Restructuring and Insolvency in Germany 2024

Restructuring and Insolvency in Germany 2024 – Der Bundesgerichtshof – Germany Federal Court

RESTRUCTURING AND INSOLVENCY 2024

GERMANY

Franz Aleth, Marvin Knapp

(Freshfields Bruckhaus Deringer)

GENERAL

Legislation

1. What main legislation is applicable to insolvencies and reorganizations?

In general, the Insolvency Code governs all bankruptcies and insolvent judicial reorganizations in Germany. As regards the restructuring and orderly winding up of financial institutions, the prerequisites and proceedings are primarily stipulated in the German Act on the Recovery and Resolution of Credit Institutions. There are also special provisions in the German Banking Act granting certain rights and responsibilities to the Federal Financial Supervisory Agency (BaFin) in the event of (imminent) insolvency of a financial institution. For example, BaFin can impose a temporary moratorium.

To alleviate the impact of the covid-19 pandemic, the German legislator introduced a law to mitigate the consequences of the pandemic in civil, insolvency and criminal proceedings that, among other things, included a temporary suspension of the obligation to file for insolvency owing to illiquidity or over-indebtedness (which was amended and extended several times) and certain privileges in connection with clawback risks.

Furthermore, especially with a view to addressing the consequences from the turmoil in energy markets and disruptions of supply chains, on 9 November 2022, the Act on the Temporary Adjustment of Restructuring and Insolvency Law Provisions to Mitigate the Consequences of the Crisis (SanInsKG) came into force, which has primarily modified the obligation to file for insolvency because of over-indebtedness (but not illiquidity) until 31 December 2023.

On 1 January 2021, the German legislator introduced the German Act on the Advancement of Restructuring and Insolvency Law (the Restructuring Advancement Act), including the German Act on the Stabilization and Restructuring Framework for Companies (StaRUG), which established a comprehensive legal framework for out-of-court restructurings in Germany based on Directive (EU) 2019/1023 of 20 June 2019. In addition to several other legislative amendments, the Restructuring Advancement Act amended certain provisions in the German Insolvency Code and the Covid-19 legislation.

Excluded entities and excluded assets

2. What entities are excluded from customary insolvency or reorganization proceedings and what legislation applies to them? What assets are excluded or exempt from claims of creditors?

In principle, insolvency or reorganization proceedings may be commenced by or against any natural or legal person. An unincorporated association that otherwise has no separate legal standing will be deemed to be a legal person. Insolvency or reorganization proceedings cannot, however, be commenced against a legal entity that is subject to state supervision, if the law of the respective state so provides.

Furthermore, the German Act on the Recovery and Resolution of Credit Institutions provides for specific rules concerning the restructuring and orderly winding up of financial institutions.

In principle, insolvency proceedings involve all assets owned by the debtor on the date insolvency proceedings are opened and assets acquired by the debtor during the insolvency proceedings. However, there are certain exceptions as regards the assets of natural persons that cannot be seized or form part of the insolvency estate. From a practical point of view, this exemption does not affect corporate insolvencies.

Public enterprises

3. What procedures are followed in the insolvency of a government-owned enterprise? What remedies do creditors of insolvent public enterprises have?

German insolvency law does not provide for specific procedures for government-owned enterprises. The insolvency law and the provisions of the StaRUG also apply to such enterprises.

However, insolvency or reorganization proceedings cannot be commenced against the federal government or a state government, or any legal entity that is subject to state supervision, if the law of the respective state so provides.

Creditors of insolvent public enterprises have the same remedies available to them as creditors of insolvent non-public enterprises.

Protection for large financial institutions

4. Has your country enacted legislation to deal with the financial difficulties of institutions that are considered ‘too big to fail’?

The German Act on the Recovery and Resolution of Credit Institutions, which entered into force on 1 January 2015 in connection with the implementation of Directive 2014/59/EU on the bank recovery and resolution and Regulation (EU) No. 806/2014, provides specific rules for the restructuring of financial institutions.

Under the German Act on the Recovery and Resolution of Credit Institutions, the following set of resolution tools are available:

• sale of the business or shares of the institution;
• transfer to a ‘bridge institution’;
• transfer to an asset management company; and
• bail-in of shareholders and creditors (i.e, converting specific loan receivables into equity by way of a debt-for-equity swap).

There is no specific restructuring act for insurance companies. However, there are some special rules for insolvency proceedings involving insurance companies (sections 311 et seq of the German Insurance Supervision Act). For instance, if an insurance company becomes insolvent, only the supervising authority may file for insolvency.

Courts and appeals

5. What courts are involved? What are the rights of appeal from court orders? Does an appellant have an automatic right of appeal or must it obtain permission? Is there a requirement to post security to proceed with an appeal?

Regarding insolvency proceedings, the district courts have exclusive jurisdiction. The general place of jurisdiction of the debtor usually determines which district court is competent. However, if the debtor’s center of main interest (COMI) is in another district, the district court of that district will have exclusive local jurisdiction.

If the debtor has made use of measures under the StaRUG up to six months prior to the filing for insolvency, the insolvency court located at the seat of the respective restructuring court also has local jurisdiction. If more than one court has jurisdiction, the court where the application for commencement of the insolvency proceedings was first filed has exclusive jurisdiction.

In the case of a group of companies, subject to certain conditions, it is possible for affiliated companies to commence several insolvency proceedings at the same insolvency court.

Generally, the competent insolvency court has jurisdiction to deal with all matters connected with the insolvency proceedings.

Orders or decisions of the insolvency court can only be appealed where the Insolvency Code expressly provides for the option of an immediate appeal (i.e, there is no general right of appeal). However, an appeal is possible if the relevant decision has not been taken by the judge, but rather by the clerk of the court. In any case, a creditor will only be entitled to appeal if its claim is rejected or its rights are violated by the decision.

The deadline for filing an immediate appeal is two weeks beginning with the announcement or the service of the relevant decision. The appeal must be filed by way of a written notice to the relevant insolvency court, which will consider whether to grant (injunctive) relief.

Pursuant to section 4 of the Insolvency Code in connection with section 574 et seq of the Code of Civil Procedure, an appeal on points of law is applicable to challenge decisions resulting from an immediate appeal. However, such an appeal is only admissible if the court of appeals has permitted the appeal on the point of law. The court of appeals will grant permission to file a complaint on points of law if:

• the legal matter is fundamentally important; or
• a judgment is required for the purposes of advancing the law or for ensuring consistency of court decisions.

Neither the Insolvency Code nor the Code of Civil Procedure require the provision of security to proceed with an appeal.

As far as restructurings through insolvency plan proceedings are concerned, following a complaint by a creditor (or shareholder if applicable), the court may refuse to ratify an insolvency plan if the complainant objects to the insolvency plan by no later than the hearing for discussion and voting, and if it can be demonstrated that the insolvency plan puts the complainant in a less favorable position compared to the situation without an insolvency plan (e.g, if the applicant can demonstrate that an asset sale or a liquidation would be more favorable).

Irrespective of such complaint, the court ratifies the insolvency plan if it provides for compensation if an affected party shows to the satisfaction of the court that it will be placed in a less favorable position. This is to be determined in a separate proceeding.

Furthermore, at the request of the insolvency administrator (or the debtor in self-administration proceedings), the regional court may dismiss an appeal against the court order by which an insolvency plan is confirmed without delay, if it appears that the immediate effectiveness of the insolvency plan should take precedence, because the damage that would result from a delayed implementation of the insolvency plan outweighs the losses suffered by the complainant. In this case, the complainant will be compensated from the insolvency estate for the losses suffered by the implementation of the insolvency plan.

Regarding StaRUG proceedings, the following applies.

District courts, in their capacity as restructuring courts, have exclusive jurisdiction for restructuring matters. To concentrate the competence for restructuring proceedings, the number of restructuring courts is significantly lower than the number of insolvency courts at the district level.

The restructuring court located in the district where the debtor has its general place of jurisdiction has exclusive jurisdiction. If the debtor’s COMI is in another district, the restructuring court of that district has exclusive jurisdiction.

In the case of a group of companies, it is possible for affiliated companies to bundle the jurisdiction for restructuring matters of all (involved) companies at the same court.

Based on the corresponding provisions in the Insolvency Code, decisions of the restructuring court can only be appealed if the StaRUG expressly provides for the option of an immediate appeal (i.e, there is no general right of appeal). However, this restriction only applies to the extent that the restructuring court has made restructuring-specific decisions under the StaRUG. If the decisions are of a non-restructuring-specific nature, remedies provided for under the general provisions (i.e, those of the Civil Procedure Code) remain in force. In any lawsuit related to restructuring measures under the StaRUG, the court located in the district of the restructuring court has exclusive jurisdiction.

Given the applicability of the Code of Civil Procedure for an immediate appeal and an appeal on points of law, the same rules apply as set out above in connection with insolvency proceedings.

Similar to insolvency plans, upon a complaint of a party affected by the plan, the court may refuse to ratify a restructuring plan if the complainant objects to the plan and can demonstrate that it will be in a less favorable position than it would be in the next best alternative scenario without a plan. However, the court ratifies the plan if it provides for compensation for such creditors.

At the request of a party filing an appeal, the court can order that the appeal has suspensive effect if implementing the restructuring plan would result in serious and, in particular, irreversible disadvantages for the filing party that are disproportional to the advantages of an immediate implementation of the plan. Furthermore, at the debtor’s request, the regional court may dismiss an appeal against the court order by which a restructuring plan is confirmed without delay, if the interest in an immediate effectiveness of the restructuring plan prevails, because the harm that would result from the delayed implementation of the restructuring plan outweighs the losses sustained by the complainant.

TYPES OF LIQUIDATION AND REORGANIZATION PROCESSES

Voluntary liquidations

6. What are the requirements for a debtor commencing a voluntary liquidation case and what are the effects?

A voluntary liquidation may only be implemented in accordance with general corporate procedures if the debtor is able to discharge all its debts or reach an out-of-court settlement with all its creditors.

Under the Insolvency Code, the debtor may (voluntarily) initiate insolvency proceedings when illiquidity is imminent, as defined in the Insolvency Code.

Upon the filing for insolvency under the Insolvency Code, the debtor is generally no longer entitled to dispose of its assets. An insolvency administrator is appointed by the insolvency court. In this context, however, the Insolvency Code provides for self-administration proceedings that give the debtor the opportunity to continue to manage and administer the insolvency estate, subject to the supervision of a custodian who is usually an insolvency practitioner. In general, self-administration proceedings are not designed to initiate a voluntary liquidation but rather a voluntary restructuring (either through an insolvency plan, a corporate restructuring or an asset sale).

Voluntary reorganizations

7. What are the requirements for a debtor commencing a voluntary reorganization and what are the effects?

Since 1 January 2021, German law provides a comprehensive legal framework for voluntary out-of-court restructurings. Through the German Act on the Stabilization and Restructuring Framework for Companies (StaRUG), the German legislator has implemented Directive (EU) 2019/1023 on restructuring, which demands that EU member states to implement, among other things, a pre-insolvency restructuring procedure.

The StaRUG has filled a gap that existed between consensual pre-insolvency out-of-court restructuring, on the one hand, and in-court restructuring in the context of formal and comprehensive insolvency proceedings, on the other hand. The new law provides for the opportunity to implement financial restructurings despite the opposition of individual parties outside of insolvency proceedings, while any operational restructuring measures will continue to require a consensual agreement of all affected parties.

A debtor has access to this restructuring framework if it is not yet illiquid (cash-flow insolvent) or over-indebted but imminently illiquid (as defined in the Insolvency Code). As a key element, the StaRUG regulates the content and the conclusion of a restructuring plan. The debtor is exclusively entitled to submit such restructuring plan. However, those affected by the plan can make proposals to amend the plan. The debtor can choose whether the plan is to be voted on outside or within a formal court process. Irrespective of whether the voting was done outside or within a court process, court confirmation of the plan is required, unless all affected parties vote in favor of the restructuring plan.

In substance, the restructuring plan can regulate, among other things, the following in particular:

• modification of liabilities of, and security granted by, the debtor as well as the underlying contractual relationships (including changes to contractual terms of financing agreements). In contrast, claims based on tort, fines or the claims of employees, including pension claims, cannot be compromised or amended by the plan;
• impairment of third-party security granted by affiliated group companies (within the meaning of section 15 of the German Stock Corporation Act, including subsidiaries as well as parent or sister companies), whereby such impairment of third-party security requires adequate compensation for the benefit of the secured creditors; and
• impairment of shareholder rights, for example, in the form of capital measures or the transfer of shares or membership rights.

Contrary to an insolvency process, the StaRUG process is a selective process, meaning that the debtor has flexibility as to which stakeholders to include in the restructuring plan, as long as the selection is made according to appropriate criteria (in this respect, the inclusion of only financial liabilities would as such be possible).

The debtor has the possibility to use certain supportive measures to increase the chances of success of the implementation of a restructuring plan. For example, the debtor may, even in the preparatory phase of the restructuring plan, apply to the court for a moratorium on foreclosure and enforcement – a ‘stabilization order’. Such moratorium is to last up to three months. This maximum period may be extended:

• by one month if the debtor has submitted a restructuring plan and the plan is expected to be adopted within a period of one month; or
• up to eight months if the debtor has requested the court confirmation of a plan approved by the creditors.

When using measures under the StaRUG, the debtor’s management generally retains full control of the company and its business operations. However, in certain circumstances, the appointment of a restructuring officer by the court is required (e.g, if the court orders a comprehensive set of stabilization measures affecting substantially all creditors, or if an impairment of third-party security is proposed). The debtor will then be obliged to support the restructuring officer in the performance of their duties and, in particular, to provide them with information and to grant them access to internal bookkeeping.

Under the StaRUG, the debtor may also seek the assistance of a court-appointed restructuring facilitator in the event of economic or financial difficulties. Such proceeding aims at reaching a consensual restructuring settlement between the debtor and its creditors.

In relation to bonds governed by German law, the German Bond Act 2009 provides for an out-of-court restructuring procedure that allows modifications of the terms and conditions of German bonds by way of a resolution of the bondholders (usually 50 per cent of the bonds by value participating at a bondholders’ meeting, but 75 per cent for substantial changes of the terms and conditions).

However, the process must be referred to and permitted under the terms of the notes. Such process can be used as an alternative to the StaRUG in restructuring German law governed bonds and, due to the lower voting threshold (majorities determined on the basis of those noteholders present and voting, rather than on the basis of the overall nominal amount as under the StaRUG), there can be benefit in using the procedure under the German Bond Act.

If the debtor is a legal entity or a (limited liability) partnership with legal entities only as (general) partners, and it is established that the debtor cannot pay its debts as they fall due (illiquidity) or the debtor is over-indebted (as defined in the Insolvency Code), under German law the managing directors of the debtor must file for insolvency without undue delay.

In any event, the filing must occur at the latest within three weeks of the date on which the company became illiquid (as defined in the Insolvency Code).

Alternatively, the filing must occur within six weeks (eight weeks until 31 December 2023 under the Act on the Temporary Adjustment of Restructuring and Insolvency Law Provisions to Mitigate the Consequences of the Crisis (SanInsKG)) of the date on which the company became over-indebted (as defined in the Insolvency Code or, as the case may be, the SanInsKG).

As of 1 May 2021, there is no longer any temporary, COVID-19 pandemic-driven suspension of the obligation to file for insolvency in effect.

Also, the Insolvency Code gives the debtor, but not the creditors, the ability to initiate a restructuring within insolvency proceedings. The debtor can combine the filing for insolvency with an application for self-administration proceedings (debtor-in-possession) and the submission of a restructuring plan (i.e, the insolvency plan). Furthermore, if the debtor is over-indebted or will imminently be illiquid (or both), section 270d of the Insolvency Code provides for a self-administration procedure – the protective shield procedure – that establishes a three-month moratorium. This provides the debtor with protection from creditor enforcement and enables it to prepare an insolvency plan.

Since 1 January 2021, sections 270 et seq of the Insolvency Code provide for extensive adjustments to the self-administration regime. Overall, the self-administration proceedings in insolvency have been more closely aligned with the interests of creditors. Consequently, the debtor must provide more comprehensive documentation with the self-administration application. In addition, the custodian must review the documentation and state in writing whether any objections are to be raised based on the results of the review.

In larger insolvency proceedings, prior to filing for insolvency, the debtor has the option of a preliminary meeting with the competent insolvency court to discuss relevant aspects of the envisaged proceeding, in particular in the case of a self-administration. A preliminary meeting does not have legally binding consequences.

Aside from the debtor, only the insolvency administrator is authorized to submit an insolvency plan to the insolvency court. However, the creditors’ meeting can instruct the insolvency administrator (and in the case of self-administration, the debtor or the custodian) to prepare an insolvency plan, which the insolvency administrator has to submit to the court within a reasonable time frame. The (preliminary) creditors’ committee (if one has been appointed), the works council, the spokespersons’ committee of the managerial employees and the debtor also have an advisory role in the preparation of the plan by the administrator.

Successful reorganizations

8. How are creditors classified for purposes of a reorganization plan and how is the plan approved? Can a reorganization plan release non-debtor parties from liability and, if so, in what circumstances?

The StaRUG provides for the possibility to implement an out-of-court restructuring plan, thereby preventing an insolvency. A restructuring plan allows modifications of liabilities and security granted by the debtor as well as the underlying contractual relationships, and an impairment of shareholder rights, for example, in the form of capital measures or the transfer of shares or membership rights. Accordingly, under the restructuring plan of the German car part manufacturer LEONI AG, the existing shares were canceled and delisted from the Frankfurt Stock Exchange to allow a single investor to make a cash contribution, together with a contribution in kind, against the issuance of new shares by LEONI AG.

The restructuring plan can even provide for a pre-insolvency debt-for-equity swap without shareholder consent (albeit the local court of Hamburg, in order of 17 March 2023 – 61c RES 1/23, decided that the initiation of a restructuring under the StaRUG by the managing director of a German limited liability company required an approving shareholders’ resolution passed with a qualified majority of 75 per cent). A debt-for-equity transaction without the consent of the affected creditor is, however, not permitted. Also, claims based on tort, fines or claims of employees, including pension claims, cannot be compromised or amended by the plan.

The restructuring plan also allows an impairment of third-party security granted by affiliated group companies within the meaning of section 15 of the German Stock Corporation Act, including subsidiaries as well as parent or sister companies. However, secured creditors will need to be adequately compensated for such an impairment. This option may avoid separate procedures for intra-group third-party security providers.

Closely resembling insolvency plan proceedings, the affected parties (creditors, and potentially shareholders) must be divided into classes to vote on a restructuring plan. A class must be formed according to the principle of similarity of rights and interests within a class. Separate classes must be formed for the following stakeholders if the restructuring plan proposes to impair their rights:

• holders of security rights;
• holders of claims that, in the event of insolvency, would constitute non-subordinated insolvency claims;
• holders of certain claims that would be subordinated in insolvency proceedings including, but not limited to, shareholder loans;
• shareholders; and
• holders of third-party security and holders of small debts.

Unlike in insolvency proceedings, the debtor has flexibility as to which stakeholders to include in the restructuring plan. The selection must be made according to appropriate criteria, and, for example, the inclusion of only financial liabilities would be possible. The plan thereby enables the implementation of a financial restructuring without the need to include any other counterparties.

The plan is adopted if at least a qualified majority of 75 per cent of the voting rights (by nominal value of claims or interests) in each class vote in favor of the plan. The restructuring plan also allows for a cross-class cramdown, with the result that the consent of a particular class is deemed granted if certain requirements are met.

The Insolvency Code places very few restrictions on what may be included in an insolvency plan. By approving a plan, the parties can, among other things, agree to deviate from the statutory rules on the disposition of the debtor’s assets and the distribution of proceeds. The plan must describe the proposed measures for restructuring the debtor and how the plan affects the rights of creditors (and shareholders if applicable). Typically, a plan will contain provisions for a partial waiver of claims or for deferred payments.

It will also set out the likely outcomes for creditors in a liquidation, an asset sale and a restructuring of the business, so that the creditors can evaluate for themselves the advantages, whether financial or otherwise, of a restructuring by way of an insolvency plan. If the plan provides for the debtor’s business to continue, it will be assumed that the debtor will continue as a going concern for the purposes of determining the expected outcome without a plan, unless there is no prospect of the debtor being sold by way of an asset deal or otherwise be continued as a going concern.

As mentioned above, the insolvency plan must separate creditors into classes. In particular, it must distinguish between secured and unsecured creditors. The plan must be approved by each class of creditors. A class of creditors accepts the plan if a majority in number and in value in that class vote in favor of the plan. It is then up to the court to decide whether to confirm that plan.

Furthermore, creditors who have not filed their claims with the insolvency administrator and had them included on the official table are also bound by the measures approved in the insolvency plan. Such creditors will be treated as creditors of the appropriate class if they assert a claim against the debtor after the insolvency proceedings have been terminated.

Under the Insolvency Code, an insolvency plan also allows for an impairment of third-party security granted by affiliated group companies within the meaning of section 15 of the German Stock Corporation Act that includes subsidiaries as well as parent or sister companies. However, secured creditors will need to be adequately compensated for such an impairment. This option, which was introduced on 1 January 2021, avoids separate procedures for intra-group third-party security providers (e.g, if the parent company is insolvent and its subsidiaries are co-obligors or collateral providers, or both).

As the plan can provide for the disposition of the debtor’s assets, it may also create releases by the debtor in favor of (other) third parties (e.g, releasing the management, advisers or lenders of the debtor company from a potential liability). Such releases become effective upon the creditors’ consent to, and the insolvency court’s approval of, the plan.

In addition, an insolvency plan may provide for all types of (restructuring) measures permissible under corporate law, especially a debt-for-equity swap. Where a debt-for-equity swap is planned, the shareholders need to vote on the insolvency plan in addition to the creditors. Shareholders will form (at least) one separate voting class. A class of shareholders accepts the plan if a majority in value in that class votes in favor of the plan. As under corporate law, this majority is sufficient here even without a majority in number.

Concerning debt-for-equity swap, each creditor who is to receive an equity participation must consent. It is not sufficient that the class has been consulted (i.e, it is not possible to force a lender to convert a loan into equity).

Involuntary liquidations

9. What are the requirements for creditors placing a debtor into involuntary liquidation and what are the effects? Once the proceeding is opened, are there material differences to proceedings opened voluntarily?

Insolvency proceedings can only be commenced by way of an insolvency filing (i.e, an application). An application may be submitted by a creditor if the creditor can establish that the debtor is illiquid or over-indebted (as defined in the Insolvency Code). If the creditor’s application is well-founded, the insolvency court will then give the debtor an opportunity to be heard.

Once the proceedings are commenced, there are no material differences to proceedings initiated voluntarily by the debtor.

Upon the commencement of the insolvency proceedings, the insolvency administrator immediately takes possession of and administers all assets the insolvency estate comprises. Moreover, the debtor’s management will be subject to a positive duty to provide information.

Once the administrator has taken possession of the debtor’s assets, they are required to prepare a list of the assets comprising the insolvency estate, stating the value of each object. The administrator must also prepare a list of all creditors whose names appear in the debtor’s books and papers, or whose identities are revealed by other statements of the debtor, or who assert their claims in the course of the proceeding. Also, the administrator is obliged to prepare a statement of affairs. Once all the assets of the estate have been realized and the final distribution has taken place, so that the insolvency proceedings will be closed, the legal entity or partnership will be erased from the commercial register.

Involuntary reorganizations

10. What are the requirements for creditors commencing an involuntary reorganization and what are the effects? Once the proceeding is opened, are there any material differences to proceedings opened voluntarily?

Insolvency proceedings may be commenced by a creditor upon submission of an application if it can demonstrate that the debtor is insolvent. Upon an admissible filing by a creditor the court will hear the debtor. Once the proceedings are commenced, there are no material differences to proceedings opened voluntarily. An individual creditor does not have authority to submit an insolvency plan. However, the creditors’ meeting may instruct the insolvency administrator to draft a restructuring plan. If each class of creditors (and shareholders, if applicable) accepts the plan, and if the insolvency court confirms the plan, it will then come into effect.

Restructuring measures under the StaRUG cannot be commenced by a creditor, only by the debtor. However, those affected by the plan can make proposals to amend the plan.

Expedited reorganizations

11. Do procedures exist for expedited reorganizations(eg, ‘prepackaged’ reorganizations)?

Under the StaRUG, the debtor has very broad discretion and flexibility as to the extent of judicial assistance that provides the possibility to expedite a restructuring. For instance, the debtor can choose whether the restructuring plan is to be voted on outside or in the context of a court hearing. If all those affected agree to the restructuring plan, a court confirmation of the plan is not required. Overall, the procedure will take a few weeks so a pre-pack within a few days is not possible.

The Insolvency Code does not explicitly provide for any specific procedure on expedited restructurings such as pre-packaged restructurings.

However, in practice, an insolvency administrator may sell the debtor’s business or key assets shortly after the insolvency proceedings are commenced. Additionally, the debtor is entitled to file an application for the opening of insolvency proceedings when illiquidity is imminent. At the same time, the debtor can apply for self-administration, which would allow the debtor to continue to manage the insolvency estate under the supervision of a custodian (usually an insolvency practitioner), and also submit an insolvency plan for a restructuring of the business as a pre-packaged plan.

In practice, a pre-packaged plan will often be discussed with the debtor’s main (secured and unsecured) creditors before it is filed to ensure that they will not oppose it once insolvency proceedings have been initiated.

Unsuccessful reorganizations

12. How is a proposed reorganization defeated and what is the effect of a reorganization plan not being approved? What if the debtor fails to perform a plan?

Restructuring plan

The adoption of a restructuring plan under the StaRUG requires, in principle, a 75 per cent majority of the voting rights in each class, with voting rights determined by the amount of the claim, the value of the security and, in the case of share or membership rights, the share of the subscribed capital of the debtor.

Given that the required 75 per cent majority relates to the entire volume and not only to the volume of claims, membership rights or security within a class actually participating in the voting, there is a risk that the requisite majority is not achieved due to a number of non-participating stakeholders (e.g, in the case of broadly dispersed notes or promissory notes). However, the restructuring plan allows for a cross-class cramdown with the result that the consent of a particular class is deemed to have been granted, provided that:

• the class is not any worse off than it would have been in an alternative scenario without the plan;
• the class participates adequately in the economic value to be distributed under the plan to those affected by it; and
• the majority of the voting classes has consented to the plan and, in the case of two classes, the consent of one class is sufficient (however, the class must not exclusively comprise shareholders or subordinated creditors).

A class will be deemed to participate adequately in the economic value if:

• no other creditor receives any value in excess of the amount of its claim;
• neither a subordinated creditor nor the debtor or any person holding an equity interest in the debtor receives a value not fully offset by performance into the debtor’s assets – the ‘absolute priority’ rule; and
• no equal ranking creditor is better off than the creditors of the class concerned.

However, the following two exceptions apply regarding the absolute priority rule:

• in situations where the participation of shareholders (or the debtor) retaining economic value is necessary for the continuation of the company to achieve the added value of the plan, and the shareholders (or the debtor) have entered into a commitment to cooperate for five years or for a shorter period set for the implementation of the plan; and
• if the impairment of the rights of creditors is minor, such as in the case of a mere 18-month deferral of the maturity of their claims.

An exception from the principle of equal treatment of equal ranking claims can apply, provided that the more favorable treatment of another equal ranking creditor is appropriate in the circumstances, considering the debtor’s financial difficulties.

In contrast to an insolvency plan, these exceptions apply to all types of shareholders (i.e, there is no need to be a natural person or part of the management).

The court confirmation of a restructuring plan will, in particular, be rejected if:

• the debtor is not imminently illiquid (as defined in the Insolvency Code);
• the provisions on the content, the procedural treatment or the adoption of the restructuring plan have not been complied with in a material respect, provided that the debtor is unable to remedy the non-compliance or fails to remedy it within a reasonable period set by the restructuring court; or
• the claims allocated to the plan-affected parties by the plan and the claims of the other creditors not affected by the plan can obviously not be satisfied.

If the plan provides for new financing, confirmation must also be refused if the restructuring concept the plan is based on is not convincing or if circumstances are known that show that the concept is not based on the actual facts or does not have reasonable prospects of success. Court confirmation of the restructuring plan will also be refused if the adoption of the restructuring plan has been procured using improper means, in particular, by favoring a party affected by the plan.

The court may also refuse to confirm the plan if a creditor (or shareholder where its rights are concerned) successfully objects to or appeals the plan.

Insolvency plan

An insolvency plan must first be considered by the insolvency court. Both the debtor and the insolvency administrator are entitled to submit an insolvency plan. The insolvency court will reject the plan if:

• the formalities regarding the authority to submit the plan and regarding its contents, especially regarding class formation, have not been observed;
• it clearly has no chance of being accepted by the involved participants (ie, creditors and, if involved, shareholders) or confirmed by the insolvency court; or
• the claims to which the participants are entitled by the plan can obviously not be satisfied.

Also, the insolvency court will reject the plan if it is submitted after the final hearing.

If the plan is not rejected on any of these grounds, the insolvency court will set a date for a hearing at which the insolvency plan and the creditors’ (and, if involved, shareholders’) voting rights can be discussed and the plan will be voted on (the hearing for discussion and voting). Each class of creditors (and shareholders) will vote separately on the plan. A majority in number and value of each class of creditors is required for a plan to be accepted.

A class of shareholders accepts the plan if a majority in value in that class votes in favor of the plan.

Even if the required majority is not attained, the consent of a voting class is deemed to be given if:

• the members of that class are not any worse off than they would have been in an alternative scenario without the plan (i.e, are not disadvantaged to a greater extent than they would be on the liquidation of the debtor’s business and a disposal of its assets by the insolvency administrator);
• the members of that class participate adequately in the economic value that was to accrue to the participants in the plan; and
• the majority of the other classes have consented to the plan.

A class will be deemed to participate adequately in the economic value if:

• no other creditor receives any value in excess of the amount of its claim;
• neither a subordinated creditor nor the debtor or any person holding an equity interest in the debtor receives a value not fully offset by performance into the debtor’s assets – the absolute priority rule; and
• no equal ranking creditor is better off than the creditors of the class concerned.

Since 1 January 2021, an exception to the absolute priority rule applies in situations where the participation of the debtor, who is an individual person retaining economic value, is necessary for the continuation of the company to achieve the added value of the plan, and the debtor has entered into a commitment to cooperate for five years or for a shorter period set for the implementation of the plan. Such exception also applies to equity holders who are part of the management.

Once the creditors (and shareholders where their rights are concerned) accept the plan, it must be confirmed by the insolvency court. The insolvency court will not confirm the plan if, among other things, the acceptance of the plan by the creditors (and shareholders, if applicable) is obtained in a wrongful manner, including, but not limited to, acceptance because of preferential treatment of a creditor.

The court may also refuse to confirm the plan if a creditor (or shareholder where its rights are concerned) successfully objects to or appeals the plan.

Generally, a debtor’s default in performing an approved insolvency or restructuring plan does not affect the validity of the plan. However, if creditors’ claims are deferred or partially waived as part of the plan, that deferment or waiver ceases to bind that creditor if the debtor falls into significant arrears in the performance of the plan. The debtor will be deemed to have fallen into significant arrears if it fails to pay a liability due, despite the creditor making a written demand and setting a minimum period of two weeks for payment.

Corporate procedures

13. Are there corporate procedures for the dissolution of a corporation? How do such processes contrast with bankruptcy proceedings?

German corporate law contains different procedures for the dissolution and liquidation of a corporation. The cases in which the company may or must be dissolved are set out in the relevant laws. These laws specify additional reasons, other than insolvency, for the dissolution of the company. At any time, the shareholders can resolve to dissolve the company with a qualified majority of usually 75 per cent of the votes cast.

The commencement of dissolution as such does not cause the company to cease to exist as a legal entity. It merely constitutes the commencement of the company’s liquidation by changing the purpose of the company. Once dissolved, the company can no longer pursue the business purpose defined in its articles. Its sole purpose becomes the liquidation of its business. Therefore, it must:

• terminate its current business transactions;
• discharge its obligations;
• collect its receivables;
• convert its assets into cash; and
• distribute the liquidation proceeds, if any, to the shareholders (after expiration of a 12-month blocking period at the earliest).

Generally, the company is liquidated by its liquidators, who are appointed at the shareholders’ meeting, except in the case of insolvency, where the insolvency administrator liquidates the company in accordance with the provisions of the Insolvency Code. The company is not deleted from the commercial register until liquidation is completed.

Conclusion of case

14. How are liquidation and reorganization cases formally concluded?

Under the StaRUG, the following applies:

• if all parties affected by the restructuring plan vote in favor of the plan, the restructuring plan will take effect on a purely contractual basis; or
• if the restructuring plan is not accepted by all affected parties, it will take effect as soon as the restructuring court has confirmed the plan.

Unlike in insolvency plan proceedings, there is generally no suspensive effect in the case of an immediate appeal (at the request of a party filing an appeal, the court will order the suspensive effect of the appeal if implementing the restructuring plan would result in serious and, in particular, irreversible disadvantages for the filing party that are disproportional to the advantages of an immediate implementation of the plan). In practice, the restructuring process is concluded once the plan has become legally binding.

The restructuring plan may provide for supervising the fulfillment of certain requirements. The restructuring court will order the termination of supervision when:

• the claims, the fulfillment of which is being supervised, have been satisfied (or satisfaction is guaranteed);
• three years have elapsed since the restructuring plan became legally effective; or
• insolvency proceedings are commenced against the debtor’s assets or the opening is rejected for lack of assets.

In insolvency proceedings, liquidation and restructuring cases are formally concluded by an order of the insolvency court. As soon as the final distribution has been made, the insolvency court will make an order terminating the insolvency proceedings. As far as restructuring cases are concerned, the insolvency court orders the termination of the insolvency proceedings as soon as the insolvency plan has been approved and becomes legally binding (i.e, an appeal against the order confirming the plan is no longer possible) and any necessary remediation measures to cure the illiquidity or over-indebtedness, or both, have been implemented in accordance with the insolvency plan, for example, registration of the debt-for-equity swap with the competent commercial register.

If the performance of the plan is to be supervised, the court will make an order to that effect, together with the order terminating the insolvency proceedings. The insolvency court will then order the termination of supervision when:

• all the claims covered by the plan have been satisfied (or satisfaction is guaranteed); or
• three years have elapsed since the termination of the insolvency proceedings and no application to commence a new insolvency proceeding has been filed.

INSOLVENCY TESTS AND FILING REQUIREMENTS

Conditions for insolvency

15. What is the test to determine if a debtor is insolvent?

In general, the Insolvency Code specifies two criteria for establishing insolvency:

• illiquidity; and
• over-indebtedness, if the debtor is a legal entity (e.g, a limited liability company or stock corporation) or a (limited liability) partnership that has solely legal entities as (general) partners.

Illiquidity

According to the Insolvency Code, a debtor is illiquid when it is unable to pay its debts as they fall due. A company is deemed to be illiquid if it has ceased making payments. The German Federal Court of Justice has, however, established the following qualifications:

• the debtor is not considered illiquid if it can reasonably be expected that it will meet its due payment obligations within no more than three weeks from their due date, including any new obligations becoming due during the three-week period (German Federal Court of Justice decision of 19 December 2017 (II ZR88/16));
• where the liquidity shortfall amounts to less than 10 per cent of all due payment obligations, the company is only considered illiquid if the shortfall is likely to increase to more than 10 per cent in the near future; and
• where the liquidity shortfall amounts to 10 per cent or more of the due payment obligations, illiquidity is assumed, unless there is a high likelihood that the shortfall will soon be covered completely or almost completely, and the creditors can be reasonably expected to wait.

Accordingly, a mere temporary interruption of payments will not constitute illiquidity.

Over-indebtedness

Under the German Insolvency Code, a company is over-indebted if:

• based on a balance sheet based on liquidation values, its liabilities exceed its total assets (including hidden reserves); and
• the company does not have a positive going-concern prognosis.

A positive going-concern prognosis generally exists if it is more likely than not that the business of the company can be continued as a going concern without becoming cash-flow insolvent within the forecast period of 12 months. If there are material liabilities that become due beyond the 12-month period and that the company is in all likelihood unable to honor, the 12-month period may be extended (but this is not entirely clear). Under the SanInsKG, which came into force on 9 November 2022, the forecast period for the going-concern prognosis has been shortened from the aforementioned 12 months to 4 months until 31 December 2023.

It should, however, be noted that the regular 12-month forecast period might already become relevant again from 1 September 2023, if the management can recognize that a predominant likelihood of the company being fully financed for a period of 12 months starting from 1 January 2024 cannot be assumed.

Imminent illiquidity

Also, the Insolvency Code establishes the concept of imminent illiquidity. The debtor is deemed to be imminently illiquid if it is likely to be unable to meet its existing payment obligations when they fall due. This is particularly the case when it appears that the company is more likely to become illiquid than to recover. For the imminent illiquidity test, as of 1 January 2021, the German legislator has set the forecast period to 24 months. Imminent illiquidity gives the debtor, but not the creditors, the right to initiate a restructuring or liquidation under the Insolvency Code. It does also constitute the entry condition for the tools available under the StaRUG.

Mandatory filing

16. Must companies commence insolvency proceedings in particular circumstances?

Each managing director, or each member of the management board, of a legal entity (eg, limited liability company or stock corporation), a (limited liability) partnership that has solely legal entities as (general) partners or an unincorporated company is obliged to file for insolvency without undue delay and at the latest within three weeks of the date on which the company has become illiquid or within six weeks of the date on which the company has become over-indebted (as defined in the Insolvency Code).

The managing directors are not obliged to file for insolvency immediately if they can reasonably expect that the illiquidity or over-indebtedness will be remedied within three, respectively six, weeks. However, each managing director is obliged to file for insolvency whenever it becomes clear that the illiquidity or over-indebtedness cannot be remedied. This is deemed to be the case after the three weeks, respectively the six weeks, have lapsed.

The obligation to file for insolvency does not only apply to the managing directors or management board members of German entities, but also to the corresponding legal representatives of foreign companies that have their center of main interests in Germany.

Each shareholder of a limited liability company is also obliged to file for insolvency if the company has become illiquid or is over-indebted (or both), and the company does not have, or no longer has, a managing director. The same applies to each member of the supervisory board of a stock corporation if the stock corporation does not have, or no longer has, a management board.

It should be noted that under the SanInsKG, which came into force on 9 November 2022, the maximum period for filing for the commencement of insolvency proceedings because of an over-indebtedness is extended from six to eight weeks until 31 December 2023. The SanInsKG has not modified the obligation to file for insolvency in relation to illiquidity.

DIRECTORS AND OFFICERS

Directors’ liability – failure to commence proceedings and trading while insolvent

17. If proceedings are not commenced, what liability can result for directors and officers? What are the consequences for directors and officers if a company carries on business while insolvent?

If the managing directors of a German limited liability company and the members of the management board of a stock corporation do not comply with the obligation to file for insolvency, they can be held liable for damages resulting from the delayed initiation of insolvency proceedings and may also be liable for a fine or prison sentence of up to three years under German criminal law.

Damage claims for the delayed initiation of insolvency proceedings can be asserted by the insolvency administrator, if the underlying contract from which the claim of a creditor against the debtor results was concluded prior to the insolvency of the company, or by the creditors, if the underlying contract was concluded after the insolvency of the company, but before insolvency proceedings were actually initiated.

If a shareholder of a limited liability company or a member of the supervisory board of a stock corporation does not comply with the obligation to apply for insolvency proceedings, they may be liable for a fine or prison sentence of up to three years under German criminal law.

The aforementioned liabilities do not only apply in the case of not filing an application for the commencement of insolvency proceedings (in due course), but also in the case of an incorrect filing (e.g, by missing required information).

In addition to personal and criminal liability, if a company carries on business while insolvent, certain transactions entered into by the insolvent company might be contested by the insolvency administrator after the commencement of the insolvency proceedings.

Directors’ liability – other sources of liability

18. Apart from failure to file for proceedings, are corporate officers and directors personally liable for their corporation’s obligations? Are they liable for corporate pre-insolvency or pre-reorganization actions? Can they be subject to sanctions for other reasons?

In principle, the managing directors of a German limited liability company and the members of the management board of a stock corporation are not personally liable for their company’s obligations concerning its creditors. Notwithstanding this, directors can be held liable, jointly with the company, for a defective product if the defectiveness results from insufficient supervision or organization of the production and monitoring process.

Generally, the managing directors of a German limited liability company and the members of the management board of a stock corporation are required to exercise the diligence expected of a responsible businessperson in the conduct of the affairs of the company. If they fail to do so, they will be jointly and severally liable to the company for any resulting damage. The obligation to exercise the diligence expected of a responsible businessperson also includes the duty, if a crisis threatens, to consider all possible remedial steps and, as far as possible, to initiate such measures.

This general duty of the management has been stipulated and further detailed by section 1 of the German Act on the Stabilization and Restructuring Framework for Companies (StaRUG). According to this standard, a general duty to recognize and manage crises at an early stage applies to the management of legal entities as well as to the management of limited liability entities without legal personality.

Management must continuously monitor developments that could jeopardize the existence of the company. If such developments are identified, management must take appropriate countermeasures and report to the corporate bodies responsible for supervising management without delay. Thus, management must implement a system for early crisis detection in their corporate organization, irrespective of the legal form. Any further obligations from other laws remain unaffected by this provision.

Furthermore, the managing directors of a German limited liability company and the members of the management board of a stock corporation are required to call a shareholders’ meeting if it appears to be in the best interests of the company. A special meeting must be called without undue delay if it appears from the annual balance sheet, or from a balance sheet prepared during the fiscal year, that half or more of the share capital has been eroded. A managing director who fails to notify the shareholders in these circumstances may become criminally liable.

Whenever the company is insolvent, the managing directors and the management board members must ensure that the company generally ceases to make payments, unless the payments are consistent with the due care of a prudent businessperson. The management is under an obligation to apply an emergency management with the effect that it may only make such payments that are necessary to avoid an immediate breakdown of the business.

Notwithstanding this, after the occurrence of illiquidity or over-indebtedness, payments in the ordinary course of business are basically still permitted as long as management pursues the preparation of an insolvency filing or measures to remedy the insolvency in a responsible and conscientious way (see section 15b of the Insolvency Code, which has replaced specific provisions in company laws as of 1 January 2021 and applies to payments made after 1 January 2021).

Moreover, for the period in which the obligation to file for insolvency was suspended in accordance with the provisions installed due to the covid-19 pandemic, payments made in the ordinary course of business, in particular for the maintenance or resumption of business operations or the implementation of a restructuring plan, were privileged and thus not subject to the above-described prohibition of payments.

Accordingly, after the occurrence of illiquidity or over-indebtedness, the managing directors and the management board members can be held personally liable for payments that result in a reduction of the insolvent estate. Also, they may be held personally liable for (earlier) payments to a shareholder that resulted in the illiquidity of the company, unless such payments were consistent with the due care of a prudent businessperson. However, these damage claims are to be asserted by the insolvency administrator in favor of the insolvency estate.

Apart from this, a managing director may be liable for pre-insolvency actions that are inconsistent with an orderly management of affairs leading to a reduction of the (insolvency) estate. For instance, a prison term of up to five years or a fine may be imposed on a managing director who, in the event of over-indebtedness or an impending or actual illiquidity of the company:

• conceals or removes or, in a manner inconsistent with the requirements of an orderly management of affairs, destroys, damages or renders useless parts of the estate that would belong to the insolvency estate in the event of the initiation of insolvency proceedings;
• fails to keep commercial books that they are obligated to keep under the law, or keeps or changes such books, in a manner that makes the view of the financial status more difficult; or
• contrary to the requirements of commercial law, prepares balance sheets in a manner that makes the assessment of the financial status more difficult.

A prison term of up to two years or a fine may be imposed on a managing director who, knowing the illiquidity of the company, grants to a creditor a security or satisfies a debt to which it is not entitled or not entitled in such form or not entitled at such time, and thereby intentionally or knowingly prefers it over other creditors.

In principle, these offenses are only actionable if the company has stopped its payments, or if insolvency proceedings have been commenced, or if opening of insolvency proceedings has been rejected for lack of funds.

According to section 69 of the Fiscal Code of Germany, a personal liability can arise for tax liabilities of the company, provided that such taxes have intentionally or negligently not been paid.

The managing directors can also be personally responsible for financial damages relating to:

• fraud (section 263 of the Criminal Code);
• breach of trust (section 266 of the Criminal Code); and
• withholding and embezzlement of employees’ contributions to social insurance (section 266a of the Criminal Code).

Directors’ liability – defenses

19. What defenses are available to directors and officers in the context of an insolvency or reorganization?

Available defenses mainly depend on the status of the crisis and the type of reorganization procedure, namely:

• if a company enters a stage of (financial) crisis, but the managing directors are not (yet) obliged to file for insolvency, there are a number of potential measures that should, and partially must, be taken by the directors and officers, reviewing and potentially increasing the level and the quality of documentation to demonstrate that:
• the management has properly analyzed different (restructuring) options (including an out-of-court restructuring under the StaRUG) and scenarios;
• payments have still been made in accordance with the law; and
• the management does not have to file for insolvency (yet) – for example, by preparing, among other things, a liquidity forecast to prove that the company is neither over-indebted (as there is a predominant likelihood that the company’s business can be continued within the next 12 months (four months until 31 December 2023 under the Act on the Temporary Adjustment of Restructuring and Insolvency Law Provisions to Mitigate the Consequences of the Crisis (SanInsKG)) nor illiquid;
• closely monitoring the financial situation of the company as, in the case of a stock corporation and at least a larger limited liability company, the management must ensure that an appropriate organizational setup is in place that enables a constant analysis and monitoring of the operational, commercial and financial situation and performance of its undertaking. This corresponds to the general obligation, which is relevant for all companies, to install early detection systems to ensure that material risks for the company are identified at an early stage (section 1 of the StaRUG);
• briefing the shareholders on the financial situation of the company and presenting suggestions for a financial restructuring of the company; and
• depending on the complexity and development of the crisis, seeking independent, professional advice (e.g, to receive an opinion that the company can (still) continue its business or assess the value of assets in a due diligence review) and informing such advisers about the company’s situation.

If a third party (e.g, an insolvency administrator) claims a breach of duty by the management, the aforementioned measures can enable the directors and officers to prove that they have complied with all duties in the context of the (financial) crisis (also taking into consideration that the burden of proof is often on the director).

In this context, the need to take these measures increases if the success or viability of the company might be endangered and an insolvency is imminent, with the result of more expansive analysis and scrutiny being required. In such cases, the management generally becomes obliged to analyze even more specifically the predicted operational and financial performance, potential future threats (including their reasons) and potential mitigation and remediation measures. Any such analysis, including results and evaluation by the management, should then be documented in even more detail.

Furthermore, to a certain extent, it is possible that the directors will be indemnified by the company in connection with their actions as an operating director. The scope of such potential indemnity depends on whether the company is a limited liability company or a stock corporation.

In the case of a limited liability company, it is possible to exclude the liability for all cases except for gross negligence and intentional breaches of duties. However, liability for non-compliance with the rules on the maintenance of share capital and for payments made after the company has become insolvent, and any liability under criminal law, cannot be limited. Usually, the indemnity is provided by way of a shareholders’ resolution.

In the case of a stock corporation, an indemnity cannot be granted in advance. The officers can, however, ask the general meeting to approve a management decision. Following an approval, they are not liable to the company for the consequences of the decision. Also, the directors (or the company) can take out directors’ and officers’ insurance, which is intended to protect directors against claims for breaches of their duties.

If an insolvency proceeding has been commenced and the insolvency court has approved the self-administration, so that the management can continue to manage the insolvency estate under the supervision of a custodian, the aforementioned measures are, in general, also available (except for indemnifications by the company owing to the lack of power of the shareholders). It is also recommendable to appoint an external restructuring expert as a chief restructuring officer, so that the management board can demonstrate sufficient knowledge and experience to handle a restructuring process in self-administration. This should also be considered in connection with an out-of-court restructuring under the StaRUG.

To alleviate the impact of the covid-19 pandemic, the German legislator had, among other things, introduced a temporary suspension of the obligation to file for insolvency in certain circumstances (lately, until 30 April 2021), and a corresponding limitation of management’s liability for allowing affected companies to continue to do business. The relevant law provided for certain rebuttable presumptions that took a significant burden off the directors in assessing whether the filing obligation was suspended or payments were carried out with the due care of a prudent director.

It should also be noted that under the SanInsKG, which came into force on 9 November 2022, the maximum period for filing for insolvency due to an over-indebtedness has been extended from six to eight weeks until 31 December 2023. The SanInsKG has, however, not modified the obligation to file for insolvency in relation to illiquidity.

Shift in directors’ duties

20. Do the duties that directors owe to the corporation shift to the creditors when an insolvency or reorganization proceeding is likely? When?

Generally, German insolvency law does not provide for a shift of directors’ duties to the creditors when an insolvency or restructuring proceeding is likely. Instead, it provides for:

• a duty to apply for the opening of insolvency proceedings if the company is insolvent (illiquid or over-indebted);
• potential directors’ liabilities in the case of non-compliance;
• specific duties and (payment) restrictions in a crisis or (imminent) insolvency, and potential liability in the case of non-compliance;
• certain rights for the creditors to participate in key decisions to be taken in conjunction with an insolvency proceeding (e.g, appointment of (preliminary) insolvency administrator order of self-administration); and
• rights for the insolvency administrator (or in the case of self-administration, the custodian) to contest transactions and payments of the insolvent company that prefer certain creditors (preferential transactions).

Regarding the StaRUG, the government draft of the law provided for a shift of duties, according to which from the onset of imminent illiquidity, management should have no longer been obliged to protect the interests of the shareholders, but rather the interests of the creditors as a whole (as well as a personal liability in the event of a violation of said duty). However, due to strong criticism of the legal prerequisites and the practical applicability raised by scholars and practitioners during the legislative process, such shift of duties was ultimately not incorporated in the new law.

Notwithstanding this, some scholars and practitioners are (still) in favor of such ‘shift of directors’ duties towards protection of creditors’ interests, in particular if a restructuring under the StaRUG is the only or best, or both, restructuring tool available to the debtor. In practice, this discussion foremost has an impact on whether management requires a shareholders’ resolution to initiate such restructuring (by way of notifying the restructuring court) and to avoid any risk of personal liability.

For instance, the local court of Hamburg (order of 17 March 2023 – 61c RES 1/23) decided that the initiation of a restructuring under the StaRUG by the managing director of a German limited liability company required an approving shareholders’ resolution passed with a qualified majority (75 per cent). This decision has been criticized in legal literature so that any further development of the ongoing discussion remains to be observed.

In this context, it should also be noted that, once a proposed restructuring has become pending upon notification to the restructuring court, the debtor’s management must procure the restructuring matter with the due care of a prudent and conscientious manager in recovery proceedings, safeguarding the interests of the general body of creditors.

Directors’ powers after proceedings commence

21. What powers can directors and officers exercise after liquidation or reorganization proceedings are commenced by, or against, their corporation?

This depends on whether the insolvency court appoints an insolvency administrator or approves self-administration.

If the insolvency court appoints an insolvency administrator, the right to manage and transfer the debtor’s assets passes to the insolvency administrator after the opening of insolvency proceedings. Therefore, if the managing directors, after the opening of insolvency proceedings, transfer an object forming part of the insolvency estate (without the consent of the insolvency administrator), such transfer is legally invalid, subject to certain exceptions.

Once the application to open insolvency proceedings has been filed, but before an order has been made opening the insolvency proceedings, the court may appoint a preliminary insolvency administrator. Usually, a preliminary insolvency administrator has fewer powers than an insolvency administrator, although the scope is similar and, if necessary, they can manage and dispose of the debtor’s assets (in which case, they are referred to as a strong preliminary insolvency administrator).

However, the preliminary administrator is generally not entitled to sell the entire enterprise or one of its businesses. The preliminary insolvency administrator’s primary role is to continue the business of the debtor and to examine whether or not the debtor is insolvent. The insolvency court is authorized to order that encumbered assets that are of particular significance for a restructuring must not be released to the secured creditors by the preliminary insolvency administrator.

Rather, the secured creditors are only entitled to demand compensation for the loss of value caused by the preliminary insolvency administrator’s usage. Liabilities incurred by a strong preliminary insolvency administrator, such as where they have been authorized to dispose of the debtor’s assets, are deemed to be liabilities of the estate, provided that the insolvency proceeding will be opened subsequently.

In contrast, sections 270 et seq of the Insolvency Code provide for a process called self-administration, whereby the debtor may, under the supervision of a custodian (usually an insolvency practitioner), continue to manage the insolvency estate and dispose of assets.

When using measures provided under the StaRUG, the debtor’s management retains full control of the company and its business operations. However, in certain cases, the court will appoint a restructuring officer to supervise the debtor-in-possession process (e.g, if cross-class cramdown is required, which does not relate solely to financial creditors).

MATTERS ARISING IN A LIQUIDATION OR REORGANIZATION

Stays of proceedings and moratoria

22. What prohibitions against the continuation of legal proceedings or the enforcement of claims by creditors apply in liquidations and reorganizations? In what circumstances may creditors obtain relief from such prohibitions?

Pending legal proceedings

The Code of Civil Procedure imposes a stay on proceedings when the court opens insolvency proceedings. In a judgment dated 16 May 2019 (V ZR 295/16), the German Federal Court of Justice clarified that proceedings are only interrupted if the subject matter directly or indirectly affects the insolvency estate. If several claims are asserted within a proceeding, the proceeding will be suspended if merely a part of these claims concerns the insolvency estate.

If the court has appointed a strong preliminary insolvency administrator, so that the debtor is generally prevented from selling assets already at an earlier stage, then the stay of proceedings commences when the court appoints the preliminary insolvency administrator.

Once insolvency proceedings have been formally opened, the insolvency administrator is entitled to choose whether to continue with legal proceedings initiated by the debtor pre-insolvency.

Enforcement of claims

Once insolvency proceedings have been formally opened, creditors are prevented from enforcing their claims. In certain circumstances, the court could impose a stay on the initiation of enforcement of claims or suspend pending enforcement actions before insolvency proceedings are formally opened. As regards pending enforcement actions over immovables, only the court seized with the claim has the right to suspend such actions.

Creditors cannot, in general, apply to the court to lift this moratorium on enforcement actions. There are, however, exceptions. Creditors who can show that an asset does not belong to the estate because of a right of segregation may enforce their claim irrespective of the insolvency proceedings. Creditors with a right to separate satisfaction are also exempted; they may claim preferential satisfaction of their claim from the respective asset.

For those financial institutions subject to the Banking Act, the German Federal Financial Supervisory Agency may suspend transactions by and against the institution to avoid its insolvency, for example, by ordering a moratorium.

Under the German Act on the Stabilization and Restructuring Framework for Companies (StaRUG), the debtor may, even in the preparatory phase, apply to the court for a moratorium on foreclosure and enforcement (also with regard to third-party security provided by affiliates of the debtor) to secure the chances of implementing a restructuring plan.

This court application must be supplemented by a draft of the restructuring plan or concept as at the day of the application, as well as a financial plan covering the next six months (under the Act on the Temporary Adjustment of Restructuring and Insolvency Law Provisions to Mitigate the Consequences of the Crisis, until 31 December 2023, that is, four months), demonstrating the availability of sufficient cash during that period. Also, the debtor must declare whether:

• there are arrears to employees, tax authorities, social security institutions or suppliers;
• enforcement restrictions or moratoria have been imposed in the last three years; and
• the commercial disclosure requirements of the annual financial statements have been complied with for the last three financial years.

The moratorium is to last up to three months. However, this maximum period may be extended by one month if the debtor has submitted a restructuring plan that is expected to be adopted within a period of one month, or extended up to eight months if the debtor has (already) requested the judicial confirmation of a plan approved by the creditors.

Effects of such a moratorium on foreclosure and enforcement are that:

• execution measures against the debtor are prohibited or discontinued on an interim basis (stay of execution); and
• rights to movable assets, which might be asserted as a separate satisfaction right or a right to segregation if insolvency proceedings are opened, may not be enforced by the creditor; instead, such assets may be used for the continuation of the debtor’s business to the extent that they are of considerable significance for this purpose (stay of realization).

During the moratorium, contractual counterparties may not withhold performance of contractual obligations based on outstanding payments by the debtor at the time of the order and creditors are prevented from initiating insolvency proceedings for the duration of a stabilization measure.

For the duration of the stabilization measure, secured creditors who are unable to enforce their claims are economically protected. To the extent they are economically entitled to the value of the security, they must be paid the contractually owed interest, and any loss in value resulting from continued use must be compensated by ongoing payments. Also, in the case of revolving security, the proceeds must either be distributed to the secured creditor or separated, so that they are in principle not available for the financing of business operations (although deviating agreements with the secured creditors are possible). This limitation affords secured creditors a strong negotiating position if a stabilization measure is ordered.

These moratoria do not affect financial collateral (as defined in paragraph 17, section 1 of the Banking Act; for example, cash deposits, pledges or fiduciary transfers of securities) and collateral granted to the participant of a securities settlement system (as defined in paragraph 16, section 1 of the Banking Act).

Doing business

23. When can the debtor carry on business during a liquidation or reorganization? Is any special treatment given to creditors who supply goods or services after the filing? What are the roles of the creditors and the court in supervising the debtor’s business activities?

Sections 270 et seq of the Insolvency Code provide that the debtor may, under the supervision of a custodian (usually an insolvency practitioner), continue to manage the insolvency estate and dispose of assets (a process called self-administration). This is similar to the debtor-in-possession provisions of Chapter 11 of the US Bankruptcy Code. Such self-administration can be ordered by the insolvency court as preliminary self-administration when filing for insolvency or as self-administration in connection with the commencement of the insolvency proceeding. Thus, the debtor can continue to manage the insolvency proceeding without any interruption (e.g, by an appointment of a preliminary administrator).

The prerequisite for the proceedings is that the insolvency court orders (preliminary) self-administration when the debtor applies for the opening of insolvency proceedings. So far, the conditions for the making of such a court order were:

• that the debtor had applied for the order; and
• that there were no circumstances that led to the expectation that such an order would disadvantage creditors.

However, following an assessment conducted by the German legislator, the self-administration regime has been adjusted as of 1 January 2021, to align it more closely with the interests of creditors (noticing that the old regime could still apply for applications made until 31 December 2021, if the insolvency of the debtor resulted from the covid-19 pandemic).

Accordingly, since 1 January 2021, the debtor must provide comprehensive documentation with the self-administration application. This should include a self-administration plan containing:

• a financial plan;
• a concept for the implementation of the insolvency proceedings and the envisaged (restructuring) measures;
• a presentation of the status of negotiations with creditors, persons invested in the debtor and third parties on the envisaged measures;
• a presentation of the precautionary measures taken by the debtor to ensure its ability to fulfil obligations under insolvency law; and
• a justified presentation of any additional or reduced costs likely to be incurred during self-administration in comparison to regular insolvency proceedings and in relation to the insolvency estate.

Moreover, the debtor must provide declarations regarding certain arrears, moratoria, injunction of foreclosure and enforcement and compliance with commercial disclosure obligations within the past three years.

Under the adjusted regime, self-administration is ordered by the insolvency court if:

• the debtor’s self-administration plan is complete and coherent; and
• no circumstances are known that indicate self-administration planning is based on incorrect facts in material respects. This applies to both the order of preliminary self-administration as well as the order of self-administration.

Also, if a preliminary creditors’ committee unanimously approves or rejects the debtor’s application, the insolvency court is bound by such vote.

If the restructuring plan is successful and the debtor is to continue its business once the insolvency proceeding has come to an end, the plan may provide for the continued supervision of the debtor’s performance. That supervisory role is carried out by the custodian.

Furthermore, section 270d of the Insolvency Code provides for the protective shield procedure, which puts a moratorium in place on creditor enforcement for a limited period. The conditions for opening the protective shield procedure are that:

• the debtor applies for it when over-indebtedness or imminent illiquidity (or both) has occurred (as defined in the Insolvency Code); and
• the intended restructuring has reasonable prospects of success.

If these requirements are met, the insolvency court may, without opening regular preliminary insolvency proceedings, order the moratorium on creditor enforcement for a maximum of three months, during which the debtor must, under the supervision of a custodian (usually an insolvency practitioner), establish and present a restructuring plan. A debtor cannot apply for the protective shield procedure if it is already illiquid (as defined in the Insolvency Code). However, in light of the covid-19 pandemic, exceptional access to the protective shield procedure was facilitated for illiquid debtors who filed for insolvency in 2021 and met certain requirements.

Regarding the continued trading of the debtor’s business after the opening of the insolvency proceedings, creditors who supply goods or services are paid as priority creditors of the estate. Examples of priority liabilities of the estate include liabilities:

• incurred by the insolvency administrator – or self-administering management – or otherwise as a result of the administration, disposition, sale and distribution of the insolvency estate; and
• arising after the opening of the insolvency proceeding from continuing contracts (e.g, employment agreements and lease agreements), and contracts that the administrator has adopted.

In this context, it has been codified that the insolvency court may authorize the debtor in the preliminary self-administration proceeding to incur priority liabilities, thereby eliminating any legal uncertainty that has previously existed. Also, the (preliminary) self-administering management is liable to the creditors for damages like an insolvency administrator acting in a regular insolvency proceedings (i.e, the self-administering managers may be held personally liable if they intentionally or negligently breach the duties incumbent upon insolvency administrators under the Insolvency Code, or if a priority liability created as a result of a legal act by the self-administrating debtor cannot be settled in full out of the insolvency estate).

In a judgment dated 3 December 2019 (II ZR 457/18), the German Federal Court of Justice confirmed that the self-administering management may also sell the debtor’s assets by way of an asset deal; in other words, self-administration proceedings do not necessarily need to result in implementing an insolvency plan.

When using measures under the StaRUG, the debtor’s management generally retains full control of the company and its business operations. However, in certain cases, the court will appoint a restructuring officer to supervise the debtor-in-possession process (e.g, if an impairment of third-party security is proposed or cross-class cramdown is required, which does not relate solely to financial creditors). Also, if certain requirements are met, the restructuring court may establish a creditors’ advisory committee supporting and monitoring the debtor’s management activities.

Post-filing credit

24. May a debtor in a liquidation or reorganization obtain secured or unsecured loans or credit? What priority is or can be given to such loans or credit?

Generally, the insolvency administrator may borrow loans and other credit to secure the necessary financing for a continuation of the debtor’s business. Such liabilities incurred by the insolvency administrator are treated as priority liabilities of the insolvency estate. As priority liabilities, they will be settled prior to the satisfaction of unsecured creditors, albeit only after the costs of the insolvency proceedings, which are also priority liabilities, and the secured creditors have been satisfied. The insolvency administrator must obtain the consent of the creditors’ committee or, if a creditors’ committee has not been appointed, the consent of the creditors’ meeting if a debt is to be incurred that would significantly burden the insolvency estate.

To enable a successful restructuring, a reorganization plan can also give priority to creditors that either:

• make loans or give credit to the debtor or a takeover company during the period of supervision (which follows the ratification of the plan); or
• permit existing loans or credits to continue during this time.

Those liabilities are also priority liabilities. They will not only be paid prior to satisfaction of those unsecured creditors who already exist, but also to new creditors entering into contractual agreements with the debtor within the period of supervision, while secured creditors will still be paid first. The aggregate maximum amount of such priority credit will be fixed in the plan. Further, such preferential satisfaction requires an agreement between the debtor or takeover company and the respective creditor and written approval by the insolvency administrator.

Within the scope of the StaRUG, a restructuring plan may also encompass the provision of new financing where, based on the plan, this is necessary to finance the restructuring. Such financing, as well as any security provided in respect thereof, is, in principle, excluded from clawback risks in a subsequent insolvency proceeding and privileged with regard to lender liability.

An exception from the privilege applies if the confirmation of the plan is based on incorrect or incomplete information provided by the debtor and the other party was aware of this. Also, this privilege only applies to the granting of new financing and pertaining security, but not to its repayment. Moreover, it is only applicable for a limited period until the debtor is sustainably restructured. Against this background, it is to be expected that restructuring opinions are still requested by lenders to protect themselves against clawback and liability risks.

Extensions and deferrals of existing loans do not qualify for the aforementioned privileges. The law does not provide any privileges for bridge financings. Moreover, the German legislator has not enacted the option of creating a priority position for new financing in any subsequent insolvency proceedings (see paragraph 4, article 17 of Directive (EU) 2019/1023). However, including a provision in the restructuring plan that grants priority to new financing over existing creditors is possible.

Sale of assets

25. In reorganizations and liquidations, what provisions apply to the sale of specific assets out of the ordinary course of business and to the sale of the entire business of the debtor? Does the purchaser acquire the assets ‘free and clear’ of claims or do some liabilities pass with the assets?

Upon the opening of insolvency proceedings, which include either a restructuring or liquidation, the insolvency administrator is entitled to sell the debtor’s assets. If the insolvency administrator intends to effect transactions of special significance to the insolvency proceedings, they require the approval of the creditors’ committee or the creditors’ meeting. In particular, approval is necessary if the entire enterprise, or one of its businesses, is to be transferred.

In practice, most insolvency administrators – in alignment with the major secured and unsecured creditors – aim to sell the business as a going concern as soon as possible by way of an asset sale to realize the best possible price and to preserve the greatest possible number of jobs. In this context, according to a judgment of the German Federal Court of Justice (12 May 2020 – IX ZR 125/17), the standard of liability stipulated for the management of stock corporations (the business judgment rule) does not apply for business decisions to be made by insolvency administrators.

The relevant benchmark for a business decision of an insolvency administrator is the best possible satisfaction of the creditors and the objective of the relevant proceeding jointly agreed by the creditors (i.e, liquidation, asset sale or insolvency plan).

In general, the sale of assets is free and clear of any liability on the part of the buyer, provided that the insolvency proceedings have actually been opened. According to a judgment of the German Federal Court of Justice (3 December 2019, II ZR 457/18), the same is true for a sale of assets executed within self-administration proceedings.

However, such asset sale does not typically affect creditors with security rights in rem to the assets. As a rule, the insolvency administrator is entitled to dispose of encumbered movable assets that are in the possession of the debtor and subsequently pay off the secured creditors with the proceeds from the sale (section 166 of the German Insolvency Code).

On 27 October 2022 (IX ZR 145/21), the Federal Court of Justice decided that the insolvency administrator’s right of realization under section 166 of the German Insolvency Code does not extend to other rights mentioned therein (i.e, apart from movable property in the possession of the administrator and receivables assigned for security purposes, the right of realization of the insolvency administrator does not extend to other rights such as, in particular, pledged company shares or assigned or pledged IP rights).

Therefore, while it has been so far fiercely debated whether a secured creditor remains entitled to enforce a share pledge after the insolvency filing of the pledgor, based on this judgment a robust view can be taken that the right to enforce a share pledge remains vested with the secured creditor.

In practice, the insolvency administrator usually provides the acquirer of the debtor’s business (or certain parts thereof) with a release letter from the main secured creditors confirming that the security will be released upon payment of the purchase price. Apart from this, under section 613a of the Civil Code, the sale of a business (as a whole or in part) causes all employment relationships pertaining to this business (or the respective part sold) to be transferred by operation of law to the buyer (unless the employees concerned object to the transfer of their employment).

However, any claims of the employees against their employer that came into existence prior to the opening of insolvency proceedings are in general considered as ordinary insolvency claims with no priority; in other words, the acquirer is not liable for the debts of the debtor. Following a referral to the Court of Justice of the European Union (9 September 2020 – Case C-674/18 and Case C-675/18), the Federal labor Court has confirmed that such rule does also apply to pension claims (26 January 2021, 3 AZR 139/17 and 3 AZR 878/16). The decision has brought some additional certainty for investors regarding the acquisition of a business out of insolvency proceedings.

Under the StaRUG, restructuring plans may also provide for asset deals. Under certain conditions, such asset deals may be excluded from clawback risks in a subsequent insolvency proceeding (at least to a certain extent). This exclusion requires, among other things, that the creditors who are not affected by the plan can be satisfied in priority to the creditors affected by the plan from the appropriate consideration in view of the value of assets transferred.

Negotiating sale of assets

26. Does your system allow for ‘stalking horse’ bids in sale procedures and does your system permit credit bidding in sales?

Subject to approval at the creditors’ meeting, the insolvency administrator might pursue stalking horse bids in a sale procedure. In practice, however, such bids do not seem to be particularly relevant as the insolvency administrator will usually aim to dispose the debtor’s business as soon as possible, and will not focus too much on preliminary stalking horse bids that could considerably delay the sales procedure and ultimately jeopardize the sale of the business. If the insolvency administrator expects that a number of parties might be interested in acquiring the debtor’s business, they will initiate an auction process to obtain the best possible price (and preserve the likelihood of a sale in a well-ordered process).

Under the Insolvency Code, a creditor may not unilaterally implement a credit bid in the sales process (unlike in a security enforcement process initiated by creditors outside of insolvency proceedings). It is possible, however, for the insolvency administrator and the acquirer of the debtor’s business, who is also a secured creditor, to agree that the consideration owed by the acquirer is (partly) paid by way of a set-off or a similar type of settlement, subject to creditors’ meeting approval (as, for instance, in the insolvency proceedings of the German solar manufacturer SolarWorld in 2017).

If the acquirer’s claims against the debtor are only unsecured insolvency claims, these claims cannot be considered at nominal value; if at all, such claims could at best be valued at a percentage equaling the insolvency quota. As to assigning a claim of a (secured) creditor, there are no restrictions under the Insolvency Code. If a creditor aims to acquire the business of the debtor (i.e, the insolvent company), it is more often the case that this will be achieved by implementing an insolvency plan (e.g, providing for a debt-for-equity swap).

Rejection and disclaimer of contracts

27. Can a debtor undergoing a liquidation or reorganization reject or disclaim an unfavorable contract? Are there contracts that may not be rejected? What procedure is followed to reject a contract and what is the effect of rejection on the other party? What happens if a debtor breaches the contract after the insolvency case is opened?

Any mutual contracts that have not been performed by either party in full at the time of the formal opening of insolvency proceedings become unenforceable, unless the insolvency administrator chooses to perform the contract. The counterparty to such a contract can require the insolvency administrator to decide without delay whether to perform the contract. If the insolvency administrator does not make a decision, after having received such request, the insolvency administrator’s option to elect performance of the contract falls away.

Any damages incurred by the other party because of such avoidance of contract may be filed as an ordinary, unsecured insolvency claim. According to the German Federal Court of Justice (16 May 2019, IX ZR 44/18), the right of the insolvency administrator to opt for the adoption of the contract generally only applies if the outstanding obligations under the respective contract are reciprocal main obligations.

Contracts for the sale of goods by the insolvent company that are subject to retention of title remain in place upon request of the purchaser if possession of the goods was transferred to the purchaser prior to the formal commencement of the insolvency proceedings. If, on the other hand, the insolvent company prior to the opening of the proceedings has purchased goods and received possession of such goods subject to retention of title by the seller, the insolvency administrator may postpone their decision on the option to maintain the contract until the date of the information hearing.

Where the insolvent company is tenant under contracts for the lease of real estate, the insolvency administrator may terminate the lease giving the relevant statutory notice period, irrespective of the agreed contractual term. The landlord is not entitled to terminate a contract because of the insolvency of the tenant as long as the tenant is performing after the filing for insolvency proceedings (arrears from the time prior to filing are disregarded). Employment contracts where the insolvent company is the employer may be terminated by either party with a notice period of three months, irrespective of any contractual provision to the contrary.

In the insolvency proceedings, employees can be made redundant with the benefit that severance payments under a social plan are capped at an aggregate maximum amount of two-and-a-half times the monthly salary per employee. However, even after the commencement of the insolvency proceedings, the Employment Protection Act still applies, which may constrain redundancies by the insolvency administrator.

In self-administrations (section 270 et seq of the Insolvency Code), the provisions on the performance of mutual contracts in an insolvency scenario also apply, allowing the self-administering management of the insolvent company to exercise the insolvency administrator’s rights. The self-administering management is, however, supervised by a custodian (usually an insolvency practitioner) whose consent is required for certain measures. Where an insolvency administrator (or, in the event of a self-administration, the debtor) breaches the approved mutual contract mentioned above, the other party can claim the resulting damage.

Such a damages claim would be a claim to the estate, which would take priority over insolvency claims. However, if the insolvency administrator (or, in the event of a self-administration, the debtor) has opted for the non-performance of the contract, the resulting damage may only be filed as non-preferred insolvency claim.

The StaRUG does not provide for a right to terminate contracts, since corresponding provisions, which were originally provided for in the draft law, have been deleted in the final version. Insofar as operational restructuring measures are required, financial creditors must make their consent conditional on the implementation of a corresponding concept (or to consider an operational and financial restructuring by implementing an insolvency plan).

Notwithstanding this, the restructuring plan may impair outstanding receivables resulting from any contracts (except for those related to employees).

Intellectual property assets

28. May an IP licensor or owner terminate the debtor’s right to use the IP when a liquidation or reorganization is opened? To what extent may IP rights granted under an agreement with the debtor continue to be used?

There are no specific statutory provisions dealing with intellectual property rights in insolvency. In the event of the insolvency of the licensee, the insolvency administrator has the right to continue the license agreement under its present terms or reject its continuation (any claims for damages of the licensor for non-performance being insolvency claims). Contractual clauses providing for a right of the licensor to terminate the license agreement upon the opening of insolvency proceedings over the estate of the licensee will, at least according to the prevailing view, be void.

In the event of the insolvency of the licensor, the different types of licenses (exclusive and non-exclusive, main licenses and sub-licenses) and intellectual property rights (patents, trademarks and copyrights) need to be reviewed individually to determine whether the licensee is still the owner of a license and authorized to use it. Generally, the insolvency administrator over the estate of the licensor has a right to opt to continue the license agreement. Concerning an exclusive copyright main license (for software or films), the High Court of Mannheim held that the choice of non-performance resulted in the licensee’s loss of the license (judgment of 27 June 2003, 7 O 127/03).

A judgment of the German Federal Court of Justice (17 November 2005, IX ZR 162/04) shows a possible way to ensure the continuous use of software by the licensee in the event of a licensor’s insolvency. In that case, the license agreement allowed both parties to terminate the agreement if the continuation of the agreement was unacceptable to one party.

The agreement further provided for a transfer of the source code of the software developed by the licensor to the licensee under the condition precedent of such termination, the licensee in this event being obliged to pay a one-off compensation to the licensor. In the insolvency proceedings over the estate of the licensor, the insolvency administrator chose not to continue the license agreement. Therefore, the licensee terminated the agreement. The court held that:

• the insolvency administrator had the right to choose not to further perform the license agreement;
• because of this, the licensee had the right to terminate the agreement; and
• as the transfer of the source code was already effected before the commencement of insolvency proceedings (although under a condition precedent that was only fulfilled after the commencement of the insolvency proceedings), this transfer was not affected by the commencement of the insolvency proceedings and subsequent actions of the insolvency administrator.

In another judgment (21 October 2015, I ZR 173/14), the German Federal Court of Justice also stated that, under certain circumstances, insolvency administrators are no longer entitled to reject or assume contracts in relation to license buyouts once the mutual obligations of the parties to the license agreement have been fulfilled. According to the Regional Court of Munich (9 February 2012 – 7 O 1906/11), this is the case where the parties agree on an irrevocable and perpetual license that is not subject to any royalty fees, or where royalty fees have already been paid at once or at least upon the opening of insolvency proceedings, so that the license agreement is to be qualified as a sales contract.

On the contrary, the continuation of contracts, where continuing rights and obligations are foreseen, are determined by section 103 of the German Insolvency Code (i.e, they are subject to the disposition of the insolvency administrator). Regarding secondary obligations, the Regional Court of Munich (21 August 2014 – 7 O 11811/2) decided that only obligations that are manifestations of a functional reciprocity and are therefore agreed upon in the context of granting license may lead to the contract not being fulfilled by the parties in full.

Furthermore, the M2Trade (I ZR 70/10 of 19 July 2012) and Take Five (I ZR 24/11 of 19 July 2012) judgments of the German Federal Court of Justice stated that even if an (insolvent) sub-licensor loses the main license in an insolvency proceeding over its estate, any sub-licensee will still retain its sub-license (i.e, the loss of the main license does not automatically end the sub-license). In these judgments, the Federal Court of Justice also indicated a tendency towards treating all intellectual property rights sub-licenses equally. It remains unclear whether this also applies to main licenses.

Personal data

29. Where personal information or customer data collected by a company in liquidation or reorganization is valuable, are there any restrictions in your country on the use of that information or its transfer to a purchaser?

In addition to the Federal Data Protection Act, the Insolvency Code does not provide for any specific restrictions on using customer data within an insolvency proceeding. Therefore, it is not uncommon that the customer base of an insolvent company, which often represents an asset of significant value, is sold as part of an asset deal between the insolvency administrator and a third party. In this context, the Bavarian State Office for Data Protection Supervision (BayLDA) imposed a significant fine (a five-figure amount) on both the seller (ie, the appointed insolvency administrator) and the purchaser in connection with the sale of customer personal data.

According to the BayLDA, customer personal data (e.g, email addresses, phone numbers and credit card information) had been transferred unlawfully as part of an asset deal in violation of the Federal Data Protection Act, as the insolvency administrator and the purchaser failed either to obtain customer consent or, alternatively, give the customers an opportunity to object to the transfer of the personal data.

On 25 May 2018, Regulation (EU) 2016/679 on general data protection (GDPR) entered into force – together with a revised Federal Data Protection Act that also became effective on 25 May 2018. The GDPR raises some concerns among German insolvency practitioners, as it is questionable whether and under which conditions an insolvency administrator is a controller pursuant to article 4(7) of the GDPR, and therefore can be held liable for non-compliance with data protection rules.

Some insolvency experts reject a (potential) liability of the insolvency administrator, unless he or she has actual control over the data processing. The local court of Hamburg (judgment of 15 November 2021 – 11 C 75/21) has declined classifying the insolvency administrator as a controller pursuant to article 4(7) of the GDPR, arguing that the insolvency administrator would not fall within the scope of the GDPR (article 2, lit a). It remains to be seen if future court decisions will follow this view and provide further legal certainty.

In practice, depending on the type of transferred data, the asset purchase agreement usually requires the consent of the customers or the opportunity for customers to object to the transfer within a certain time.

Arbitration processes

30. How frequently is arbitration used in liquidation or reorganization proceedings? Are there certain types of disputes that may not be arbitrated? Can disputes that arise after the liquidation or reorganization case is opened be arbitrated with the consent of the parties?

There are no statistics addressing the number of arbitration proceedings in conjunction with insolvency proceedings.

After the opening of insolvency proceedings, the debtor loses its ability to be a party to a dispute in relation to the estate; instead, the insolvency administrator will be the right party. In principle, the insolvency administrator is, subject to certain exceptions, bound by an arbitration clause agreed by the debtor pre-insolvency. However, an arbitration clause agreed by the debtor prior to the opening of insolvency proceedings does not affect indispensable rights of the insolvency administrator, so that, for example, the insolvency administrator is not bound by an arbitration clause in respect of avoidance claims pursued by the insolvency administrator or proceedings related to the insolvency administrator’s right to reject the fulfillment of a contract.

Also, the insolvency administrator may refuse to submit to arbitration proceedings if there is insufficient money in the estate to cover the expenses of such proceedings. The insolvency court does not have the authority to direct the insolvency administrator to submit a dispute to arbitration. The insolvency administrator is, however, bound by the arbitration he or she has agreed to with the other party involved.

Apart from the exclusions mentioned above, in relation to the insolvency administrator’s intrinsic rights, there are no types of insolvency disputes that may not be arbitrated. Where the insolvency administrator is willing to enter into an arbitration agreement in an insolvency proceeding, the consent of the creditors’ committee or, if a creditors’ committee has not been appointed, the consent of the creditors’ meeting must be obtained.

Where the insolvency administrator rejects the claim, or another creditor objects to its insertion in the insolvency table, the creditor may need to bring proceedings to have the claim recognized. This may involve having to litigate or arbitrate an underlying dispute. In such litigation or arbitration, the court or tribunal will be asked to make a declaration, rather than order specific performance. If the arbitration tribunal grants a declaration that the underlying claim is valid, the creditor would be permitted to be included in the insolvency table. Where the counterparty obtained an arbitral award prior to the opening of insolvency, they can file such a claim with the insolvency table (although the insolvency officeholder could appeal the award).

The opening of insolvency proceedings does not automatically cause arbitration proceedings to be interrupted (contrary to ‘regular’ legal court proceedings). This depends mainly on the procedural rules applied by the arbitral tribunal. In any case, the insolvency administrator must have the chance to be heard in the arbitration proceedings. Otherwise, the arbitration award will not be recognized by German courts.

CREDITOR REMEDIES

Creditors’ enforcement

31. Are there processes by which some or all of the assets of a business may be seized outside of court proceedings? How are these processes carried out?

The court order opening insolvency proceedings imposes an automatic stay on unsecured creditors initiating or continuing actions against the company. Unsecured creditors can no longer enforce their rights in legal proceedings outside the insolvency proceedings.

The Insolvency Code does not impose an automatic stay on the enforcement by secured creditors. Creditors who claim that an asset does not belong to the estate because of a right of segregation, including retention of title creditors, are free to enforce their rights against the company. Creditors secured by charges on real estate may enforce such charges irrespective of the insolvency proceeding. The insolvency administrator may also initiate such enforcement proceedings (e.g, by selling real estate in an auction and paying the proceeds to the security holder). Hence, the creditor and the insolvency administrator are both equally and independently entitled to enforcement with respect to real estate.

Creditors with a security interest in movable property will mainly be prevented from enforcement, which may then only be initiated by the insolvency administrator. Movable assets that are subject to security held by creditors and receivables, which have been assigned for security purposes, will generally be sold by the insolvency administrator free and clear of the security, and the proceeds of such sale will be paid to the holders of such security, less a handling fee.

This does not affect financial collateral (as defined in paragraph 17, section 1 of the Banking Act, such as cash deposits, pledges or fiduciary transfers of securities) and collateral granted to the participant of a securities settlement system (as defined in paragraph 16, section 1 of the Banking Act). The insolvency administrator is not entitled to enforcement if the creditor is still in possession of the movable asset.

In this case, the creditor’s enforcement right remains unaffected by the opening of the insolvency proceedings. In addition, on 27 October 2022 (IX ZR 145/21), the German Federal Court of Justice clarified that the insolvency administrator’s right of realization under section 166 of the German Insolvency Code, which – as mentioned above – encompasses movable property in the possession of the administrator and receivables assigned for security purposes, does not extend to other rights such as, in particular, pledged company shares or assigned or pledged IP rights.

Under the German Act on the Stabilization and Restructuring Framework for Companies, the debtor may, in its preparatory phase, apply to the court for a moratorium on foreclosure and enforcement (also with regard to third-party security provided by affiliates of the debtor) to secure the chances of implementing a restructuring plan for a period of up to three months (with the possibility of an extension by follow-up or new order).

Effects of such a moratorium on foreclosure and enforcement are the following:

• execution measures against the debtor are prohibited or discontinued on an interim basis (stay of execution); and
• rights to movable assets, which might be asserted as separate satisfaction right or a right to segregation if insolvency proceedings were opened, may not be enforced by the creditor; instead, such assets may be used for the continuation of the debtor’s business to the extent that they are of considerable significance for this purpose (stay of realization).

During the moratorium, contractual counterparties may not withhold performance of contractual obligations based on outstanding payments by the debtor at the time of the order, and creditors are prevented from initiating insolvency proceedings for the duration of a stabilization measure.

For the duration of the stabilization measure, secured creditors who are unable to enforce their claims are economically protected. To the extent that they are economically entitled to the value of the security, they must be paid the contractually owed interest, and any loss in value resulting from continued use must be compensated by ongoing payments. In the case of revolving security, the proceeds must either be distributed to the secured creditors or separated, so that they are in principle not available for the financing of business operations (although deviating agreements with the secured creditors are possible). This limitation affords secured creditors a strong negotiating position if a stabilization measure is ordered.

The moratorium does not affect financial collateral (as defined in paragraph 17, section 1 of the Banking Act, such as cash deposits, pledges or fiduciary transfers of securities) and collateral granted to the participant of a securities settlement system (as defined in paragraph 16, section 1 of the Banking Act).

Unsecured credit

32. What remedies are available to unsecured creditors? Are the processes difficult or time-consuming? Are pre-judgment attachments available?

An unsecured creditor must first obtain a judgment in respect of its debt. It can then initiate a judicial execution of the debtor’s personal or real property. However, these procedures can be very difficult and time-consuming, especially if the debtor contests the creditor’s claim. In principle, an attachment could be obtained in advance of a judgment or execution, but only where certain strict requirements have been met. An example would be if the enforcement of the judgment would become impossible or considerably more difficult without such a court order.

CREDITOR INVOLVEMENT AND PROVING CLAIMS

Creditor participation

33. During the liquidation or reorganization, what notices are given to creditors? What meetings are held and how are they called? What information regarding the administration of the estate, its assets and the claims against it is available to creditors or creditors’ committees? What are the liquidator’s reporting obligations?

In principle, all decisions of the insolvency court require notice to all the persons affected. Notwithstanding this, public notifications are sufficient for proof of service on all parties, even where the Insolvency Code provides for personal service. Thus, creditors should pay attention to all public notifications issued by the insolvency court and maintain contact.

The creditors have a right to be informed by the insolvency administrator about the affairs of the insolvency estate. The insolvency administrator will usually fulfil their duty to provide information at creditors’ meetings (in particular, the information hearing) by giving a detailed report on the financial situation of the debtor, the reasons for the insolvency, the prospects of a successful restructuring, the feasibility of an asset sale (to sell the business as a going concern) or an insolvency plan, the impacts on the satisfaction of creditors and on measures already taken by the insolvency administrator prior to the meeting.

Since 1 January 2021, insolvency administrators should, and in larger insolvency proceedings must, maintain an electronic creditor information system by means of which any insolvency creditor who has filed a claim can be provided with:

• all decisions of the insolvency court;
• all reports sent to the insolvency court (except for those concerning only other creditors’ claims); and
• all documents relating to its claims.

A creditors’ meeting can only be called by the insolvency court. The most important creditors’ meetings are:

• information hearing – at this first meeting, the creditors mainly resolve, based on a report by the insolvency administrator, whether to continue or (partially or completely) shut down the debtor’s business. The creditors also decide whether a creditors’ committee should be established (or, if applicable, the preliminary creditors’ committee should be maintained), the approval of which would be required before certain measures can be taken by the insolvency administrator, for example, significant transactions;
• examination hearing – at this meeting, the registered claims are examined;
• hearing for discussion and voting – at this meeting, an insolvency plan and the creditors’ (and, if applicable, shareholders’) voting rights are discussed, and the plan is voted on; and
• final hearing – the purpose of this meeting is for a discussion of the insolvency administrator’s final statement of fees, the raising of any objections against the final list of creditors and a decision by the creditors as to the assets of the insolvency estate that cannot be realized. The insolvency court also decides on the final distribution.

When the insolvency court makes the order opening the insolvency proceeding, it also sets dates for the information hearing and the examination hearing, which can take place on the same day.

Creditors’ meetings and other meetings and appointments can be set-up as virtual meetings. In this case, the participants are obliged to refrain from knowingly recording sound and images and to take suitable measures to ensure that third parties cannot observe the sound and image transmission.

Under the German Act on the Stabilization and Restructuring Framework for Companies (StaRUG), the extent of (formal) creditor participation depends on whether the restructuring plan is voted on outside of, or within, court proceedings.

Apart from court-ordered voting on the restructuring plans, if:

• voting is taking place outside of a meeting of affected parties (i.e, merely in writing) and no possibility has been provided to discuss the plan at an earlier stage, a meeting for discussion of the plan is to be held upon the request of an affected party; and
• voting is taking place at a meeting, such meeting will be convened in writing, whereby the convening notice must be accompanied by the complete restructuring plan including annexes.

Before deciding on the confirmation of the restructuring plan, the court must hold a meeting to hear the affected parties, if voting on the plan was not effected in the context of a court procedure.

In the case of court-ordered voting on the restructuring plan, the parties affected by the plan are summoned to a hearing for discussion and voting.

Creditor representation

34. What committees can be formed (or representative counsel appointed) and what powers or responsibilities do they have? How are they selected and appointed? May they retain advisers and how are their expenses funded?

The Insolvency Code provides for the formation of a creditors’ committee whose members must support and supervise the insolvency administrator in connection with the administration. The insolvency court is generally obliged to appoint a preliminary creditors’ committee in conjunction with the opening of preliminary insolvency proceedings, if the debtor meets two of the three following thresholds:

• balance sheet total of at least €6 million;
• annual turnover of at least €12 million; and
• at least 50 full-time employees.

In all other cases, the insolvency court may appoint a preliminary creditors’ committee upon request of either the debtor, the preliminary insolvency administrator or a creditor. The preliminary creditors’ committee can require the insolvency court to appoint an independent person as preliminary insolvency administrator and it also has the right to suspend an early self-administration procedure.

In the first creditors’ meeting (i.e, the information hearing), the creditors will have to decide whether the preliminary creditors’ committee is to be maintained and, if so, whether certain members of the committee should be removed and additional members should be appointed.

In the preliminary creditors’ committee and in the final creditors’ committee, creditors with a right to separate satisfaction, the largest insolvency claim holders, the minority creditors and the employees will be represented. The members of the creditors’ committee are responsible for supporting and monitoring the insolvency administrator (or the debtor’s management in the case of self-administration).

For this purpose, the members of the creditors’ committee have numerous powers and responsibilities. They must, primarily, keep themselves informed about the business of the debtor, examine the debtor’s books and implement a cash audit. If the insolvency administrator intends to effect transactions of special significance, they require the approval of the creditors’ committee. In particular, such approval will be necessary if the entire enterprise, or one of its businesses, is to be transferred.

The members of the creditors’ committee are entitled to adequate compensation for their function as members of the creditors’ committee and to reimbursement of necessary expenses. Expenses incurred through retaining advisers will only be reimbursable if they are proportionate and necessary to properly fulfil the duties as a member of the creditors’ committee.

Under the StaRUG, the restructuring court may establish a creditors’ advisory committee, if the claims of all creditors (except creditors generally excluded from the plan) are to be modified by a restructuring plan and the restructuring matter has the characteristics of an overall procedure. Creditors who are not affected by the plan (e.g, employees) may also be represented on the committee.

The committee supports and monitors the debtor’s management activities. The debtor must notify the committee of the extent to which tools of the stabilization and restructuring framework have been used. Where the restructuring court must appoint a restructuring officer, the committee may provide a proposal by way of a unanimous resolution.

Committee members have a claim to remuneration for their work and to compensation for reasonable expenses, which is determined by the insolvency court.

The debtor’s obligations concerning the employee representation bodies and their participation rights under the German Works Constitution Act remain unaffected by the StaRUG.

Enforcement of estate’s rights

35. If the liquidator has no assets to pursue a claim, may the creditors pursue the estate’s remedies? If so, to whom do the fruits of the remedies belong? Can they be assigned to a third party?

Once insolvency proceedings have been opened, and the insolvency court has appointed an insolvency administrator (rather than ordering self-administration), only the insolvency administrator may pursue claims belonging to the estate. The insolvency administrator cannot authorize a creditor to pursue a claim. In certain cases, the insolvency administrator may authorize the debtor or, respectively, its representatives to pursue a claim in court; however, this would not be a solution if the estate is insufficient to pursue the claim. Legal aid is available to an insolvency administrator, provided that:

• the costs of the lawsuit are not covered by the estate;
• the advancement of the costs by those who have an economic interest in the success of the lawsuit would be inappropriate;
• the lawsuit has adequate chances of success; and
• the pursuit of the claim is not arbitrary.

Consequently, no legal aid will be granted if (certain) creditors are able to advance the costs and if such creditors benefit from the lawsuit because of a substantial increase of their quota. In many cases, the granting of legal aid for a lawsuit of the insolvency estate is denied, because there are creditors who would benefit from the lawsuit and could advance the costs of the lawsuit, but are unwilling to do so. In any case, the insolvency administrator is free to enter into a loan to finance the costs of the lawsuit. The repayment obligation of the loan would be an estate claim taking priority over ordinary unsecured insolvency claims.

Generally, the insolvency administrator is entitled to sell, transfer and assign a receivable belonging to the estate (e.g, to continue the business of the debtor).

Claims

36. How is a creditor’s claim submitted and what are the time limits? How are claims disallowed and how does a creditor appeal? Can claims for contingent or unliquidated amounts be recognized? Are there provisions on the transfer of claims and must transfers be disclosed? How are the amounts of such claims determined?

The court order opening the insolvency proceeding, when sent to creditors or publicized, will include a notice to creditors requiring them to submit their claims to the insolvency administrator (or the custodian in the case of self-administration) within a period of between two weeks and three months from the date of the order (a delayed filing is, however, still possible for a small fee). It will also include a request to creditors to notify the administrator promptly if they claim to have security over the debtor’s chattels or immovable assets. The subject, nature and basis of the security right and the claim secured should also be stated.

Creditors are obliged to register their claims with the administrator (or the custodian in the case of self-administration) in writing, stating the basis and the amount of the claim (filing by transmitting an electronic document is possible if the administrator has explicitly consented to such transmission). Copies of documents supporting or evidencing the claim must be attached to the written statement by which the claim is asserted.

If the amount of the claim cannot be determined exactly at the time the claim is registered, the claim must be registered based on a fair estimate of the value as at the date of the opening of the insolvency proceeding. Claims that are subject to a condition precedent can be registered with the administrator and must be considered when proceeds are distributed.

Respective amounts are, however, not distributed, but retained by the administrator either until the condition precedent is fulfilled, in which case the amount is released to the relevant insolvency creditor, or until it becomes clear that the condition precedent will not be fulfilled, in which case the proceeds are free for distribution to the other insolvency creditors.

At the examination hearing, the registered claims will be examined to determine amount and ranking. In principle, claims that are registered after the expiry of the registration period can still be examined. A claim is deemed to have been admitted where no objection has been raised by either the administrator or another creditor.

The insolvency court will then prepare a table of registered claims showing which claims have been admitted and setting out the amount and the ranking of each claim. Inclusion in the table has the effect of a final judgment as far as the administrator and the creditors are concerned. Creditors who have claims that have not been objected to by the debtor may enforce such claims after termination of the insolvency proceedings by way of execution, as they can under any normal executable judgment. Thus, an objection by the debtor cannot hinder the admission of a claim but may prevent the creditor from executing its claim based on the entry in the table.

If a creditor’s claim is disputed by the administrator or another creditor, the creditor can bring proceedings before an ordinary court for a decision as to whether its claim should be admitted.

Generally, all claims rank equally, with preferential and subordinated claims being the exception. Among the subordinated claims, shareholder loans are of particular importance. All shareholder loans made by lenders holding more than 10 per cent of the shares in the borrower (i.e, a company or a partnership that has no individual persons as general partners) are typically classified as subordinated insolvency claims.

Furthermore, a repayment of such a shareholder loan made in the year prior to the opening of insolvency proceedings will generally be subject to insolvency clawback. Prior to an insolvency, shareholder loans may, however, be repaid, provided that the repayment is not restricted by a subordination agreement or by statutory law (e.g, section 15b of the Insolvency Code).

There are no specific provisions that deal with the purchase, sale or transfer of claims against the debtor and there is no general obligation to disclose such transfer of claims.

However, setting off claims against the insolvency estate is not permitted if a creditor acquires their claim from another creditor after the opening of the insolvency proceedings, notwithstanding that the acquired claim may have originated prior to the opening of insolvency proceedings.

Creditors who acquire a claim at a discount are entitled to claim for its full-face value (i.e, they may file the full amount with the insolvency administrator).

Creditors can claim interest that has accrued after the opening of insolvency proceedings. However, interest accruing on such claims from the opening of the insolvency proceedings is subordinated to other claims of insolvency creditors. They will only be paid when all other insolvency creditors’ claims have been satisfied. However, they rank higher than further subordinated claims such as the costs incurred by the insolvency creditors because of their participation in the proceedings, fines (whether regulatory, coercive or administrative fines), claims to the debtor’s gratuitous performance of a consideration and shareholder loans (subject to certain above-mentioned exceptions).

Set-off and netting

37. To what extent may creditors exercise rights of set-off or netting in a liquidation or in a reorganization? Can creditors be deprived of the right of set-off either temporarily or permanently?

As a general principle, claims by or against the insolvency estate existing as at the date of the opening of the insolvency proceedings may be set off against each other if:

• the claim of the creditor existed and was due and payable at the time of the opening of insolvency proceedings; and
• the claim of the estate against which the creditor wishes to effect set-off was also existing at the time of the commencement of insolvency proceedings.

In the event that the claim or cross-claim is contingent or not yet due at the date of the opening of insolvency proceedings, the set-off may only be effected once the claim becomes unconditional or due. A set-off will be excluded if the claim of the estate that is to be offset becomes unconditional or due prior to the time that the set-off can be effected by the creditor.

No set-off is permissible if:

• a creditor’s claim arises after the opening of the insolvency proceedings;
• a creditor acquires its claim from another creditor following the opening of the insolvency proceedings (even if the original creditor’s claim pre-dated the insolvency);
• a creditor acquires the right to set off by means of a voidable transaction; or
• a creditor is a debtor of the insolvency estate and has a claim that must be satisfied from the assets of the debtor that are not affected by insolvency.

These restrictions on a set-off may not affect financial services, in particular financial securities within the meaning of paragraph 17, section 1 of the Banking Act.

After the validity of the netting arrangements used in the financial sector was doubted by the Federal Court of Justice in a judgment dated 9 June 2016 (IX ZR 314/14), the German legislator passed an amendment to section 104 of the Insolvency Code providing clarity on the status of netting arrangements. Section 104(4) of the Insolvency Code allows counterparties to contractually agree on netting provisions that deviate from the statutory mechanism of termination and settlement of contracts regulated in section 104 of the Insolvency Code, as long as this is compatible with the basic principles of the legal provision. The law entered into force on 29 December 2016, partly retroactively.

Modifying creditors’ rights

38. May the court change the rank (priority) of a creditor’s claim? If so, what are the grounds for doing so and how frequently does this occur?

Neither the insolvency nor the restructuring court can modify the rank (priority) of a creditor’s claim.

Priority claims

39. Apart from employee-related claims, what are the major privileged and priority claims in liquidations and reorganizations? Which have priority over secured creditors?

Under the Insolvency Code, in general, there are no priority claims. However, as of 1 January 2021, value added tax liabilities incurred during the preliminary insolvency proceeding (i.e, between the filing for insolvency and the opening of the insolvency proceeding) enjoy priority status by law.

Employee-related claims relating to a period prior to the opening of insolvency proceedings do not typically enjoy priority status. However, employees are protected by the insolvency money, which covers wages for a period of up to three months prior to the opening of the insolvency proceedings.

The opening of insolvency proceedings does not affect creditors with proprietary claims for the return of assets that do not belong to the insolvency estate. Secured creditors may also enjoy certain superior rights. Furthermore, claims and costs arising from transactions executed by the insolvency administrator after the opening of the insolvency proceedings attract priority status (i.e, they need to be paid prior to the satisfaction of unsecured creditors but after creditors with a right to separate satisfaction or a right to set off).

In the StaRUG, the German legislator did not enact the option of creating a priority position for new financing providers concerning all other creditors in any subsequent insolvency proceedings (see paragraph 4, article 17 of Directive (EU) 2019/1023). However, a provision that grants priority to new financing providers over existing creditors can be included in the restructuring plan.

Employment-related liabilities

40. What employee claims arise where employees’ contracts are terminated during a restructuring or liquidation? What are the procedures for termination? (Are employee claims as a whole increased where large numbers of employees’ contracts are terminated or where the business ceases operations?)

Generally, the opening of insolvency proceedings over the estate of the employer does not affect the relationship with the employees. Claims of the employees against their employer that came into existence prior to the opening of insolvency proceedings are in general considered as ordinary insolvency claims with no priority. Claims of the employees against their insolvent employers that come into existence after the opening of insolvency proceedings attract priority status as estate debts.

Employment contracts where the insolvent company is the employer may be terminated by either party with a notice period of three months (irrespective of any contractual provision to the contrary or an exclusion of termination). However, even after the opening of the insolvency proceedings, the Employment Protection Act still applies, which may constrain redundancies by the insolvency administrator.

The German Insolvency Code contains several provisions that facilitate and accelerate consultation processes with the works council on operational changes that lead to redundancies and help to procure an effective termination of employment relationships. For example, protection from dismissal is limited in the event a list of employees to be made redundant has been agreed with the competent works council in a balance of interests or approved by the labor law court in advance of issuing the notice letters.

Where no works council exists, the redundancies will not trigger any severance payments under social plans. In the event that a works council had been established before a redundancy decision was taken, redundancies can be made during insolvency proceedings with the benefit that severance payments under a social plan are in any event capped at an aggregate maximum amount of two-and-a-half times the monthly salary per employee.

There are no specific rules in the case of terminations of large numbers of employees’ contracts or where the business ceases operations.

Under the StaRUG, claims of employees (including pensions) cannot be varied by the restructuring plan. Also, the law does not provide for any provisions facilitating or accelerating redundancies. Moreover, the debtor’s obligations concerning the employee representation bodies and their participation rights under the German Works Constitution Act remain unaffected by the StaRUG.

Pension claims

41. What remedies exist for pension-related claims against employers in insolvency or reorganization proceedings and what priorities attach to such claims?

Employees’ pension claims do not enjoy priority in insolvency proceedings unless they were secured by a specific collateral in each individual case and are thereby treated preferentially compared to any other regular claim. However, pension commitments of the (insolvent) employer in relation to the employees are in general protected by the German pension insurance association. In simple terms, the German pension insurance association assumes the obligation of the insolvent employer to satisfy vested pension claims and is in turn subrogated in the insolvency as a non-prioritised creditor. Under an insolvency plan, the German pension insurance association is granted a hope note for the contingency that the business recovers.

Claims for deficiencies in an external pension plan or a pension scheme do not enjoy priority in the insolvency of an employer. Where pensions are granted through a pension fund, however, the insolvency protection via the German pension insurance association is also available to the employees if the assets of the external pension fund do not suffice.

Under the StaRUG, pension claims cannot be impaired by a restructuring plan.

Environmental problems and liabilities

42. Where there are environmental problems, who is responsible for controlling the environmental problem and for remediating the damage caused? Are any of these liabilities imposed on the insolvency administrator personally, secured or unsecured creditors, the debtor’s officers and directors, or on third parties?

Employees’ pension claims do not enjoy priority in insolvency proceedings unless they were secured by a specific collateral in each individual case and are thereby treated preferentially compared to any other regular claim. However, pension commitments of the (insolvent) employer in relation to the employees are in general protected by the German pension insurance association. In simple terms, the German pension insurance association assumes the obligation of the insolvent employer to satisfy vested pension claims and is in turn subrogated in the insolvency as a non-prioritized creditor. Under an insolvency plan, the German pension insurance association is granted a hope note for the contingency that the business recovers.

Claims for deficiencies in an external pension plan or a pension scheme do not enjoy priority in the insolvency of an employer. Where pensions are granted through a pension fund, however, the insolvency protection via the German pension insurance association is also available to the employees if the assets of the external pension fund do not suffice.

Under the StaRUG, pension claims cannot be impaired by a restructuring plan.

Liabilities that survive insolvency or reorganization proceedings

43. Do any liabilities of a debtor survive an insolvency or a reorganization?

Generally, the insolvency administrator (or in the event of self-administration, the debtor’s management board) is responsible for fulfilling the debtor’s public law obligations in the insolvency proceedings (e.g, obligations resulting from environmental issues). Claims and costs arising from fulfilling such obligations attract priority status.

However, the insolvency administrator is entitled to release objects from which public law obligations derive (e.g, land) from the insolvency estate so that they become part of the debtor’s assets not affected by the insolvency proceedings. In this case, the government would engage a third party to solve the environmental issues. According to case law of the Federal Administrative Court, the resulting claims of the government are either to be treated as priority claims or as unsecured insolvency claims. This generally depends on the grounds of the liability:

• if there is a liability for the status of the object (e.g, the owner exercises legal or actual control over the polluted site that contravenes the regulations), the government has a priority claim;
• if there is a liability for the behavior of the debtor as polluter prior to the opening of the insolvency proceedings (e.g, a debtor causes the pollution of the site through their actions), the government does not have a priority claim, but an unsecured claim; and
• if there is a liability of an operator of a plant, the government has a priority claim.

Distributions

44. How and when are distributions made to creditors in liquidations and reorganizations?

Provided that the debtor is reorganized by way of an insolvency plan under the Insolvency Code, the debtor’s debts only survive the cessation of the insolvency proceedings if, and to the extent that, they are specified in the insolvency plan – except for (regulatory or coercive) fines, administrative fines and fees resulting from a criminal or administrative offence, which can neither be excluded nor limited by an insolvency plan.

This also applies for creditors who have not filed their claims with the insolvency administrator and had them included in the official table. Such creditors are bound by the measures approved through the insolvency plan and will be treated as creditors of the appropriate class of creditors if they assert a claim against the debtor after the insolvency proceedings have been terminated.

If, following the termination of the insolvency proceedings, any enforcement by these creditors jeopardizes the enforcement of the insolvency plan, the insolvency court may, upon a request by the debtor, entirely or in part unwind an enforcement or deny it for a maximum of three years. Moreover, any such claims made by these creditors become statute-barred after one year.

A third party that acquires the debtor’s business by way of an asset deal is generally not liable for any debts of the debtor, provided that the insolvency proceedings have actually been opened. The acquirer may, however, be held liable for the clean-up costs of polluted land acquired from the insolvency estate.

On the acquisition of the debtor’s business, whether as a whole or in part, by way of an asset deal, the employees working in the business, or the respective part thereof, transfer to the purchaser by operation of law, unless the employees concerned object to the transfer of their employment relationships (see section 613a of the Civil Code). A dismissal of employees for the sole reason of the transfer is not permitted, even if the acquisition of the business is made from an insolvency estate.

However, redundancies may still be made for operational reasons – for instance, to make the restructuring of the business possible (see sections 125 to 128 of the Insolvency Code). Furthermore, the transfer of the employment relationships by operation of law does not encompass the employees’ claims and pension rights arising prior to the opening of the insolvency proceedings – as confirmed by the Federal labor Court (26 January 2021, 3 AZR 139/17 and 3 AZR 878/16).

After the termination of the regular insolvency proceedings (i.e, without an insolvency plan), creditors may in principle assert their remaining claims against the debtor without any insolvency-related restrictions. However, once insolvency proceedings have been completed, any legal entity or partnership will generally cease to exist and be removed from the commercial register.

Under the StaRUG, the following claims cannot be varied or impaired by a restructuring plan:

• claims of employees under or in connection with the employment relationships, including rights under company pension commitments;
• claims from intentional tortious acts; and
• claims to fines, regulatory, coercive and administrative fines, as well as other claims arising from criminal or administrative offenses of the debtor.

Claims that are (so far as legally permissible) part of the restructuring plan will only survive if, and to the extent that, they are specified in the plan. In this context, the debtor has flexibility as to which stakeholders to include in the restructuring plan as long as the selection is made according to appropriate criteria. It is possible, for example, that a restructuring plan provides for an impairment of all financial creditors’ claims, whereby all other claims remain unaffected and therefore survive.

SECURITY

Secured lending and credit (immovables)

45. What principal types of security are taken on immovable (real) property?

Distributions may be made whenever there is sufficient cash in the insolvency estate. However, the insolvency administrator must obtain the consent of the creditors’ committee, if one has been appointed, before each distribution. The final distribution takes place once all the assets of the estate have been realized, but only after the consent of the insolvency court has been obtained.

Distributions pursuant to an insolvency plan (under the Insolvency Code) or a restructuring plan (under the StaRUG) are not restricted by the terms of the Insolvency Code or the StaRUG and, therefore, payments to creditors should be consistent with what has been agreed by the creditors (and shareholders, if applicable) in the plan.

Secured lending and credit (movables)

46. What principal types of security are taken on movable (personal) property?

The principal types of security devices that are taken on immovable (real) property are as follows.

Hypothek

Real property can be charged by way of a hypothek (ie, mortgage) as security for payment of a definite sum that equals the secured personal debt. It is not necessary for the creation of a hypothek that the owner of the real property is the personal debtor in respect of the claim secured by the charge. The hypothek may be certificated or non-certificated. Both forms are registered with the land register, but only the holder of a certificated hypothek receives a certificate after registration that enables them to transfer the hypothek by means of written assignment and handing over the certificate, and without registration of the transfer in the land register.

Grundschuld

A grundschuld (ie, land charge) creates a charge on real property for the payment of a definite sum of money. It differs from an (accessory) hypothek because it does not depend on an underlying personal debt and theoretically may exist without one. In practice, the parties usually agree that the grundschuld will not be transferred back to the real property owner until all outstanding sums have been repaid.

CLAWBACK AND RELATED-PARTY TRANSACTIONS

Transactions that may be annulled

47. What transactions can be annulled or set aside in liquidations and reorganizations and what are the grounds? Who can attack such transactions?

The principal types of security devices that are taken on movable (personal) property are:

• retention of title: pursuant to section 449 of the Civil Code, the seller of personal property may retain title over the assets sold by them until the purchase price has been paid;
• security transfer of assets: a security transfer of assets is an arrangement pursuant to which a debt is secured on personal property, possession of which is retained by the debtor;
• security transfer of receivables: a security transfer of receivables is an arrangement whereby security is granted over receivables owed to the debtor (often in the form of a global assignment); and
• pledges: pledges can be grated in respect of movable assets and rights (eg, claims, shares and IP). A pledge entitles the secured party to seek satisfaction of the secured obligation by way of a disposal of the pledged asset.

In practice, often a combination of these security devices are found. For instance, suppliers usually supply their products on retention of title terms. However, the terms of supply may entitle the customer to sell the products in the ordinary course of business, provided that the (future) payment claims arising from such sales to third-party customers are assigned to the supplier as security.

Equitable subordination

48. Are there any restrictions on claims by related parties or non-arm’s length creditors (including shareholders) against corporations in insolvency or reorganizationproceedings?

Once insolvency proceedings have commenced that include either a restructuring or liquidation, the insolvency administrator (or the custodian in case of self-administration) is entitled to contest the actions taken by the insolvent company within certain periods prior to the filing for insolvency proceedings (suspect periods), if these actions were (directly or indirectly) to the detriment of the debtor’s creditors.

This, in particular, applies to transactions and payments (including the granting of collateral to a creditor) that illegitimately preferred certain creditors and thereby decreased the value of the insolvent estate (preferential transactions). On the one hand, the avoidance law – stipulated in sections 129 to 146 of the Insolvency Code – ensures the equal treatment of all creditors for a (rather short) period of up to three months prior to the filing for insolvency (special avoidance provisions, sections 130 to 132 of the Insolvency Code).

On the other hand, the avoidance law invalidates debtor actions that appear illegitimate or at least less considerable than the interest of the creditors in the best possible realization of their claims, such as actions willfully and collusively disadvantaging the insolvency creditors or gratuitous transactions, respectively (general avoidance provisions, sections 133 to 136 of the Insolvency Code). The suspect period for such actions is one to ten years, depending on the overall effects of the transaction and the counterparty’s knowledge of the implications of the transaction on the position of other creditors, as shown by the following examples.

Pursuant to section 130 of the Insolvency Code (congruent cover), the fulfillment of a debt or the granting of collateral, or enabling a counterparty to obtain such fulfillment or collateral, may be contested if it was made:

• in the three months prior to the insolvency filing, provided that at such date the company was illiquid and the other party was aware of this; or
• after the insolvency filing, provided that at such date the other party was aware of the company’s illiquidity or of the fact that the company had filed for insolvency.

This provision enables the insolvency administrator to contest transactions of the insolvent company, irrespective of any right of a creditor to such fulfillment or such security at the time (eg, the right of a creditor to a specific security). Knowledge of circumstances that necessarily indicate the state of illiquidity of the company, or of the company’s application to open insolvency proceedings, is deemed equivalent to actual knowledge of the illiquidity or of the filed petition.

Section 130 of the Insolvency Code (congruent cover) does not apply if the underlying security agreement calls for an increase of financial collateral (as defined in section 1(17) of the Banking Act, such as cash deposits, pledges or fiduciary transfers of securities) to close the gap between the value of the collateral that has already been provided and the value of the collateral that must be provided under the security agreement (margin collateral).

Furthermore, pursuant to section 142(1) of the Insolvency Code (cash transactions), congruent payments on the part of a debtor in return for which its property benefited directly from an equitable consideration may (only) be contested if the conditions of sections 133(1) to 133(3) of the Insolvency Code are met and the counterparty knew that the debtor was acting unlawfully.

Pursuant to section 131 of the Insolvency Code (incongruent cover), the fulfillment of a debt or the granting of security the counterparty could not have claimed, or not in such way or at such a time (ie, the creditor was not entitled to claim at the time), under the existing contractual arrangements can be contested if it was made:

• in the month prior to the insolvency filing or after the filing;
• in the second or third months prior to the insolvency filing, provided that at such date the company was illiquid; or
• in the second or third month prior to the insolvency filing, provided that the other party was aware that the action was to the disadvantage of the insolvency creditors or that the other party was aware of circumstances that necessarily lead to the conclusion of such disadvantage. Knowledge that the fulfillmentof a debt or granting of security is to the disadvantage of other insolvency creditors will be assumed if the other party is an insider or a non-arm’s length creditor (section 138 of the Insolvency Code) at the time of the action.

Pursuant to section 133(1) of the Insolvency Code (legal acts willfully disadvantaging the insolvency creditors), any legal actions taken by a debtor within the 10 years prior to the insolvency filing or after such filing can be contested by the insolvency administrator, provided that the action was taken by the debtor with the intent of disadvantaging its creditors and the counterparty was aware that the debtor intended to disadvantage its creditors. Knowledge of the debtor’s intention will be presumed if the counterparty was aware of the debtor’s imminent illiquidity and of the disadvantageous effect of the action on the other creditors.

An intention of a debtor to disadvantage its creditors does not require an actual desire of the debtor to disadvantage them. Rather, it will suffice that the debtor recognizes that the satisfaction of, or the granting of security to, one creditor can cause disadvantages to its other creditors, in particular, reducing the likelihood that its other creditors can be paid (whether in whole or in part) out of the remaining assets. However, the suspect period is reduced to four years if the contestable action has provided the counterparty a security or satisfaction (section 133(2) of the Insolvency Code).

As to legal acts willfully disadvantaging insolvency creditors (section 133 of the Insolvency Code), the German Federal Court of Justice has increased the requirements for the evidence of a debtor’s intent to willfully disadvantage its creditors (6 May 2021 – IX ZR 72/20). According to the court, neither the debtor’s knowledge of its proven illiquidity nor the debtor’s knowledge of its imminent illiquidity – taken on their own without additional circumstances – are sufficient to prove an intent to disadvantage creditors. In practice, it is expected that the decision results in an increased burden of proof for insolvency administrators.

Under the German Act on the Stabilization and Restructuring Framework for Companies, certain restructuring measures and actions (eg, new financing and asset deals) may be excluded from clawback risks in a subsequent insolvency proceeding (at least to a certain extent), provided that specific requirements are met.

In addition to the avoidance rights mentioned above, the insolvency administrator can challenge the repayment of shareholders’ loans (or legal transactions corresponding in economic terms to the settlement of such loan), if the repayment was made within the previous year prior to the filing for the opening of insolvency proceedings. Any security granted for shareholders loans remains subject to clawback with a look-back period of 10 years from the date of the filing for the opening of insolvency proceedings.

Furthermore, any security over the debtor’s assets obtained by execution of a judgment in the month prior to the filing for insolvency, or subsequent to such filing, will be set aside by operation of law as at the date of the opening of the insolvency proceedings.

To exercise the avoidance right, an informal declaration by the insolvency administrator is sufficient. Moreover, the insolvency administrator is entitled to close a dispute by way of an out-of-court settlement. If the creditor rejects the avoidance, the insolvency administrator will have to sue the creditor before the civil courts.

Anything that was transferred, disposed of or yielded from the assets of the debtor by means of a voidable transaction must be restored to the insolvency estate.

If no insolvency proceedings have been initiated, transactions and payments of the company may be contested by creditors under the Voidance Act, which provides rights for creditors substantially similar to the general avoidance rights of an insolvency administrator in insolvency proceedings.

Following the covid-19 pandemic, the German legislator introduced certain rules to temporarily exclude or reduce the clawback rights of an insolvency administrator subject to specific conditions. The same applies to the treatment of shareholder loans.

Lender liability

49. Are there any circumstances where lenders could be held liable for the insolvency of a debtor?

All shareholder loans made by lenders holding more than 10 per cent of the shares in the borrower (ie, a company or a partnership that has no individual persons as general partners) are generally classified as subordinated insolvency claims. Claims resulting from legal actions that are economically comparable to a shareholder loan will also be generally classified as subordinated insolvency claims. In a decision dated 11 July 2019 (IX ZR 210/18), the German Federal Court of Justice stated that, if a claim of a shareholder, which results from a mutual exchange agreement, has been deferred for more than three months (either by contract or in fact), the claim is generally treated as a shareholder’s loan.

If a state development bank or one of its subsidiaries has granted a loan to a company in which it holds an equity interest or has performed another legal act that is economically comparable to granting a loan, such claims are not subordinated. This applies, in particular, to state aid measures provided during the covid-19 pandemic (eg, by the German Reconstruction Credit Institute).

Furthermore, the repayment of a shareholder loan made in the year prior to the opening of insolvency proceedings will generally be voidable. Prior to an insolvency, shareholder loans may be repaid, provided that such repayment is not restricted by a subordination agreement or by statutory law (section 15b(5) of the Insolvency Code).

Regarding shareholder loans granted during the period in which, due to the covid-19 pandemic, the obligation to file for insolvency was suspended (ie, from 1 March 2020 until 30 April 2021), the following applies:

• insofar as the obligation to file for insolvency was legally suspended (ie, certain requirements were met), the repayment of a new loan granted during the suspension period until 30 September 2023 and the granting of security in respect of such new loan during the suspension period are deemed not to disadvantage creditors (ie, there will be no clawback);
• this assumption also applies to the repayment of shareholder loans and payments in respect of claims arising from legal acts that correspond economically to such loan (but not to any security granted in respect of such loans or claims), if insolvency proceedings are applied for until 30 September 2023; and
• new shareholder loans – granted within the suspension period – are not subordinated in a subsequent insolvency of the subsidiary (if applied for until 30 September 2023).

Transactions made by the debtor with persons that have a close relationship with the debtor prior to the opening of insolvency proceedings can regularly be more easily contested, as the German Insolvency Code contains specific avoidance provisions on transactions with related parties (see sections 133(4) and 138 of the German Insolvency Code), and also turns the burden of proof partially around to their disadvantage (see sections 130(3), 131(2), 132(3), 133(4) and 138 of the German Insolvency Code).

If the debtor is a legal entity or a company without legal personality, then the persons with a close relationship to the debtor are, among other things:

• members of the body representing or supervising the debtor;
• general partners and persons holding more than one quarter of the debtor’s capital; and
• a person or a company that has, on the basis of a comparable association with the debtor under company law or under a service contract, the opportunity to become aware of the debtor’s financial circumstances.

Under German law, a lender is generally not liable for the insolvency of the debtor. If a lender refuses to grant a (new) loan to the distressed company, calls in its (existing) loans or refuses to waive (partially) its claims, thereby causing the company’s insolvency, the lender generally cannot be held liable, as it has no legal obligation to participate in the restructuring or remediation measures of the company. Also, section 490(1) of the German Civil Code explicitly allows the lender to extraordinarily terminate its loan and, if necessary, liquidate collateral in the event of a significant deterioration in the financial condition of the debtor that jeopardizes the enforcement of the repayment claim.

In some exceptional cases, an unjustified termination of a loan by a lender may trigger a liability of such lender: for example, if the loan had been granted in view of an envisaged restructuring of the debtor and the financial deterioration has not gone beyond the forecasted financial development, or the debtor has always complied with its obligations and the lender has received sufficient security for covering the loans provided.

While the risk of liability for causing the debtor’s insolvency is not very likely, lenders (e.g, banks) who grant a loan to a distressed company should be cautious because of a possible liability for causing or assisting the debtor’s delay in filing for insolvency, as under specific circumstances it could constitute a deliberate immoral infliction of damage under section 826 of the German Civil Code. A delay in filing for insolvency that may give rise to a lender’s liability occurs when:

• a lender grants a loan that is not sufficient for a restructuring of the company, so that it only postpones the ultimately unavoidable insolvency of the company; and
• the lender grants the loan to gain advantages for itself (eg, to enable the debtor in the short term to settle other existing liabilities of the lender, thereby damaging the other creditors of the company).

As the decisive question is whether the loans extended by the lender during the crisis were – together with the envisaged remediation measures – at least suitable for restructuring the debtor, the lenders usually require the preparation of a (positive) restructuring opinion by an auditor in accordance with the S6 auditing standard of the German Institute of Public Auditors. Because of the restructuring report, the lender can defend and exculpate itself by stating that, based on the examination of the debtor’s situation at the time the loan was granted, it assumed that the envisaged restructuring would be successful.

The preparation of restructuring opinions usually takes between six and 12 weeks, depending on the complexity of the business. Temporary measures, such as a bridge financing to cover an immediate financing need, are exempt from liability provided that, among other things, a restructuring opinion is commissioned by the debtor and the liquidity granted is sufficient to keep the debtor solvent until the envisaged date for the delivery of the restructuring opinion.

GROUPS OF COMPANIES

Groups of companies

50. In which circumstances can a parent or affiliated corporation be responsible for the liabilities of subsidiaries or affiliates?

In principle, neither the parent nor affiliated companies can be held liable for the liabilities of subsidiaries or affiliates, unless they have given, for example, guarantees or security for the debtor’s liabilities. Generally, only the (insolvent) limited liability company is liable to fulfil its obligations unless explicitly agreed otherwise between the shareholder and the company (e.g, by entering into a profit and loss transfer agreement) or the shareholder and affiliated companies with the relevant creditors (e.g, by providing a guarantee), or both.

There is, however, case law on piercing the corporate veil, for example, in cases of substantial under-capitalization of the company or a misuse of the corporate form. The most important category of this case law encompasses capital maintenance requirements: measures of fundamental impairment. This means that a shareholder must not withdraw the company’s assets required for the ordinary course of business, thereby accepting a possible impairment of the company’s creditors. In the event of a measure of fundamental impairment, the shareholders – and even the shareholders of such shareholders – can be held (personally) liable by the insolvency administrator in an unlimited way.

Combining parent and subsidiary proceedings

51. In proceedings involving a corporate group, are the proceedings by the parent and its subsidiaries combined for administrative purposes? May the assets and liabilities of the companies be pooled for distribution purposes?

There are not yet any provisions on combining proceedings in connection with group insolvencies. German insolvency law strictly adheres to the principle ‘one debtor, one estate, one proceeding’. Therefore, a pooling of the assets and liabilities of group companies (substantive consolidation) is not permitted. Also, a combination of the procedures (joint administration or procedural consolidation) is not possible under German insolvency law.

However, the Law for the Facilitation and Management of the Insolvencies of Groups of Companies that was finalized on 13 April 2017 and entered into force on 21 April 2018, offers a formal coordination of individual insolvency proceedings of group companies and their respective insolvency estates, but also explicitly rejects a substantive consolidation of assets and liabilities of group companies.

In essence, the Act includes the following provisions:

• an optional common place of jurisdiction for the different insolvency proceedings;
• the obligation on the different insolvency courts to coordinate with each other on the appointment of one joint insolvency administrator for the group-wide insolvency proceedings;
• an obligation of the different insolvency courts, insolvency administrators and creditors’ committees to cooperate; and
• coordination proceedings to further enhance the coordination between the different insolvency proceedings over group entities.

Moreover, since 1 January 2021, an insolvency plan under the Insolvency Code, as well as a restructuring plan under the German Act on the Stabilization and Restructuring Framework for Companies, allow an impairment of third-party security granted by any affiliated group companies within the meaning of section 15 of the German Stock Corporation Act that includes subsidiaries as well as parent or sister companies. However, affected secured creditors will need to be adequately compensated for such impairment.

This option may avoid separate procedures for intra-group third-party security providers. In practice, third-party security has often complicated the restructuring of a corporate group if, for example, the parent company became insolvent and its subsidiaries were co-obligors or collateral providers, or both.

INTERNATIONAL CASES

Recognition of foreign judgments

52. Are foreign judgments or orders recognized, and in what circumstances? Is your country a signatory to a treaty on international insolvency or on the recognition of foreign judgments?

As far as cross-border insolvencies within the European Union are concerned, Regulation (EU) 2015/848 (the Recast EU Insolvency Regulation), which has entered into force in all EU member states except Denmark, and replaced the Council Regulation (EC) 1346/2000, applies.

Cross-border insolvencies concerning non-EU member states are governed by German international insolvency law.

Within the European Union, the courts of the member state in which the debtor’s center of main interest (COMI) is situated will have jurisdiction to open main insolvency proceedings. Generally, foreign insolvency proceedings are recognized automatically, and the German assets of the debtor will be subject to the foreign insolvency proceedings. Notwithstanding this, foreign insolvency proceedings will not be recognized if to do so would be incompatible with German public policy. If, pursuant to German international law, the courts of a non-EU member state where the proceedings were commenced do not have jurisdiction over the company, such proceedings will not be recognized in Germany.

If a debtor’s COMI is in a member state of the European Union, the opening of secondary proceedings in Germany requires that the debtor has an establishment in the country. Generally, this is also the case where insolvency proceedings of a non-EU member state are to be recognized in Germany. Such secondary proceedings encompass only the German assets of the debtor. If foreign insolvency proceedings have already been commenced against the debtor, proof of insolvency is not required for the commencement of the German insolvency proceedings.

Employment relationships with employees working in Germany will still be governed by German law. Creditors’ rights in rem concerning assets, whether tangible or intangible, movable or immovable, that are owned by the debtor and situated in Germany are not affected by the commencement of foreign insolvency proceedings.

Although any avoidance is, in principle, subject to the law that governs the underlying insolvency proceedings, a transaction that, pursuant to the general principles on conflict of laws, is governed by German law may only be avoided by a foreign insolvency office holder if the transaction may also be avoided pursuant to German law or is ineffective for any other reason.

The regulation on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Regulation (EU) No. 1215/2012 (the Brussels Recast Regulation)) is also relevant in relation to recognition of foreign proceedings.

For international restructuring matters, sections 84 et seq of the German Act on the Stabilization and Restructuring Framework for Companies (StaRUG), which came into effect on 17 July 2022, provide the debtor with the option to conduct public restructuring matters, with the result that the individual steps in the proceedings will be made public. With such public announcement, the restructuring proceedings can be recognized under the EU Insolvency Regulation (as public restructuring proceedings under the StaRUG have been added to Annex A of the Recast EU Insolvency Regulation).

It is, however, uncertain if and to what extent non-public restructuring matters can be recognized. Even though it may be argued that such matters can be recognized under, for example, the Brussels Recast Regulation, in practice an assessment on a case-by-case basis is required. Also, it is likely that ultimately this question can only be decided by the competent courts.

UNCITRAL Model Laws

53. Have any of the UNCITRAL Model Laws on Cross-Border Insolvency been adopted or is adoption under consideration in your country?

Germany has adopted neither the UNCITRAL Model Law on Cross-Border Insolvency, nor the UNCITRAL Model Law on Enterprise Group Insolvency or the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments.

Foreign creditors

54. How are foreign creditors dealt with in liquidations and reorganizations?

Foreign creditors are entitled to participate in German insolvency or restructuring proceedings in the same way as domestic creditors. The foreign creditor is subject to the rules of the Insolvency Code (e.g, for submitting an insolvency claim) or the StaRUG.

Foreign creditors in possession of a foreign judgment have to apply to a German court for recognition of the judgment before bringing steps to enforce it.

Cross-border transfers of assets under administration

55. May assets be transferred from an administration in your country to an administration of the same company or another group company in another country?

Assets belonging to the insolvency estate of the German debtor may only be transferred to an insolvency estate of a debtor in another country based on:

• a supply and delivery agreement between the two debtors that has not been terminated following the insolvency; or
• an asset sale and purchase agreement entered into by the insolvency administrators (i.e, on the basis of continuing or new contractual arrangements).

COMI

56. What test is used in your jurisdiction to determine the COMI (center of main interests) of a debtor company or group of companies? Is there a test for, or any experience with, determining the COMI of a corporate group of companies in your jurisdiction?

The EU Insolvency Regulation defines COMI as the place where the debtor conducts the administration of its interests on a regular basis and that is ascertainable by third parties.

In the case of Interedil Srl v Fallimento Interedil Srl and Intese Gestione Crediti SpA (Case C-396/09), the Court of Justice of the European Union confirmed that COMI must be interpreted in a uniform way in EU member states and by reference to EU law and not national laws. If a company’s registered office and place of central administration are in the same jurisdiction, the registered office presumption set out in the recitals to the EU Insolvency Regulation cannot be rebutted.

Where a company’s central administration is not in the same place as its registered office, a comprehensive assessment of all relevant factors makes it possible to establish, in a manner that is ascertainable by third parties, that the company’s central administration is in another EU member state.

Factors that have been held to be relevant to determine a debtor’s COMI (in addition to the rebuttable registered office presumption) are:

• location of internal accounting functions and treasury management;
• governing law of main contracts and location of business relations with clients;
• location of lenders and location of restructuring negotiations with creditors;
• location of human resources functions and employees, as well as location of purchasing and contract pricing and strategic business control;
• location of IT systems;
• domicile of directors;
• location of board meetings; and
• general supervision.

The rebuttable presumption that a company’s COMI is where its registered office is located has been slightly modified in the Recast EU Insolvency Regulation, which states that it is not possible to rely on the rebuttable presumption where a debtor has moved its registered office in the preceding three months.

As regards a corporate group of companies, there is no specific test to determine the COMI. Hence, in general, the parent company and each subsidiary of a corporate group is subject to an individual and entirely separate insolvency proceeding, often at different insolvency courts and under different administrators.

The insolvency of NIKI Luftfahrt GmbH (as part of the insolvency of the Air Berlin group in 2017–2018) became the first test for the Recast EU Insolvency Regulation, which caused a conflict of competence between German and Austrian courts owing to the lack of clarification on the term ‘COMI’. The case brought up some interesting judgments dealing with the determination of COMI.

First, the local court of Berlin-Charlottenburg (Germany) found that it had international jurisdiction over the case (decision of 13 December 2017 – 36n IN 6433/17). Even though NIKI had its registered office in Vienna, the court was satisfied that the company’s COMI was in Berlin. In particular, the following considerations were highlighted by the local court:

• NIKI was part of the Air Berlin group and indirectly controlled by Air Berlin, which was in insolvency proceedings in Germany at that time;
• NIKI’s operational business was mainly driven from Berlin; and
• most of the flights conducted by NIKI departed from Germany.

At a later stage, the Regional Court of Berlin overruled the decision of the local court as it found that, based on the following facts (among others), NIKI’s COMI should be held to be in Austria (decision of 8 January 2018 – 84 T 2/18):

• the fact that NIKI was part of the Air Berlin group could not rebut the COMI presumption;
• the seat of NIKI’s management was irrelevant, as it had frequently travelled between Vienna and Berlin;
• the fact that most flights departed from Germany was irrelevant, since an entity could have a number of establishments; and
• NIKI’s employment contracts were 80 per cent governed by Austrian law.

The decision was further appealed by the appointed German preliminary insolvency administrator before the German Federal Court of Justice. Nevertheless, even before a decision was made by the German Federal Court of Justice, on 13 January 2018, the Austrian Higher Court of Korneuburg opened a (second) main insolvency proceeding in Austria and appointed an Austrian administrator. The Austrian court took the stance that it could open the main proceedings in Austria because the first decision of the German local court was invalid following the decision of the Regional Court and that, therefore, there were – despite the pending appeal before the German Federal Court of Justice – no longer any parallel main insolvency proceedings in Germany.

To continue and finalize the initiated sales process of NIKI’s assets to a third party:

• the German main insolvency proceeding was converted into a secondary insolvency proceeding;
• the German insolvency administrator dropped its appeal before the German Federal Court of Justice; and
• both the German administrator and the Austrian administrator agreed to cooperate closely.

Ultimately, NIKI’s assets could be sold to Niki Lauda. Consequently, the German Federal Court of Justice has neither provided further guidelines on the determination of the COMI, nor made a judgment whether an insolvency proceeding continues during a pending appeal. There are, however, strong arguments in favor of the view that an insolvency proceeding continues while an appeal is pending. Accordingly, most German insolvency practitioners are of the opinion that the Austrian court was not allowed to open a main insolvency proceeding in Austria before the German Federal Court of Justice had decided on the appeal.

The StaRUG does not (yet) provide for any specific provisions on international jurisdiction. Following the general provisions on local jurisdiction set out in the StaRUG, German courts, therefore, assume local jurisdiction (only) over companies having either their registered seat or their COMI in the respective court district. Thus, a sufficient connection, such as recognized by the UK or Dutch schemes, alone is not enough to receive access to the measures provided for under the StaRUG.

Since 17 July 2022, it has become possible for a debtor to conduct public restructuring matters (i.e, all steps in the proceedings will be made public). In this case, the COMI test as stipulated in the EU Insolvency Regulation will apply (as public restructuring proceedings under the StaRUG have been added to Annex A of the Recast EU Insolvency Regulation).

Cross-border cooperation

57. Does your country’s system provide for recognition of foreign insolvency proceedings and for cooperation between domestic and foreign courts and domestic and foreign insolvency administrators in cross-border insolvencies and restructurings? Have courts in your country refused to recognize foreign proceedings or to cooperate with foreign courts and, if so, on what grounds?

Generally, German insolvency law allows for recognition of foreign insolvency proceedings and for cooperation between domestic and foreign courts and domestic and foreign insolvency administrators.

According to article 19 of the Recast EU Insolvency Regulation, any judgment opening insolvency proceedings handed down by a court of an EU member state that has jurisdiction pursuant to article 3 of the Recast EU Insolvency Regulation will be recognized in all the other EU member states from the time that it becomes effective in the state of the opening of proceedings. The judgment opening the proceedings will, with no further formalities, produce the same effects in any other EU member state as under this law of the state of the opening of proceedings, unless the Recast EU Insolvency Regulation provides otherwise.

However, according to article 33 of the Recast EU Insolvency Regulation, any EU member state may refuse to recognize insolvency proceedings opened in another EU member state or to enforce a judgment handed down in the context of such proceedings where the effects of the recognition or enforcement would be manifestly contrary to that state’s public policy, in particular, its fundamental principles or the constitutional rights and liberties of the individual.

In 2018, the opening of insolvency proceedings over the assets of NIKI Luftfahrt GmbH in Austria (as part of the insolvency of the Air Berlin group in 2017–2018) raised questions about when exactly one jurisdiction had to recognize foreign openings of insolvency proceedings, as both the German insolvency court of Berlin-Charlottenburg and the Austrian Higher Court of Korneuburg had assumed jurisdiction to open main insolvency proceedings.

The concept of an automatic recognition is similarly reflected in the Insolvency Code governing international insolvency law for non-EU members. According to section 343 of the Insolvency Code, the opening of foreign insolvency proceedings will be recognized. However, this does not apply if the courts of the state of the opening of proceedings do not have jurisdiction in accordance with German law or where recognition leads to a result that is manifestly incompatible with major principles of German law, in particular where it is incompatible with basic rights.

There are only a few statutory provisions governing the cooperation between domestic and foreign courts and domestic and foreign insolvency administrators. According to article 41 of the Recast EU Insolvency Regulation, the administrators of main and secondary proceedings exchange all relevant information and cooperate with each other. The concept of article 41 of the Recast EU Insolvency Regulation is reflected in section 357 of the Insolvency Code governing international insolvency law for non-EU members.

Under article 41 of the Recast EU Insolvency Regulation or section 357 of the Insolvency Code, the German insolvency administrator is obliged to share all relevant information and documentation with a foreign administrator to facilitate an effective and smooth process and the best possible satisfaction of creditors in the insolvency procedures. This would, among other things, encompass the sharing of information on the insolvency estate, court actions, opportunities to realize the insolvency estate, registration of claims and voidance rights.

Although not expressly provided for in the Recast EU Insolvency Regulation or the Insolvency Code, German insolvency administrators should also be allowed to enter into protocols to establish a contractual framework for the conduct of the various proceedings. Depending on their contents, such protocols would require approval by the German creditors’ meeting or the creditors’ committee.

Under the Recast EU Insolvency Regulation, there are provisions governing the cooperation between domestic and foreign insolvency courts.

In contrast, the Insolvency Code does not contain any provisions governing cooperation between domestic and foreign insolvency courts. The UNCITRAL Model Law contains provisions on the cooperation of insolvency courts in international proceedings; these, however, have not been translated into German law. It is undisputed, however, that such cooperation between courts is allowed and some even say that insolvency courts are obliged to cooperate according to the principles established for the cooperation of insolvency administrators.

The purpose of such cooperation is, principally, to share information to avoid jurisdictional conflicts and clarify the financial position of the debtor. Such cooperation is to be handled on an informal basis without formal requests for judicial assistance. Against this background, insolvency courts should also be allowed to agree on protocols to establish a framework for the different proceedings.

For multiple insolvency proceedings in different member states relating to members of the same group of companies, the Recast EU Insolvency Regulation has introduced certain procedures to facilitate cross-border coordination and cooperation.

In several cases, German insolvency courts have successfully cooperated with foreign insolvency courts and avoided jurisdictional conflicts (e.g, in cases such as the insolvency of the PIN Group, where German and Luxembourg courts have been in close contact, or the insolvency of the BenQ Group, where German and Dutch courts have cooperated).

However, in a judgment dated 15 February 2012 (IV ZR 194/09), the German Federal Court of Justice refused to recognize an English scheme of arrangement between the UK-based insurance company Equitable Life Assurance Society and its creditors.

Given the fact that the particular scheme related to an insurance company and, therefore, specific insurance regulation had to be applied, the court did not decide whether the Council Regulation (EC) No. 44/2001 (the predecessor to the Brussels Recast Regulation) could be applied for schemes of arrangements concerning non-insurance companies. However, the court indicated that there were arguments to apply Council Regulation (EC) No. 44/2001 as scheme of arrangements were similar to judgments in the meaning of that regulation.

In this context, a number of Germany-based companies have successfully used an English law scheme of arrangement through the years. Given Brexit and Germany’s introduction of a new restructuring regime under the StaRUG, it remains to be seen if Germany-based companies will further consider the use of an English law scheme of arrangement as the preferred restructuring option, as, for instance, the case of the German gaming group Löwen Play in 2022.

Cross-border insolvency protocols and joint court hearings

58. In cross-border cases, have the courts in your country entered into cross-border insolvency protocols or other arrangements to coordinate proceedings with courts in other countries? Have courts in your country communicated or held joint hearings with courts in other countries in cross-border cases? If so, with which other countries?

Although German courts have dealt with several cross-border insolvency cases, they have not yet entered into any cross-border insolvency protocols or similar arrangements to coordinate proceedings with courts in other countries. The same applies to joint hearings with courts in other countries. German courts have, however, cooperated with foreign insolvency courts on an informal basis.

With regard to cross-border group insolvency procedures, cooperation and communication between courts might occur more frequently in the future. Article 57 of the Recast EU Insolvency Regulation allows the involved courts to cooperate on issues such as the appointment of the insolvency administrators, the coordination of the administration and the supervision of the insolvency estate.

Winding-up of foreign companies

59. What is the extent of your courts’ powers to order the winding-up of foreign companies doing business in your jurisdiction?

In Germany, insolvency proceedings are not initiated ex officio, but rather require a filing for insolvency either by the debtor or any creditor. The obligation to file in the event of an insolvency does not only apply to the managing directors or management board members of German entities, but also to the corresponding legal representatives of foreign companies that have their COMI in Germany. If a company does not have its COMI in Germany, the courts lack jurisdiction to commence proceedings and, hence, to order the winding-up of that company.

As far as companies from EU member states (except Denmark) are concerned, recognition of the order to wind up the foreign company is provided for by article 19 of the Recast EU Insolvency Regulation.

On the other hand, concerning companies from third countries (i.e, non-EU member states), international recognition depends on bilateral or multilateral agreements with the state in which the company has its registered office, or, if neither exists, on the international insolvency law provisions of the respective state.

UPDATE AND TRENDS IN RESTRUCTURING AND INSOLVENCY IN GERMANY

Trends and reforms

60. Are there any emerging trends or hot topics in the law of insolvency and restructuring? Is there any new or pending legislation affecting domestic bankruptcy procedures, international bankruptcy cooperation or recognition of foreign judgments and orders?

Restructuring Advancement Act

On 1 January 2021, the German legislator introduced the German Act on the Advancement of Restructuring and Insolvency Law (the Restructuring Advancement Act) and the German Act on the Stabilization and Restructuring Framework for Companies (StaRUG), establishing a comprehensive legal framework for restructurings outside of insolvency proceedings in Germany based on Directive (EU) 2019/1023 on restructuring of 20 June 2019. In addition to several other legislative amendments, the Restructuring Advancement Act has amended the restructuring regime under the German Insolvency Code and the covid-19 legislation.

The new German restructuring regime, which for instance has already successfully been used by the shirt manufacturer Eterna (2021) and the German car part manufacturer LEONI AG (2023), has filled a gap between consensual pre-insolvency restructurings, on the one hand, and restructurings in the context of formal, comprehensive insolvency proceedings, on the other hand.

The key elements of the new restructuring framework are:

• a debtor-in-possession process, in limited circumstances combined with the appointment of a restructuring officer to supervise the process;
• restructuring of secured and unsecured liabilities by way of a qualified majority decision, including the possibility of a cross-class cramdown;
• amending individual provisions of certain financial contracts;
• compromising third-party security rights in the context of group financings;
• amending shareholder rights, including implementing a debt-for-equity swap without shareholder consent;
• flexibility as to which stakeholders to include in the restructuring plan (selection must be made according to appropriate criteria, for instance, the inclusion of only financial creditors would be possible);
• broad discretion as to the extent of judicial assistance (e.g, right to choose whether the restructuring plan is to be voted on without or within a court hearing);
• stabilization measures in the form of a ban on foreclosure and enforcement; and
• the invalidity of ipso facto clauses.

The StaRUG allows parties to implement financial restructurings that are supported by a vast majority of creditors against the opposition of a minority and shareholders. With the possibility to form different stakeholder groups and the availability of a cross-class cramdown, even complex financial structures can be subject of a restructuring plan.

However, as a shift of the director’s duties in favor of the creditors, which was originally included in the draft law, was ultimately not incorporated in the new law, shareholders have retained influence over the use of tools under the preventive restructuring framework.

Some scholars and practitioners are (still) arguing in favor of a shift of directors’ duties towards the protection of creditors’ interests, in particular if a restructuring under the StaRUG is the only or best restructuring option available to the debtor. However, the local court of Hamburg (order of 17 March 2023 – 61c RES 1/23) in a much-criticized ruling decided that the initiation of a restructuring under the StaRUG by the managing director of a German limited liability company required an approving shareholders’ resolution. Therefore, any further development of the ongoing discussion remains to be observed. Also, after notification of the restructuring to the court under the StaRUG, the directors must protect the interests of the creditors.

Furthermore, the right to terminate contracts (e.g, lease contracts), which was originally provided for in the draft law, has ultimately been deleted (after strong criticism was raised during the legislative process).

It is therefore expected that the tools available under the StaRUG will relate primarily to financial restructuring measures, while operational restructurings (by terminating commercial contracts) remain reserved for insolvency processes (e.g, by way of implementing an insolvency plan in self-administration). Insofar as operational measures are required, financial creditors will have to make their consent conditional on the implementation of a corresponding concept. For instance, this may apply to claims of employees (including pension claims), as those cannot be varied by a restructuring plan.

For an international group with borrowers and issuers of debt in multiple jurisdictions, the parallel use of foreign procedures may be necessary because the applicability of the StaRUG is limited to German companies or foreign companies with their center of main interests in Germany. In this respect, the preventive restructuring frameworks of other jurisdictions are more progressive (e.g, the English scheme of arrangement and the Dutch preventive restructuring framework). Therefore, it remains to be seen whether the German restructuring regime will be able to compete in the international context.

Certain provisions under the StaRUG, which came into effect on 17 July 2022, provide the debtor with the option to conduct a restructuring matter in a public way (i.e, the individual steps in the proceedings will be made public).

With such public announcement, the restructuring proceedings can be recognized under Regulation (EU) 2015/848 (the Recast EU Insolvency Regulation) – as public restructuring proceedings under the StaRUG have been added to Annex A of the Recast EU Insolvency Regulation. It is however uncertain if and to what extent non-public restructuring matters can be recognized. Even though it may be argued that such matters can be recognized under, for example, Regulation (EU) No. 1215/2012, in practice an assessment on a case-by-case basis is required.

Amendments to the Insolvency Code

The Restructuring Advancement Act has provided for several amendments to the German Insolvency Code. In particular, these relate to the insolvency reasons that trigger the duty to file for the opening of insolvency proceedings. Other changes are largely based on the results of an evaluation conducted by the Federal Ministry of Justice with respect to the actual use of restructuring instruments in insolvency proceedings established by the Further Facilitation of Restructuring Businesses Act (2012), which had significantly improved the restructuring measures available under the Insolvency Code (e.g, by providing, among other things, the possibility of a debt-for-equity swap as part of an insolvency plan and the option to cramdown dissenting shareholders).

To achieve a more specific distinction between imminent illiquidity (which triggers a ‘right’ to file for the commencement of a restructuring process under the StaRUG or an insolvency proceeding under the Insolvency Code) and over-indebtedness (which triggers a ‘duty’ to file for the commencement of an insolvency proceeding under the Insolvency Code), the forecast period in the context of the over-indebtedness test has been set to 12 months, while the forecast period as part of imminent illiquidity has been set to 24 months (as a rule).

Also, the going-concern prognosis as part of the over-indebtedness test takes into account, in contrast to the imminent illiquidity test, whether a restructuring under the StaRUG has a predominant likelihood of success.

At the same time, in the event of (mere) over-indebtedness, the period to apply for insolvency proceedings is extended from three weeks to a maximum of six weeks. In a departure from very restrictive (emergency) payment provisions imposed on the occurrence of illiquidity or over-indebtedness, under the new legislation payments in the ordinary course of business are permitted after the occurrence of illiquidity or over-indebtedness as long as management pursues the preparation of an insolvency filing or measures to permanently eliminate the insolvency in a responsible and conscientious way. This should result in a considerable relaxation of liability for directors in this phase.

Until 31 December 2023, according to the Act on the Temporary Adjustment of Restructuring and Insolvency Law Provisions to Mitigate the Consequences of the Crisis (SanInsKG), which came into force on 9 November 2022, the forecast period for the over-indebtedness test has been temporarily shortened from 12 to four months, and the maximum period for filing for the commencement of insolvency proceedings has been extended from six to eight weeks.

In the context of an insolvency plan, to facilitate group restructurings, it is meanwhile possible to impair security rights that affiliated group companies within the meaning of section 15 of the German Stock Corporation Act have granted in favor of liabilities of the insolvent debtor (third-party security). Affected creditors will need to receive an adequate compensation for such impairment.

Also, the self-administration in insolvency proceedings has been more closely aligned with the interests of creditors. Thus, the debtor must provide comprehensive documentation with the self-administration application. This should include:

• a financial planning;
• a restructuring plan;
• a presentation of the status of the negotiations with creditors; and
• declarations regarding certain arrears, moratoria, injunctions of foreclosure and enforcement and compliance with commercial disclosure obligations in the past three years.

Finally, it has been codified that the insolvency court may authorize the debtor in preliminary self-administration proceedings to incur priority liabilities, thereby eliminating any legal uncertainty that previously existed.

It is expected that these amendments will further improve the efficiency of restructuring measures under German insolvency law, and have already been well received by practitioners, as a number of prominent cases have demonstrated (eg, Pfleiderer AG (2012), IVG Immobilien AG (2014) and Senvion (2019)).

Covid-19 pandemic

The economic consequences of the covid-19 pandemic have intensively affected the German markets. Particularly affected are those companies that had to close down their businesses due to federal or state covid decrees. Given specific amendments to existing insolvency rules (in particular, the (temporary) suspension of the obligation to file for insolvency, which was in place until 30 April 2021), and a number of governmental financial aid packages, many companies were (and are) seeking to obtain financial assistance to close the enormous liquidity gaps resulting from the pandemic.

The German legislator has initiated various legislative measures and set up financial aid worth billions of euros for companies. On 28 March 2020, the Economic Stabilization Fund Act (WStFG) came into force. The WStFG has established an Economic Stabilization Fund (WSF) that, for a limited period, will support measures necessary to stabilize the economy and to secure jobs to the extent required. The WSF is meant to benefit companies of the real economy in overcoming liquidity shortfalls and in creating a framework to strengthen the capital base.

Possible WSF stabilization measures for companies of the real economy include:

• guarantees for issued debt instruments and liabilities created until 21 December 2021; and
• recapitalization measures through the acquisition of subordinated debt, hybrid bonds, profit participation rights, silent partnerships, convertible bonds, shares in companies and other equity-like instruments.

Apart from this, the German Reconstruction Credit Institute (KfW) has set up several emergency loan programs addressed to companies suffering financing difficulties during the covid-19 pandemic.

On the legal side, the German legislator passed a law to mitigate the consequences of the covid-19 pandemic in civil, insolvency and criminal proceedings on 27 March 2020 (the Mitigation Act). The Mitigation Act came into force on 1 April 2020 (except for certain rules in the field of insolvency law, which became effective retroactively as of 1 March 2020), and has been amended several times since then.

To enable companies, which became insolvent or were facing financial difficulty because of the covid-19 pandemic, to continue their business operations, the Mitigation Act has provided several measures stipulated in the Covid-19 Insolvency Suspension Act (now SanInsKG). As a key measure, the obligation to file for insolvency due to illiquidity or over-indebtedness, or both, was suspended until 1 April 2021 and the requirements were amended several times. Also, the Covid-19 Insolvency Suspension Act (now SanInsKG) has stipulated a corresponding limitation of management’s liability, allowing affected companies to continue doing business.

Also, the Covid-19 Insolvency Suspension Act (now SanInsKG) has provided for additional measures that have removed legal impediments in connection with the provision of new financing in the crisis and have generally reduced clawback risks for contractual counterparties, which are still relevant today (e.g, any repayments until 30 September 2023 of new loans granted during the suspension period and the granting of security in respect of such new loans will be exempted from insolvency clawback in subsequent insolvency proceedings).

The Restructuring Advancement Act, which came into effect on 1 January 2021, included (additional) amendments to the Covid-19 Insolvency Suspension Act (now SanInsKG) to further mitigate the effects of the covid-19 pandemic:

• to avoid insolvency filings based on over-indebtedness exclusively due to forecast uncertainties caused by the covid-19 pandemic, the forecast period in the context of the over-indebtedness test was reduced from 12 to four months until 31 December 2021, if the over-indebtedness was caused by the covid-19 pandemic; and
• a debtor’s access to the protective shield proceeding, which is a preliminary self-administration proceeding to prepare a restructuring within an insolvency proceeding, was facilitated temporarily and even made available in case of illiquidity until 31 December 2021, if – apart from other conditions being met – the debtor’s illiquidity had been caused by the covid-19 pandemic.

SanInsKG

On 9 November 2022, the SanInsKG, which mitigates the continuous impacts of the Covid-19 pandemic the critical energy market, came into force (as an amended and renamed version of the Covid-19 Insolvency Suspension Act). From an insolvency law perspective, the (temporary) key changes, which apply for a limited period until 31 December 2023, can be summarized as follows:

• for the determination whether a company is over-indebted (in the meaning of the German Insolvency Code), the forecast period for the going-concern prognosis is shortened from 12 to four months:
• if the company was already over-indebted at the time the SanInsKG entered into force, the company could still benefit from the privilege, provided that the insolvency filing period had not yet expired, a positive going-concern prognosis for four months existed and the company was not illiquid; and
• the regular 12-month forecast period might already become relevant again as of 1 September 2023, if the management can recognize that a predominant likelihood of the company being fully financed for a period of 12 months starting from 1 January 2024 cannot be assumed;
• if a company is (still) over-indebted (in the meaning of the German Insolvency Code), the maximum period for filing for the commencement of insolvency proceedings is extended from six to eight weeks;
• for the application of self-administration in insolvency proceedings, the debtor must only submit a financial plan for four months (instead of six months); and
• for the application of a restructuring under the StaRUG, the financial plan that forms part of the restructuring plan must only cover four months (instead of six months).

The SanInsKG (temporarily) modifies the duty to file for insolvency only in relation to over-indebtedness, but leaves the duty to file for illiquidity unaffected. Consequently, the directors of the company must continue to closely review the solvency of the company.

Wirecard insolvency

In connection with the insolvency of the payment services company Wirecard, there was a broad discussion on how such cases may be prevented in the future. In particular, the audit process and the tasks, powers and liability of auditors were reconsidered. As a consequence, there was, among other things, a comprehensive tightening of the liability for auditors by amendments to the German law, which became mainly effective as of 1 July 2021.

Rainfall and flooding

Due to heavy rainfall and flooding in parts of Germany in July 2021, the legislator introduced a law by which the obligation to file for insolvency was suspended with (retroactive) effect from 10 July 2021 until 31 January 2022, for cases in which the occurrence of illiquidity or over-indebtedness was due to the effects of these natural disasters.

Insolvency protection in connection with package tour contracts

As a result of the insolvency of the tour operator Thomas Cook, German insolvency protection in connection with package tour contracts has been changed for the better protection of travelers. Tour operators used to fulfil their (already under previous law existing) obligation to provide insolvency protection by taking out insurance. Yet, under previous legislation, the insurer could limit its liability for the total amounts to be reimbursed by it in a financial year to €110 million.

This limitation of liability carried the risk that travelers would not have to be fully compensated by the insurer. Therefore, in a departure from this previous form of protection for travelers in an insolvency of tour operators, insolvency insurance will meanwhile be provided by a travel insurance fund managing fund assets created through payments of tour operators.

Energy crisis

Following the events in Ukraine, the German government initiated measures to mitigate the effects of a looming gas and energy shortage. To avoid an increasing number of insolvencies in the energy sector, the Federal Ministry of Finance, among other things, increased the federal government’s guarantee authorization, so that the KfW has been able to draw low-interest, liability-free credit lines to provide financial support to companies of all sizes in the energy sector. In addition, a syndicated financing variant with substantial risk assumption has been offered.

For this purpose, companies must apply for loans from the respective financing partners, which disburse the loans after positive approval by the KfW. In accordance with the – amended and extended – European Commission’s crisis framework for state aid, these guarantee programmes are time-limited until 31 December 2023.

The Energy Security Act, as amended on 12 July 2022 (and on 23 June 2023), represents a further response to the tense situation on the energy markets. Section 29 of the Energy Security Act introduces temporary adjustments to company law that enable and facilitate the German government’s stabilization of critical infrastructure companies in the energy sector. Stabilization measures within the meaning of section 29 of the Energy Security Act comprise all measures that serve to secure or restore a positive prognosis of continued existence in accordance with section 19(2) of the German Insolvency Code, or to finance the winding-up of the company.

Conceivable measures could include, for example, guarantees from the federal government to secure loans or the granting of credit lines and capital market products in the debt capital sector. The Federal Ministry for Economic Affairs and Climate Action decides on the specific measure in each individual case. There is no legal claim or entitlement that such measure will be taken.

Due to the negative economic impacts of the Covid-19 pandemic and the energy crisis, it is likely that many companies will still come under considerable financial pressure during the next few years (e.g, if refinancing is required for loans and other financial aids that have been taken out). In particular, the automotive supply sector, the retail market and the tourism sector are expected to require restructuring activities in the upcoming years.

As a result, an increase in distressed mergers and acquisitions activity can be expected, capitalizing on financially distressed businesses in these adversely affected industry sectors. Investors might also acquire certain businesses or assets in conjunction with the implementation of a financial restructuring under the StaRUG (eg, resulting from a sales process initiated by the debtor for certain parts of its business to generate proceeds for the envisaged restructuring).

* The information in this chapter was accurate as at October 2023.

If you need more consulting, please Contact Us at TNHH NT International Law Firm (ntpartnerlawfirm.com)

You can also download the .docx version here.

“The article’s content refers to the regulations that were applicable at the time of its creation and is intended solely for reference purposes. To obtain accurate information, it is advisable to seek the guidance of a consulting lawyer.”

LEGAL CONSULTING SERVICES

090.252.4567

HÃY CLICK ĐỂ LẠI SĐT CHÚNG TÔI SẼ GỌI NGAY CHO BẠN MIỄN PHÍ

NT INTERNATIONAL LAW FIRM

• Email: info@ntpartnerlawfirm.com – luatsu.toannguyen@gmail.com
• Phone: 090 252 4567
• Address: B23 Nam Long Residential Area, Phu Thuan Ward, District 7, Ho Chi Minh City, Vietnam