After many years of declining numbers (with only 13,993 corporate insolvencies in 2021, marking a new low since the Insolvency Code (Insolvenzordnung) came into force in 1999), the number of corporate insolvencies rose again for the first time in 2022 with an increase of 4.3% compared to 2021. With 8,571 corporate insolvencies in the first half of 2023, this trend accelerated, and the number of insolvency cases increased by 20.5% compared to the same period in 2022.

The state support measures in the form of financial aid at the beginning of both the COVID-19 pandemic and the conflict between Ukraine and Russia, as well as the temporary adjustments to the restructuring and insolvency law adopted by the Restructuring and Insolvency Act to Mitigate the Consequences of the Crisis (Sanierungs- und insolvenzrechtliches Krisenfolgenabmilderungsgesetz) (see 2.3 Obligation to Commence Formal Insolvency Proceedings) have successfully prevented a rapid increase in corporate insolvencies, at least to date. However, the last temporary law adjustments will expire at the end of 2023 and the upcoming obligation to repay financial aid used poses major financial challenges for many companies. At the same time, the effects of the COVID-19 pandemic are not yet fully overcome in many economic sectors and German companies are additionally challenged again by external effects. Energy price inflation has hit the German economy hard and led to significant cost increases for companies. Moreover, the fight against inflation and uncertainty are slowing consumption and demand. As part of the fight against inflation, the European Central Bank (ECB) ended its years-long low interest rate policy, which has had a massive impact, especially on companies dependent on borrowed capital. As a result, numerous companies got into difficulties, which is reflected in the increasing insolvency numbers.

In this environment of ongoing economic challenges, self-administrated insolvency proceedings (debtor-in-possession) are increasingly accepted and widespread, especially among larger companies. With the consent of both the creditors and the insolvency court, the company’s management retains the power of disposal over the insolvency assets. Even though their share in the total number of insolvencies has increased slightly in relation to the previous year (2022: 1.9% of all corporate insolvencies; 2021: 1.5%), their share in the total number of insolvencies remains very low. This could be due to the small number of large-scale insolvency proceedings in 2022, as self-administration is predominantly used and useful in such larger cases.

Since the German Corporate Stabilisation 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. Even though the first major restructuring proceedings have already taken place, the number of proceedings remains comparatively low with a total of 27 in 2022 compared to 198 insolvency proceedings in self-administration. Nevertheless, the Restructuring Act is not seen as a failure in large parts of restructuring practice. On the contrary, initial experience shows that the existence of such a procedure as a negotiating lever can increase the willingness to find out-of-court restructuring solutions, so that part of its success can hardly be recorded statistically.

German law provides for both formal proceedings for restructuring outside 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 Stabilisation 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 Stabilisation 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, to restructure via a stabilisation and restructuring framework that 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 relieve the corporation from the need to reach the unanimous consent of all affected stakeholders. This need for unanimity was and is one of the downsides of informal out-of-court restructurings. 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).

Insolvency Law

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 Stabilisation 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, but the business may nevertheless be sold to an investor by way of an asset deal as part of such 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.

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 application 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 twelve 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 event, no later than three weeks from the occurrence of illiquidity or no later than six weeks from the occurrence of over-indebtedness, respectively.

Non-compliance with the filing obligations can lead to criminal liability and personal liability of the managing directors. See 10. Duties and Personal Liability of Directors and Officers of Financially Troubled Companies.

In order to prevent a rapid increase in corporate insolvencies solely due to short-term economic shocks, the legislator temporarily adjusted the regulations of the restructuring and insolvency law at the beginning of the COVID-19 pandemic by enacting the Restructuring and Insolvency Act to Mitigate the Consequences of the Crisis.

These adjustments include in particular a temporary suspension of the filing obligation due to illiquidity (already expired) and the extension of the deadline for filing an insolvency petition due to over-indebtedness from six to eight weeks. In addition, the long-term planning difficulties were mitigated by shortening the forecast period of the aforementioned business plan from twelve to four months. However, the last adjustments expire at the end of 2023.

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-month forecast period is to be taken as a basis. In addition, the enactment of the German Corporate Stabilisation 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) as well as the existence of a sufficient insolvency estate to pay at least the costs of the insolvency proceedings are required.

German law provides for special rules in case of an insolvency of specifically regulated entities, eg, insurance companies (Sections 311 et seq of the 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 Stabilisation 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 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 Stabilisation and Restructuring Act. In so far as the debtor is not willing or able to take measures under the German Corporate Stabilisation 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 extent 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 necessary 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 Stabilisation 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 (see 11. Transfers/Transactions That May Be Set Aside) 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. A tortious act may be the granting of new money by already committed lenders if this is intended to delay the insolvency until after the repayment of the original loan.

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 intercreditor 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 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 following may be secured 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, bank accounts and 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

The following may be secured 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 lien on a property 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 (see 2.3 Obligation to Commence Formal Insolvency Proceedings).

Once a formal out-of-court restructuring has been initiated, the enforcement of 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 (Insolvenzverwalter; see 9. Trustees/Receivers/Statutory Officers). Claims of such secured creditors will be satisfied by preferential satisfaction, ie, out of the proceeds of the realisation of the respective secured assets.

The representation of the common interests of the secured creditors in the proceedings is ensured, in addition to the rights described (see 4.2 Rights and Remedies), by the fact that a representative of the secured creditors is required by law when a creditors’ committee is appointed (see 6.3 Roles of Creditors). 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 (see 11. Transfers/Transactions That May Be Set Aside) such financing in subsequent insolvency proceedings is widely excluded. Furthermore, secured creditors of movable assets (see 4.1 Liens/Security) 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 estate (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 (see 9. Trustees/Receivers/Statutory Officers).
• 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 receivables that are economically equivalent to such a loan are subordinated by law (Section 39 of the German Insolvency Act) – this also applies to claims which were subordinated by individual agreement.
• Shareholders: besides the aforementioned shareholder loans, any theoretically remaining surplus out of the insolvency estate after satisfaction of all of the aforementioned claims will be distributed to the shareholders.

In Germany, most trade creditors are secured by retention-of-title rights (see 4.2 Rights and Remedies). 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.

From 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 Stabilisation 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 receives 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 becomes 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 co-ordination 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 enable flexible restructuring of a business. Like the restructuring plan, the insolvency plan mainly consists of two parts: a descriptive and a constructive part. In the descriptive part, 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 a liquidation scenario within a regular insolvency proceeding (see 7.1 Types of Voluntary/Involuntary 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 creditors’ 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; see 6.4 Claims of Dissenting Creditors). 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 becomes legally binding and effective.

Timing and objections

The timing of an insolvency plan depends on the complexity of the debtor’s business 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; see 9. Trustees/Receivers/Statutory Officers) to support and supervise incumbent management subject to certain conditions. Eligibility for appointment requires a natural person (ie, no legal entity) qualified as attorney, public accountant, tax consultant or similar paired with in-depth restructuring experience.

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 no longer possible. In order to safeguard the equal satisfaction of creditors in the preliminary stage of the proceedings, a court order prohibiting any enforcement actions by single creditors may avoid any detriment to the financial status of the debtor and protect the debtor’s ongoing business.

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; see 9. Trustees/Receivers/Statutory Officers) 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 (see 4.2 Rights and Remedies), restructuring creditors and subordinated restructuring creditors (ie, creditors who would be insolvency creditors or subordinated insolvency creditors in the event of the opening of insolvency proceedings, see 5.1 Differing Rights and Priorities), shareholders and creditors from intercompany third-party securities (see 6.13 Non-debtor Parties). Within each group, equal rights are to be offered to all affected stakeholders.

In comprehensive restructuring plan proceedings, it is within the court’s discretion whether to establish a creditors’ advisory council (Gläubigerbeirat). 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.

Insolvency Proceedings

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 claims;
• 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 preferential 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 mentioned (see 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:

• the members of such group are not expected to be worse off as a result of the restructuring plan than they would be in the absence of a 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 affected creditors, a reasonable participation as laid down in the second bullet point above is given if under the plan:

• no other affected creditor will receive economic values exceeding the full amount of its claim;
• neither an affected creditor with a lower-ranking claim in hypothetical insolvency proceedings, compared to the creditors forming its group, nor the debtor nor a person holding the debtor’s shares receives an economic value not fully compensated by performance in favour of the debtor; and
• no affected creditor to be satisfied on an equal footing with the creditors forming its group in hypothetical insolvency proceedings 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 affected creditor receives economic benefits exceeding the full amount of its claim; and
• subject to certain circumstances, no shareholder who, in the absence of a plan, would be treated as member of the group retains any economic value.

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 co-operation 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 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, see 4.2 Rights and Remedies).

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, suppliers 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 competent 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 the restructuring and insolvency plan proceedings now allow interference 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:

• 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 (see 11. Transfers/Transactions That May Be Set Aside); 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 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`s assets will be liquidated. The objective of liquidation insolvency proceedings is to monetise the debtor’s assets and to equally distribute the proceeds (after deduction of costs and preferential rights) to all creditors. The sale can take place either by 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 (see 2.3 Obligation to Commence Formal Insolvency Proceedings) 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 preliminary 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 marginally 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 centre of main interest (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 (ordre public).

The opening of foreign insolvency proceedings outside the EU member states is also generally recognised. This does not apply if the courts of the state opening the proceedings do not have jurisdiction under German law or if such recognition leads to a result which is manifestly incompatible with fundamental principles of German law (ordre public).

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. The 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:

• it must be a decision on the merits;
• it must be valid and legally binding;
• it must be subject to the jurisdiction of the state in which the court is located and the court must have international jurisdiction;
• the initiation of the original proceedings must meet certain requirements;
• no domestic or foreign judgment may contradict the judgment;
• no domestic proceedings in the same matter may be pending;
• the judgment must not violate the German fundamental principles of German law (ordre public); and
• enforcement of a German judgment in the state whose judgment is to be enforced in Germany does not encounter significantly greater difficulties than the enforcement of this judgment in Germany.

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 (Insolvenzverwalter) as the responsible person within formal insolvency proceedings and plan proceedings without self-administration. Furthermore, the creditors’ trustee (Sachwalter) supervises the debtor in self-administration proceedings.

Restructuring Officer

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 they find circumstances justifying cancellation of the restructuring proceedings (inter alia, if the debtor has filed an insolvency petition or an obligation to file a petition arises, see 2.3 Obligation to Commence Formal Insolvency 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.

Restructuring Moderator

The main task of the restructuring moderator is to mediate between the debtor and its creditors in bringing about a solution to overcome the economic or financial difficulties. Therefore, the debtor shall allow the moderator to inspect its 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.

Insolvency Administrator

The insolvency administrator’s main task is to determine the insolvency estate, liquidate the 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. The debtor’s economic situation will be examined and a plan developed 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 (see 11. Transfers/Transactions That May Be Set Aside). The insolvency administrator is personally liable for damages vis-à-vis all parties to the proceedings, if wrongfully violating duties owed to them.

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, these circumstances shall be disclosed 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. Like the insolvency administrator, the creditors’ trustee is responsible for enforcing claw-back claims (see 11. Transfers/Transactions That May Be Set Aside) and is also personally liable for damages vis-à-vis all parties to the proceedings, if wrongfully violating duties owed to them.

Since the access to the insolvency administrator’s office and the other offices mentioned above (see 9.1 Types of Statutory Officers) is not clearly regulated, there is no specific professional education for access to and exercise of these offices. 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. Experience with insolvency proceedings shows that it is mainly lawyers specialising in insolvency law who are appointed as insolvency administrators or creditors’ trustees. Whether this appointment practice will also be applied by the courts in the restructuring proceedings for the appointment of the restructuring officer and the restructuring moderator remains to be seen in view of the small number of proceedings to date. The selection and appointment of the insolvency administrator and creditors’ trustee 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 in case of illiquidity and within six weeks in case of over-indebtedness. During the maximum period of three weeks or six weeks, respectively, 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. As negotiations on a restructuring of the debtor’s business are expected to be more complex and time intensive in the current tense economic situation, the legislator temporarily extended the application deadline for over-indebtedness from six to eight weeks within the Restructuring and Insolvency Act to Mitigate the Consequences of the Crisis (effective until 31 December 2023) (see 2.3 Obligation to Commence Formal Insolvency Proceedings).

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 person (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, he 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, ie, a legal act which granted or enabled a creditor a security or satisfaction to which he was entitled (Section 130, German Insolvency Act): congruent coverages 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, ie, a legal act which granted or enabled a creditor a security or satisfaction to which he was not entitled or to which he was not entitled in the manner or at the time (Section 131, German Insolvency Act): incongruent coverages 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 Paragraph 1 Number 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 Paragraph 1 Number 2, German Insolvency Act): if a shareholder loan (or similar claim) has been repaid by the debtor.

Having successively expanded the claw-back provisions over the last ten years, the German Federal Supreme Court has recently raised the requirements again, in particular regarding proof of the debtor’s intention to disadvantage its creditors. Another possible defence and exception to the claw-back provisions is the exception for so-called cash transactions (Section 142, German Insolvency Act). The conditions for a cash transaction are met 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 with the intention to dishonestly cause detriment to the creditors as well as for shareholder loan and shareholder loan security coverage.

Moreover, certain privileges apply where a new financing (see 3.3 New Money) is granted in execution of a court-confirmed restructuring plan, eg, a far-reaching exclusion of the right to contest such financing in subsequent insolvency proceedings. The legislator also introduced far-reaching temporary privileges with the Restructuring and Insolvency Act to Mitigate the Consequences of the Crisis, which, together with the other measures (see 2.3 Obligation to Commence Formal Insolvency Proceedings), should ensure a legally secure continuation of business and thereby prevent a rapid increase in corporate insolvencies.

The insolvency administrator/creditors’ trustee is entitled to claim for claw-back.