Bankruptcy Procedures in Germany

Insolvency in Germany

The Insolvency Law was first adopted in Germany in 1999 and has undergone through changes during the last years. The German Insolvency Code was last modified in 2012 when the Act for the Further Facilitation of the Restructuring of Companies (Erleichterung der Sanierung von Unternehmen, ESUG) was adopted. Bankruptcy procedures can be initiated against both German companies and individuals.

Changes in the new Insolvency Code in Germany

The new German Insolvency Code comes as an improvement to the previous Bankruptcy Code (Insolvenzordnung, InsO) and it is meant to protect the value of a company, to allow the insolvency process to be overseen by a court and to involve trade unions and labor councils in the restructuring process of the company. These changes are meant to protect companies’ interests and rights. They also allow companies to choose the creditors and the creditors to choose the trustees. The creditors will be introduced in the bankruptcy proceedings earlier than they were according to the previous Bankruptcy Code. The new Insolvency Act in Germany permits employees’ representatives to be in the creditors’ committee.

The insolvency stages in Germany

There are two stages of insolvency proceedings in Germany: the preliminary and the final insolvency stage. Both stages will be supervised by the local German Insolvency Court. The first step towards bankruptcy is to establish the company is in an insolvency situation that can be determined when the court ascertains the company is unable to pay its debts, it is over-indebted or if a company’s assets cannot cover its debts. In this case the management, the shareholders or even the creditors must file an action for bankruptcy. The next step will be for the Insolvency Court to appoint a creditors’ committee and an administrator that will warrant the company’s assets and to draft the reports based on which the court will decide to start the final bankruptcy proceedings. The final bankruptcy proceedings will be declared if the administrator will demonstrate the grounds for insolvency are fulfilled and the company’s assets can at least cover the costs of the bankruptcy procedure.

The insolvency plan in Germany

The new Bankruptcy Act in Germany allows companies to try and protect the business if an economic evaluation proves that the company can be restructured.  The insolvency plan (Insolvenzplan) can be based on any provisions of the German Commercial Code or can regard the assets, the shares or other insolvency claims. The plan must be submitted to the vote and approval of both creditors and shareholders that must be divided into separate groups. The plan will be approved only if a majority of each group decides so. The insolvency plan was added to the new Code to stop shareholders that would previously oppose to share transfer to third parties.

Self-administration in bankruptcy cases in Germany

The new German Insolvency Code also allows self-administration (Eigenverwaltung) as a bankruptcy procedure. This way the company’s management will conduct the administration of the assets following the insolvency procedures. However, the court will nominate an insolvency trustee (Sachwalter) that will oversee and advise the administration of the company. The motion for self-administration must be filed within the first stage for insolvency for the court to be able to appoint the trustee instead of the administrator. Self-administration can also be incorporated in the insolvency plan, a procedure called an “umbrella proceeding”.

Our German lawyers can guide you through bankruptcy procedure or can provide you legal assistance in litigation cases. You can also contact us for any other details about the Corporate Law in Germany.