What does „insolvency“ mean?
When we talk about insolvency, we generally intend the bankruptcy of a natural or legal person. Insolvency is regulated by the Bankruptcy Regulation (InsO in German Law). The purpose of insolvency proceedings is to meet all the expenses that the insolvent owes to the creditor, cooperatively and evenly. The ordinary process normally leads to a sort of “total enforcement” of the debtor concerned; this procedure is intended to please all the creditors involved, and avoid the full refund of someone and the partial (or even inexistent) refund of others. In addition, the Insolvency Code is designed to allow anyone who declared bankruptcy (despite their honest efforts), to have a new start by exonerating their remaining liabilities.
How does a regular insolvency proceedings works?
A regular proceeding applies to a legal person/entity. It can apply to an individual person, who was self-employed at the time of declaration of bankruptcy. Individuals who were formerly self-employed fall under the regulation of regular insolvency proceedings. According to § 304 InsO (insolvency act), the procedure is manageable only if the creditors involved at the moment of declaration of bankruptcy are less than 20.
These principles also apply in case of “lifting/piercing of the corporate veil”: this basically means that the rights and liabilities of the single shareholders are applied directly to the corporation, even if this latter is generally treated as a separate legal person.
The implementation of the insolvency proceedings initially requires a corresponding request to the competent insolvency court ((§ 13 InsO), either from
- The creditor (external application)
- Or from the debtor himself (personal application)
An insolvency procedure is not initiated independently by the court. Generally, each creditor can submit an application for the start of an insolvency procedure for the following reasons (§14 InsO):
- has a legal interest in opening insolvency proceedings
- is requested to
- has the grounds to commence a proceeding
There is no legal interest, if the position of the application for insolvency serves only to exert pressure on the debtor.
The reasons for the commencement of an insolvency proceeding (§ 17 InsO) normally depends on the impossibility of payment of the debtor. If the debtor is a legal person, an extern application can also be based on (§19 InsO) the over-indebtedness of the shareholder. The so-called prima facie evidence shall be taken into consideration in the case of unsuccessful foreclosure attempt made by the debtor, such as an ineffective certificates issued by the competent court bailiff. However, other circumstances or an adequate affidavit of the creditor as applicant may also be sufficient in individual cases.
If an external application does not comply with these conditions, the insolvency court can claim the possibility of either remedying the deficiency or withdrawing the insolvency application. Generally, each debtor can lodge an application for insolvency proceedings directly by the insolvency court.
In addition to the initial application of the
- Insolvency (§ 17 InsO)
- Over-indebtedness ( §19 InsO)
You can also consider filing an application for
- Impending insolvency (§18 InsO)
A particular prima facie evidence for an initial application is usually not required, but a ground for commencement should be presented conclusively and comprehensively within the framework of the individual application.
Exception applies in case a GmbH has several managing directors. It is necessary that either all the managing directors submit the opening of the insolvency procedure or the grounds for commencement have to be made credible by the managing director.
If the individual application does not satisfy the conditions indicated, the debtor also receives the possibility of remedying his deficiencies from the insolvency court. If the debtor does not comply, the application is considered inadmissible and the insolvency procedure will be rejected.
The insolvency ordinance only offers the possibility to submit an application for insolvency. Particular obligations exist for:
- Managing directors of a GmbH (§ 64 Abs. 1 GmbHGG, Law on limited liability companies),
- Elected board members of an association (§ 42 para. BGB, German Civil Code).
Other obligation applies in this case. If a person decides to omit the actual bankruptcy of the company, the former may be liable to prosecution and may be subject to personal liability. For private individuals, there is no legal obligation to file insolvency. However, it is definitely recommended to apply for bankruptcy in order to obtain a residual debt´s relief (Section 287 (1) InsO).
Initial insolvency procedure
The insolvency court will firstly check the admissibility of the claim, before taking any decision on an initial application from a creditor or a debtor. If an admissible application is submitted by a creditor, the debtor will be subsequently questioned (§ 14. Abs. 2 InsO). At the same time, the debtor will be informed about any relevant fact regarding the insolvency proceeding; as far as concerned a private individual, he can only obtain residual debts´relief if he personally applies for the opening of the insolvency procedure against his assets (§ 20 para InsO). If the insolvency court does not provide sufficient information, it is still possible for the debtor to apply for a request of residual debt discharge. If the initial application is admissible, the insolvency court is obliged to comply with the law: the insolvency court determined ex officio all relevant circumstances.
At this stage will be examined whether there is an already existent application and if the costs for the implementation of the procedure are covered. For this purpose, the insolvency court can decide to hear witnesses and convene experts to clarify the facts (§ 5 InsO). In order to prevent disadvantageous changes in the debtor´s assets, the insolvency court may order a security measure. This is usually required, for example, if assets (bank deposits, land ownership or other capitals) are still available, the insolvent company has not closed and employees are still employed; a temporary insolvency administrator is usually appointed in these cases.
This also makes it possible to secure employees' wage demands. These are usually secured by the insolvency allowance of the Federal Agency for Labor (BA). In the case of wage arrears from the last three months prior to the opening of the insolvency proceedings, the Federal Agency for Labour will pay the insolvency allowances in net amount.
This is only paid after the commencement of the insolvency proceeding (or after rejecting the application due to a lack of assets). The temporary insolvency administrator can, however, work towards pre-financing by taking a corresponding credit secured by the later payment of the insolvency deposit. The temporary insolvency administrator can pay the wages of the employee from the taken loan, and so at least carry the enterprise forward. At the end of the investigation, will be decide if the insolvency proceeding can be open or either rejected. The insolvency proceedings on the assets of a debtor can be opened, if the debtor is aware of the reason of bankruptcy (illiquidity, pending insolvency or over indebtedness) and the costs of the proceedings are totally covered.
The costs of the procedure depend on the individual proceeding. If sufficient assets are still available, the procedure can be opened. If the funds are not sufficient to meet the expected expenses of the procedure, the insolvency application will be rejected for lack of funds (§ 26 InsO).
In the case of private individual a rejection for lack of assets is not possible, if the costs of the proceedings will be deferred to the debtor (§ 26 para. 1 s. 2 InsO i.V.m §4a InsO).
Opening of an insolvency procedure
If there are enough reasons to open an insolvency procedure and the costs of the proceedings are covered (or will be deferred), the insolvency proceedings will be carried out on the assets of the debtor (§ 27 InsO). An insolvency administrator will be nominated and he will be responsible of the assets of the debtor (§ 80 para. 1 InsO). One of the main tasks of the insolvency administrator is to manage the insolvency estate; this can be carried out by liquidation, for example, or by reorganization of the company.
Those insolvency creditors, who, at the time of opening of the insolvency procedure, had assets requirements against the debtor (§ 38 InsO), report their claim to the insolvency administrator on the insolvency table. The day of examination (§176 InsO), the declared claims will be analyzed and, if no objection is made, the case will be recorder on the insolvency table (§ 178 InsO). These claims will be then taken through the further procedure.
The creditors will receive the so-called insolvency dividend after the reutilization of the debt-relevant assets, on the basis of their claims, so far as the assets to be recovered will be available. The creditor will be therefore compensated with at least a partial portion of his claim.
In addition to the insolvency creditors, who are generally only partially compensated for their claims, there are other groups of creditors whose claims are particularly secured, and this entitle them to a full or almost complete compensation.
If the purpose of the insolvency proceedings is achieved, the procedure will be set aside (§ 200 InsO).
Creditors whose claims have not been fully offset in the insolvency proceedings, can now theoretically claim their remaining request against the debtor without restrictions (§ 201 para. 2 InsO). However, legal entities are, as a matter of principle, deleted after the termination of the insolvency proceedings. In case of natural persons, the residual-debt exemption proceedings (§ 286 ff. InsO) is actually largely applied, and aims to free the debtor from remaining liabilities which have not been repaid during the insolvency proceedings .
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