Germany: Restructuring & Insolvency

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This country-specific Q&A provides an overview of the legal framework and key issues surrounding restructuring and insolvency in Germany.

This Q&A is part of the global guide to Restructuring & Insolvency.

For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/restructuring-insolvency/

  1. What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?

    Security over immovable property:

    • A mortgage (Hypothek), a type of security which exists only as accessory to the secured debt.
    • Land charges (Grundschulden), more common than mortgages, are independent from the secured debt. How they are used, depends on the security agreement that is drafted to complement the land charge.

    Both are valid only if registered in the land register (Grundbuch); they normally require a notarized authorization of the owner of the land and are commonly created by a notarial deed in which the debtor submits to immediate enforcement in case of default, because otherwise the creditor would need to obtain a court order to initiate the public auction process.

    Security over movable property:

    • Security transfer of ownership (Sicherungsübereignung) is the most common collateral over movables, because the transferor may retain the actual possession of the movable.
    • Chattel pledge over movables is less common because it requires the pledgor to deliver the actual possession of the movable to the pledgee.
    • Retention of title as security for the claims of the seller.

    Moreover, claims may be used as collateral by assigning them as security (Sicherungsabtretung). Security assignments may be made in respect of specific claims against specific third parties or all existing and future claims against all third parties (global assignment). Claims may also be pledged, but security assignments are more common, because, unlike pledges, security assignments are valid without being notified to the third party debtor.

    While none of these security interests over movables and claims requires any specific formalities, in practice such collateral is granted in a written agreement.

    Shares in companies and other transferable rights may be pledged. Such pledge requires the same formalities as a transfer of the relevant right. Hence, a pledge of shares in a German limited liability company (GmbH) is only valid if notarized.

  2. What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?

    Mortgages and land charges can only be enforced:

    • by a sale of the real estate in a public auction (Zwangsversteigerung) or
    • by being placed under forced administration (Zwangsverwaltung), if used as a rental property, in which case a property manager is appointed by the court and the creditor receives the rental proceeds less the costs of managing the property.

    Forced administration and auction proceedings can be used concurrently.

    During preliminary insolvency proceedings (Question 4), the court can issue orders prohibiting secured creditors from realising their security over movable property which is in the debtor’s possession.

    After (final) insolvency proceedings have been opened (Question 4), only the insolvency administrator has the right

    • to sell encumbered movable property which is in his possession and
    • to collect claims assigned as security (but not pledged claims),

    in which case the estate is entitled to a share of the proceeds, as a rule, 9 per cent.; if the claims collected by the insolvency administrator represent significant amounts, the creditor should scrutinise the realisation process and the actual costs involved. In practice, quite often the secured creditors and the administrator enter into a sales agreement, thus avoiding cost intensive and long lasting court procedures. Creditors are hesitant to enforce their rights directly in such situations.

    A retention of title (Eigentumsvorbehalt) gives the holder the right to separate his property from the estate without paying any fees to the insolvency administrator. However, separation usually cannot be enforced until after the first creditors’ meeting, which is scheduled by the court (Sec. 107 Insolvency Code). The insolvency administrator or debtor in possession may also pay the contract price and obtain title to the goods.

    During insolvency proceedings, if pledged movables are in the possession of the pledgee, the insolvency administrator is generally not entitled to realise the pledged collateral and the estate therefore does not receive the 9 per cent. fee.

  3. What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?

    There are three independent tests for insolvency:

    • Illiquidity (Zahlungsunfähigkeit) is the debtor's inability to meet its payment obligations as and when due. A debtor is generally assumed to be illiquid if he has ceased to make payments. Illiquidity cannot be presumed if there is only a temporary delay in payments. Only debt that is being seriously pursued by the creditor (ernstliches Einfordern) must be considered for the purposes of determining illiquidity.
    • A company is overindebted (überschuldet) if its assets (on market value basis) no longer cover its liabilities, unless the continuation of the company’s business is predominantly likely, which requires sufficient funds to carry on its business within the present and the following business year. If this prognosis is negative, overindebtedness is determined solely on the basis of a special balance sheet (Überschuldungsstatus).
    • Impending illiquidity (drohende Zahlungsunfähigkeit) which is defined as the debtor not being able to meet its payment obligations as and when they will become due in the future.

    In case of illiquidity or overindebtedness, managing directors of limited liability companies, corporations and partnerships ultimately having limited liability must file for insolvency at the latest within three weeks. This three-week period, may only be fully used, if there is a well-founded expectation that within it illiquidity and overindebtedness can be cured. Managing directors who intentionally or negligently breach this duty face civil liability to the company and its creditors for any losses which these have incurred due to the delayed petition and criminal liability. These severe consequences are a serious threat for managing directors in distressed situations.

    In case of impending illiquidity, management has a right, but not a duty, to file for insolvency.

  4. What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and / or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?

    German insolvency law knows only a single, uniform procedure (Einheitsverfahren), so that when proceedings are commenced their result (restructuring or liquidation) is open. There are, however, two procedural phases (see below) and certain variations available designed to facilitate restructurings (see question 7).

    Preliminary insolvency proceedings
    The petition itself does not commence insolvency proceedings. Preliminary insolvency proceedings are commenced by court order, pursuant to the petition by the debtor or one of its creditors, to enable the insolvency court to gather all the information required to determine whether the prerequisites for the opening of insolvency proceedings are met. It may take any measures necessary to protect the creditors against any detrimental changes with regard to the debtor's assets until a decision with respect to the petition has been made. Those measures usually include the appointment of a preliminary administrator (vorläufiger Insolvenzverwalter), an order preventing the debtor from transferring assets and/or stipulating that transfers are only effective with the consent of the preliminary administrator.

    The court generally allows the preliminary administrator four to eight weeks to submit a written report, including (i) a high level description of the company and its activities, (ii) a statement as to whether an insolvency event has occurred, (iii) a statement as to whether the company can be restructured as a going concern or whether it should be liquidated and (iv) a statement as to whether there are sufficient funds to cover the cost of the insolvency proceeding. In practice, the preliminary administrator is responsible for running the business as a going concern and not only establishing whether or not the company can be restructured but also laying the groundwork for any possible restructuring. He or she needs to co-operate with the managing director who regularly remains in charge, both regularly form a kind of a tandem.

    Preliminary proceedings generally take up to three months because the preliminary insolvency administrator will often utilise the funding provided by the State to cover the employees’ wages during a three month period preceding the opening of insolvency proceedings to increase the chances of rescuing the company’s business. The preliminary proceedings end upon the issue of the court order opening (standard) insolvency proceedings.

    Standard Insolvency Proceedings (liquidation)
    Once insolvency proceedings are opened, the court appoints an insolvency administrator who normally will be the same person as the preliminary administrator. The authority to manage and dispose of the estate’s assets becomes exclusively vested in the administrator (Sec. 80 Insolvency Code). Dispositions made by the debtor’s management after the opening of proceedings are void.

    The creditors have significant influence. Their assembly or committee (if appointed) is vested with important rights, including the approval of (i) the appointment of the administrator and (ii) the sale of the business as a whole, of significant assets or shareholdings belonging to the estate.

    The court is not permitted to direct the administrator in the execution of his duties and does not approve sales or other transactions.

    The order opening insolvency proceedings will include the date for the first creditors’ assembly, usually six to eight weeks thereafter. In the preliminary proceedings, it may already have been determined that the company cannot survive as a going concern. If the first creditors’ assembly agrees that this course should be pursued, the insolvency administrator liquidates the company’s assets and, usually after a period of several years, sets a date with the court for the final hearing, following which the unsecured creditors receive a dividend of the liquidation proceeds.

    The following restructuring procedures (see question 7):

    • Self-administration Proceedings
    • Protective Shield Proceedings (Schutzschirmverfahren)
    • Insolvency Plan
  5. How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?

    It is generally distinguished between the

    • costs of the proceedings,
    • other liabilities of the estate (sonstige Masseverbindlichkeiten), ie any liabilities incurred by the (preliminary) insolvency administrator in the administration of the estate and
    • general or secured insolvency claims.

    General insolvency claims are those existing prior to the opening of the insolvency proceedings. They receive a dividend of the proceeds from the realisation of the estate’s assets after all costs of the proceedings and all liabilities of the estate have been fully satisfied.

    Secured claims are general insolvency claims, but the security interest will entitle the creditor to separate satisfaction from the proceeds of the realisation of the collateral. To the extent that the secured claim is not satisfied in full by the realisation of the collateral, the secured creditor is entitled to a dividend pari passu with the other general (unsecured) insolvency claims in respect of the balance.

    Certain claims are subordinated by law (Sec. 39 Insolvency Code), including:

    1. interest accrued after insolvency proceedings have been opened;
    2. costs incurred in asserting claims in the insolvency proceedings;
    3. fines and penalties in criminal and administrative proceedings;
    4. claims to gifts promised by the debtor; and
    5. shareholder loans.

    With the exception of loans granted under an insolvency plan, super priority and preferred claims are foreign to German insolvency law. Claims of employees are general insolvency claims.

  6. Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?

    German insolvency law entitles an insolvency administrator or trustee in self-administration cases to claw-back certain transactions made by the debtor prior to insolvency.

    The insolvency administrator is only able to challenge transactions that prejudice the creditors as a whole by reducing the insolvency estate. Furthermore, at least one or more of the specific statutory requirements set out in Sec. 130 et seq Insolvency Code must be met in order to challenge a transaction.

    Transactions may only be avoided if they were effected during certain “hardening periods”, i.e. certain periods before insolvency proceedings were opened. The respective hardening period varies between three months prior to the filing of an insolvency petition and up to ten years before filing, dependent upon the specific grounds for the challenge.

    Cash transactions (Bargeschäfte), however, provide a notable exception for certain transactions that could otherwise be successfully challenged: Transaction under which (i) the consideration received is equivalent to the consideration given and (ii) the time span between both is no longer than (in most cases) two weeks are generally not subject to the avoidance rules because they are not detrimental to the estate (Sec. 142 Insolvency Code).

    The terms congruent acts (kongruente Deckungen) and incongruent acts (inkongruente Deckungen) generally refer to conveyances of parts of the debtor’s estate during the three month hardening period prior to the insolvency petition or thereafter up until the insolvency proceedings are opened. Under German law, insolvency proceedings do not automatically commence with filing (see Question 4), however, transfers made in the period between filing and the commencement of proceedings are liable to avoidance by the insolvency administrator.

    An act is generally termed to be congruent (Sec. 130 Insolvency Code) if the creditor receives payment on his claim or security for his claim in strict accordance with the existing contractual obligations. On the other hand, a conveyance is generally deemed incongruent (Sec. 131 Insolvency Code) if the creditor receives payment or collateral in a manner other than that contractually specified (eg, security instead of payment), at a point in time other than specified (eg, before the payment was due), or if the creditor did not have a right to demand satisfaction at all (eg, the claim was time barred).

    Congruent acts during the hardening period may only be challenged if the creditor was aware that the debtor was unable to pay its debts as they fell due at the time of the transactions. If the transaction took place after filing, then it suffices that the creditor was aware of either (i) the filing or (ii) the debtor’s inability to pay its debts as they fell due. The cash transactions rules are applicable. Accordingly, when restructuring financing is provided, collateral should be taken in a timely fashion and only in respect of any new money.

    Any transaction which is an incongruent act and is concluded in the month prior to the filing for insolvency is liable to be avoided by the insolvency administrator. Incongruent acts concluded during the three month hardening period prior to filing for insolvency, but not in the month prior to filing, are liable to be avoided if either (i) the debtor was unable to pay its debts as they fell due at the time of the transaction or (ii) the creditor knew that the transaction would be prejudicial to the creditors as a whole. The cash transaction rules are not applicable to incongruent acts.

    An insolvency administrator can also void a transaction as a “deliberate impairment” (Sec. 133 InsO) by alleging that the transaction was made with the intent of prejudicing creditors by reducing the value of the estate. Such fraudulent conveyances that take place within the 10 years (!) preceding filing for insolvency are liable to claw back. The cash transactions rules do not apply, as the reason for avoidance is the debtor’s intent to defraud. For such challenge (i) the debtor must have intended to prejudice its creditors and (ii) the transaction counterparty must have had knowledge of such intent. Such knowledge is deemed to exist if the counterparty knew that there was a threat of the debtor becoming unable to pay its debts as they became due and that the transfer would be detrimental to the creditors. For the debtor to have the requisite intent it must be at least reckless as to whether the transaction is to the creditors’ detriment. In litigious cases, the burden of proof regarding such circumstances generally lies with the insolvency administrator. The provision has recently gained more practical relevance due to an extensive interpretation by the German Federal Supreme Court (Bundesgerichtshof). As actual intent is difficult for an insolvency administrator to prove, various circumstantial evidence will be considered by German courts in determining a debtor’s intent to prejudice its creditors. As the 10 year period is deemed to be too long, the German legislator has most recently started an initiative to reduce this time frame to four years only. It is likely that the relevant provision will be changed in 2017.

    Gratuitous transfers if they take place within the four years preceding filing for insolvency can be clawed back by the insolvency administrator.

    Where a repayment is made in respect of a debt owed to a shareholder and that payment is made in the year prior to filing for insolvency, it can be clawed back under Sec. 135 Insolvency Code. Where security has been granted in respect of such debt, it can be avoided if it was granted in the decade prior to filing for insolvency.

  7. What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play?

    German insolvency law knows only a single, uniform procedure (Einheitsverfahren), of which the below procedures are only variations designed to facilitate restructurings (see question 4).

    Self-administration Proceedings
    If certain conditions are met, the insolvency court may allow the debtor's management to run the business. The management is supervised by a trustee (Sachwalter) charged with protecting the creditors’ interests. If the creditors’ interests are negatively affected by management’s actions, the insolvency court may rescind the self-administration order and appoint an insolvency administrator.

    The opening of insolvency proceedings will nearly always be preceded by preliminary proceedings (see question 4), which may be conducted as preliminary self-administration proceedings (vorläufige Eigenverwaltung) with a preliminary trustee (vorläufiger Sachwalter) being appointed instead of a preliminary insolvency administrator.

    Protective Shield Proceedings (Schutzschirmverfahren)
    Introduced in 2012 to encourage a rescue culture, they constitute a variation on preliminary insolvency proceedings, combining preliminary self-administration and a stay on execution by creditors. They are designed to permit the debtor to draft an insolvency plan and find their conclusion in opened insolvency proceedings (see question 4), normally as self-administration proceedings, which are necessary to adopt and implement an insolvency plan.

    Insolvency Plan
    Both the debtor’s management and the insolvency administrator, if standard insolvency proceedings (see question 4) have been opened and an insolvency administrator has been appointed, may initiate an insolvency plan. In such a plan the distribution of the insolvency estate as well as the liability of the debtor may be treated differently than laid out in the Insolvency Code. Submission and implementation of an insolvency plan requires that insolvency proceedings have been commenced, but pre-packaged plans can be submitted with the insolvency filing.

    The plan must be approved by the different creditor groups with majority consent being required in each group. The composition of these groups is defined by the plan, but the court may reject the draft plan if the creditors have not been divided into reasonable groups.

    At least secured creditors, unsecured creditors and subordinated creditors, if their claims are not waived, and the shareholders must form separate groups to the extent that their rights are infringed upon by the stipulations in the insolvency plan. In practice, separate groups are often contemplated for employees, the pension insurance association and/or the tax authorities; creditors with different levels of seniority may be placed in different groups (Sec. 222 Insolvency Code).

    The vote of a dissenting group may be crammed down and the plan deemed to be accepted, if such group

    1. does not receive less than it would in straight liquidation;
    2. receives appropriate benefit from the plan; and

    the majority of the groups has accepted the plan (Sec. 245 Insolvency Code).

    After the plan has been accepted and if all procedural requirements are met, the court has to issue its final approval.

  8. Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?

    After an insolvency petition has been filed, financing during preliminary proceedings is most often limited to a pre financing of the employees’ wages in order to continue business. Such financing is secured by the employees’ claims against the Federal Employment Agency, because the State will – if certain requirements are met – substitute their salaries up to a threshold amount for a maximum period of three months before insolvency proceedings are opened. The employees’ substituted claims are assigned to the State by operation of law.

    If during (final) insolvency proceedings the administrator (or the debtor in self-administration) enters into a loan agreement and receives the loan, its repayment constitutes a liability of the estate, ranking after the court costs and the administrator’s fees, but ahead of the claims of unsecured creditors and must be paid in full, before unsecured creditors (other than those entitled to separate satisfaction) receive a dividend.

    Further, an insolvency plan can stipulate that financing granted during the supervision period after an insolvency plan has been confirmed by the court shall have super priority status if the rescue fails and new insolvency proceedings are opened (Sec. 264 Insolvency Code).

  9. How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any an ability for either party to disclaim the contract?

    As from the opening of insolvency proceedings, creditors are prevented from enforcing their contractual claims.

    In respect of a mutual contract which is not or not completely performed by the debtor and its counterparty when the insolvency proceedings are opened, the insolvency administrator has the option to perform such contract and claim the counterparty's performance (Sec. 103 Insolvency Act). If the administrator refuses to perform such contract, the counterparty is entitled to claims for non-performance only as an insolvency creditor. The counterparty may request the administrator to opt for performance or non-performance, in which case the administrator must make this decision without undue delay; otherwise, performance may no longer be requested.

    While provisions entitling the debtor’s counterparty to terminate a mutual contract which has not yet been fully performed by both parties or providing for automatic termination because of the insolvency or the insolvency petition are void, termination provisions for reasons other than the insolvency and the insolvency petition remain valid.

    By retaining title, the creditor generally ensures the right to separate his property from the estate without paying any fees to the insolvency administrator. The insolvency administrator or debtor in self-administration are also entitled to pay the contract price and obtain title to the goods.

    Only those debts which were legally established prior to the opening of insolvency proceedings are capable of set-off, which, thus, is not available if the creditor has

    • become an obligor to the insolvency estate only after the opening of the insolvency proceedings or
    • obtained its claim against the debtor from a third party after the commencement of the insolvency proceedings or pursuant to a transaction which is avoidable.

    There are specific, less restrictive set-off rules applying in certain cases of the insolvency of financial institutions.

  10. What conditions apply to the sale of assets/the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted?

    In preliminary insolvency proceedings, the insolvency court generally orders that acts of dispositions (including sales) of the debtor shall require the consent of the preliminary insolvency administrator. It may also order that only the latter can make acts of dispositions.

    In insolvency proceedings, only the insolvency administrator has the power to sell the debtor’s assets. In self-administration cases, the debtor has such power, but the court may order that the trustee’s consent is required. The sale of the business as a whole, of significant assets, immovables if sold out-of-court, and shareholdings belonging to the estate requires the approval of the creditors’ committee or, if no creditors’ committee has been appointed, the creditors’ assembly.

    In general, the insolvency administrator’s objective is to sell the debtor’s business as a going-concern (übertragende Sanierung). In this case, the transferee succeeds by law into the rights and duties under the existing employment relationships (Sec. 613a Civil Code).

    The insolvency administrator may also dispose of encumbered movable assets in his possession (other than subject to retention of title), in which case the purchaser acquires the assets “free and clear” of claims, liabilities and encumbrances. Following such sale, the insolvency administrator shall use the proceeds, after deduction of the costs of determining and disposing of the asset (in general 9%), to pay the secured creditor.

    While the insolvency administrator can sell encumbered real estate either

    • out-of-court, in which case the encumbrances remain (unless released by the secured creditor), or
    • at public auction, in which case the encumbrances are in certain cases extinct,
      in practice, the administrator concludes an agreement with the secured creditors regulating the out-of-court sale by the administrator, the release of the collateral and the distribution of the proceeds (including a fee for the estate).

    Credit bidding, ie allowing a secured creditor to bid, in the sale of its asset, the amount of its debt as a credit bid, ie not a cash bid, is not permitted by the Insolvency Code.

  11. What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty?

    If the annual or any interim balance sheet of a limited liability company shows that 50% or more of its registered share capital has been lost, the managing directors have to call an extraordinary shareholders’ meeting without undue delay.

    Where a company becomes illiquid or overindebted (see question 3), the members of the board of directors or managing directors must file an insolvency petition without undue delay, at the latest within three weeks. Managing directors who negligently or intentionally breach those obligations commit a criminal offence and are liable for damages, which can be asserted by

    • the insolvency administrator in case of damages suffered by creditors whose claim originated prior to the obligation to file for insolvency, or
    • the creditors to the extent their claim originated thereafter.

    Once the company has become illiquid or over-indebted, only payments which, also after this point in time, are compatible with the due care of a prudent businessman may be made. Otherwise, the directors are obligated to compensate the company for such payments. The same sanction applies to payments to shareholders if these led to the company becoming illiquid, unless this was not foreseeable observing due care (Sec. 64 Limited Liability Companies Act). Managing directors who negligently or intentionally breach those obligations commit a criminal offence and are liable for damages both to the company and its creditors.

    The managing directors are liable where tax claims are not, or not in time, determined or satisfied (Section 69 Fiscal Code).

    Withholding social security contributions of an employee is criminally sanctioned (Sec. 266a Criminal Code).

    A debtor that, aware of its illiquidity, grants a creditor a preferential treatment over the other creditors is liable to criminal sanctions (Sec. 283c Criminal Code).

    If a debtor diminishes its net assets or conceals the actual circumstances of its business in a manner which grossly violates regular business standards (such as buying goods on credit and selling them under their value, absence of bookkeeping, producing irregular balance-sheets) when in a state of insolvency or if such acts lead thereto, such actions are sanctioned as ‘bankruptcy’ by imprisonment up to five years, if

    • the debtor has suspended payments,
    • insolvency proceedings have been instituted or
    • the insolvency petition has been rejected due to lack of available assets

    (Sec. 283 Criminal Code).

  12. Is there any scope for other parties (e.g. director, partner, parent entity, lender) to incur liability for the debts of an insolvent debtor?

    Absent any

    • guarantee,
    • contractual assumption of liability or
    • profit and loss transfer and/or domination agreement,

    other parties are, in principle, not liable for the debts of a company with limited liability.

    The shareholders may become liable for the debts of a limited liability company if they commingle the assets of their company with their own (‘piercing the corporate veil’).

    The German Federal Court has developed a liability of the shareholders towards their company for ‘exterminating interventions’ (existenzvernichtender Eingriff), ie acts of the shareholders depriving the company of the assets it needs for remaining a going concern, so that sooner or later it will become insolvent.

  13. Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?

    Restructuring or insolvency proceedings do not have the effect of releasing directors and other stakeholders from liability for previous actions and decisions.

    However, claims of the creditors for damages suffered jointly by them due to a reduction of the insolvency estate before or after the opening of the insolvency proceedings (‘collective damage’) may, during the insolvency proceedings, be asserted only by the insolvency administrator (Sec. 92 Insolvency Code).

    Even in an insolvency plan, the liability of directors towards their company for breaching their duties cannot be waived (Sec. 225a(3) Insolvency Act, Sec. 93 Stock Corporations Act, Sec. 43(3) with 9b(1) Limited Liability Companies Act).

  14. Will a local court recognise concurrent foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition?

    Any judgment opening insolvency proceedings handed down by a court of an EU Member State which has jurisdiction shall be recognized in all other Member States (Article 19 EU Regulation 2015/848). The courts of the Member State within the territory of which the centre of the debtor's main interests (COMI) is situated, have jurisdiction to open main insolvency proceedings (Article 3 of Regulation 2015/848). However, any Member State may refuse to recognize such insolvency proceedings where the effects of such recognition would be manifestly contrary to that State's public policy, in particular its fundamental principles or the constitutional rights and liberties of the individual (Article 33 EU Regulation 2015/848).

    Similarly, insolvency proceedings opened in a non EU jurisdiction are recognized, unless, in particular, such recognition would lead to a result which is manifestly incompatible with major principles of German law, in particular with basic rights (Sec. 343 Insolvency Act).

  15. Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?

    The courts of the EU Member State within the territory of which the centre of the debtor's main interests (COMI) is situated have jurisdiction to open (main) insolvency proceedings (Article 3(1) EU Regulation 2015/848).

    Consequently, a debtor incorporated in another EU Member State may enter into insolvency proceedings in Germany, if its COMI is in, or has been moved to, Germany. The COMI is the place where the debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties. In case of a company, the place of the registered office is presumed to be the COMI in the absence of proof to the contrary, unless the registered office has been moved to another Member State within the 3-month period prior to the insolvency petition.

    Similarly, German courts have jurisdiction to open insolvency proceedings in respect of a debtor incorporated outside the EU if its COMI is in Germany (Sec. 3 Insolvency Act).

    However, German courts do not look favorably on forum shopping. Therefore, they tend in such a case to scrutinize whether the COMI is actually in Germany.

  16. How are groups of companies treated on the restructuring or insolvency of one of more members of that group? Is there scope for cooperation between office holders?

    The Insolvency Code does not differentiate between debtors belonging to a group of companies and those standing alone. Thus, in case of insolvencies of groups of companies, for each company an insolvency procedure will be opened and an insolvency administrator be appointed. There are no joint insolvency proceedings.

    In practice, however, at least, if the same insolvency court is competent for two or more group companies, in general the same insolvency administrator will be appointed, unless a conflict of interest between these companies is apparent. In case several administrators are appointed, they may cooperate, but each has to act exclusively in the interests of the estate of the debtor for which he or she has been appointed. In some insolvencies of international groups, protocols have been concluded between German and foreign insolvency administrators; such protocols may require the consent of the creditors’ committee.

    In 2014, a reform project was presented by the government aiming at regulating group insolvencies. This reform has, however, still not entered into force.

  17. Is it a debtor or creditor friendly jurisdiction?

    German insolvency law is creditor friendly:

    • The primary goal of German insolvency proceedings is the payment of the creditors’ claims (Sec. 1 Insolvency Code). This applies also in insolvency plan procedures, in particular due to the ‘best interest test’, according to which a dissenting group may only be crammed down if it does not receive less than it would in straight liquidation (question 7).
    • Security interests are respected by the Insolvency Code.

    However, this conservative view is beginning to change in Germany, also in view of the EU Proposal of 25 November 2016 on preventive restructuring frameworks (COM(2016) 723 final). Practitioners begin to accept that also the debtor must have the right to initiate its restructuring.

  18. Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?

    German trade unions tend to act in a far less aggressive manner than eg French ones. This applies also in a crisis of a debtor, where trade unions may even consent to measures reducing the debtor’s labor costs.

    In Germany, the economic doctrine prevails that the state should not interfere with insolvency procedures, their macroeconomic function being to eliminate uncompetitive players. While the German State intervenes in fact far less in restructurings than eg the French State, it frequently does not remain passive if very important companies are threatened by insolvency.

    While state guarantees may thus under certain conditions be available (at federal or state level), they must comply with the EU ‘Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty’ (2014/C 249/01) which allow state support only under narrow circumstances.

  19. What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?

    There is no formal framework for preventive out-of-court restructuring procedures encouraging the parties to restructure out of formal insolvency procedures. To the contrary, in out-of-court restructurings, not only fresh money does not enjoy by law any preferential treatment if the restructuring fails, but lenders face a substantial risk of lenders’ liability and of their loan and collateral agreements being considered as invalid. In order to mitigate such risks, well advised lenders commission a restructuring opinion (in general from a major accountancy firm) which confirms, to the satisfaction of the lenders’ legal counsel, that the restructuring concept is conclusive and has a reasonable chance to succeed. This is time-consuming and expensive.

    Loans granted prior the finalization of the restructuring opinion are only exempt from giving rise to lenders’ liability if they satisfy the strict requirements for bridge loans, namely are only granted for the time period between the commissioning of the restructuring report and its finalization. According to a recent judgment of the Berlin court of appeal, which is heavily criticized by insolvency practitioners, this period must not exceed three weeks. This is far too short in complex cases.

    The proposition of the European Commission for preventive restructuring frameworks of 22 November 2016 contains rules which would remove these obstacles.

    A major impediment to financial restructurings has recently been created by the decision of the Federal Tax Court of 28 November 2016 which declared unlawful the Ministry of Finance’s ‘restructuring decree’, which permitted under certain conditions to waive the tax claim resulting from the cancellation of debt income.