceedings without the consent of the respective creditor. Therefore, third party liabilities and securities granted by third parties are sustained during insolvency proceedings unless agreed otherwise with the secured creditor. However, since 2021 there is an exception to this principle. To some extent, the provisions regarding to the restructuring and insolvency plan proceedings now allow to interfere with intercompany third-party securities. Although the existing options may be limited in practice, as interference with these securities must be adequately compensated, acceptance by group debtors and restructuring experts remains to be seen.
German law preserves the right to set off by force of law or on the basis of an agreement. While it has not yet been clarified by the courts whether a court-ordered moratorium in the context of restructuring plan proceedings contains a ban on offsetting, the situation in insolvency proceedings is more clear. 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:
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.
Meanwhile, comparable provisions exist for restructuring plan proceedings.
An equity owner can retain its ownership under a restructuring or 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 pre-insolvency restructuring law is only marginal regulated from a conflict of laws perspective. The introduction of the restructuring framework has raised the question of whether and how restructuring proceedings from other (EU) countries are recognised in Germany and vice versa. For the German jurisdiction, this question has not yet been completely answered.
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 insolvency 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-operation is often initiated by the insolvency administrators.
See 8.1 Recognition or Relief in Connection with Overseas Proceedings.
Whether and how foreign creditor claims can be structured through a restructuring plan depends on a variety of factors. Key question often is whether the respective claim is subject to German law.
In insolvency 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 law generally recognises judgments and other court rulings issued by a foreign court against the debtor under certain conditions. While the recognition of judgments/court rulings from other EU states is simplified and largely regulated by EU law, there are certain requirements for the recognition of judgments/court rulings from non-EU states, unless recognition and enforcement treaties have been concluded with the respective states which contain special provisions. In summary, the foreign judgment/court ruling must meet the following requirements:
A foreign judgment/court ruling against the debtor may be enforced domestically if the admissibility of enforcement is pronounced by a domestic enforcement judgment. For the issuance of such an enforcement judgment, the foreign judgment must comply with the above mentioned requirements for recognition.
The different types of statutory officers vary depending on the proceedings in which the debtor is involved.
In the event of a formal out-of-court restructuring, depending on the circumstances of the individual case and the chosen procedure, a restructuring moderator (Sanierungsmoderator) or restructuring officer (Restrukturierungsbeauftragter) may be appointed by the restructuring court.
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.
The statutory role, rights and responsibilities vary depending on the scope of the relevant court order. Amongst other obligations, the restructuring officer is obliged by statute to notify the court immediately if he finds circumstances justifying cancellation of the restructuring proceedings. Furthermore, the court may delegate further powers, eg, the authority to examine the debtor’s economic situation and to monitor its management, to the restructuring officer. To fulfil their tasks, the restructuring officer shall be entitled to inspect the books and business records and to demand further information from the debtor.
The main task of the restructuring moderator is to mediate between the debtor and his creditors in bringing about a solution to overcome the economic or financial difficulties. Therefore, the debtor shall allow the moderator to inspect their books and business records and provide them with the requested expedient information. If a restructuring settlement is reached between the debtor and its creditors, it may be confirmed by the competent restructuring court at the debtor's request.
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. They have 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. They will be liable for damages vis-à-vis all parties to the proceedings, if they wrongfully violates his 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. When it comes to appointments regarding formal out-of-court restructurings, the situation is comparable to the above mentioned with a slightly larger impact of the debtor, the creditors and the shareholders on the appointment.
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 a first step, managing directors are obliged to continuously monitor developments that may jeopardise the continued existence of the legal entity. Once 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.
Once formal out-of-court restructuring proceedings have been initiated, the restructuring must be conducted by incumbent management with the diligence of a prudent and conscientious business manager and the interests of the creditors as a whole must be safeguarded.
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. However, certain privileges apply to provisions of a legally confirmed restructuring plan as well as legal acts performed in execution of such a plan.
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.
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.