Germany

Within a “regular” insolvency proceeding the insolvency court appoints an insolvency administrator who basically takes control of the company’s assets and operations to maximise returns for creditors. The process includes an assessment of the company’s financial situation, the realisation of the company’s assets and the restructuring or liquidation.

Another common option is insolvency proceedings in self-administration (Eigenverwaltung), in which the company’s management retains control over the business. A court-appointed insolvency monitor supervises the management to ensure compliance with legal (insolvency) requirements.

Besides the fact that within a regular insolvency proceeding and a self-administration proceeding different persons are in charge, the underlying insolvency regime is generally the same. For both types of insolvency proceedings, the most common ways of restructuring are:

• the sale of the assets of the company to an investor and the dissolution of the company within the insolvency proceeding thereafter; or
• the restructuring of the company itself through an insolvency plan.

In the latter event, creditors vote on the proposed plan, which can include debt restructuring or other measures aimed at restoring the company’s viability. A special form of self-administration provides a deadline for the filing of the insolvency plan right at the beginning of the insolvency proceedings (Schutzschirmverfahren).

There are pre-insolvency options and formal insolvency proceedings to obtain protection from creditors. During these proceedings the court can issue a moratorium, which may include a prohibition on enforcement measures against the company (Vollstreckungssperre) and on realisation of existing securities (Verwertungssperre).

The pre-insolvency restructuring measures under StaRUG allow the financial restructuring under the control of the debtor by means of a restructuring plan. The restructuring plan can be limited to particular classes of creditors. Instruments under StaRUG can only be initiated by the debtor in cases of imminent illiquidity.

In the case of illiquidity or over-indebtedness, StaRUG is not applicable. In such a case the debtor can only file for insolvency, either as “regular” insolvency proceedings with a (preliminary) insolvency administrator or as debtor-in-possession proceedings with a (preliminary) monitor.

Since 1 January 2021, Germany has provided a pre-insolvency restructuring regime: StaRUG provides a variety of tools for (financial) restructuring. The main goal is the implementation of a restructuring plan which can be obtained with or without the participation of the court.

StaRUG contains a stabilisation and restructuring framework that companies can use. Its instruments are:

• a voting process conducted by the court;
• pre-assessment of certain legal questions regarding the restructuring plan by the court;
• a creditor moratorium; and
• confirmation of a restructuring plan by the court.

The choice of instruments lies at the discretion of the debtor who is in control of the restructuring process.

3.1 What are the conditions to entry?

The company must be in a status of imminent illiquidity (drohende Zahlungsunfähigkeit) to enter a StaRUG proceeding. In the case of existing illiquidity or over-indebtedness the company must file for insolvency.

The StaRUG proceeding is available to any corporate debtor (except companies from the financial sector) and to individuals who are engaged in business activities.

3.2 Can creditor claims be compromised “within a class”?

The restructuring plan requires the forming of classes of creditors with comparable stakes and interests, such as secured creditors, unsecured creditors, subordinated creditors and shareholders. The selection of classes is at the discretion of the debtor. It is not necessary to include all creditor groups in the restructuring plan. However, the selection of the classes must be based on appropriate criteria and within a class the creditors must be treated equally.

A restructuring plan is accepted if in each class a majority of 75% of creditors (by value of their claims) approves the plan.

3.3 Is there a “cross-class cramdown”?

There is the possibility of a cross-class cramdown if the 75% majority is not reached in a particular group. The approval of such a dissenting group is assumed if the following requirements are met:

• the creditors in the dissenting group are presumably not treated worse under the restructuring plan than in the absence of the plan;
• the creditors of the dissenting group receive a fair share of the economic value available under the plan; and
• the majority of the groups have approved the plan.

A cross-class cramdown requires that the groups approving the plan are not limited to groups consisting of subordinated claims and/or shareholders.

3.4 Can shareholder claims be compromised?

Shareholder claims, such as loans, can be subject to compromise, just like claims from other creditors. In many cases, shareholder loans are subordinated under German insolvency law and this principle can influence their treatment under a StaRUG restructuring plan. Claims arising from such loans may have lower priority compared to other creditors.

In addition, the restructuring plan can affect shareholder rights. The plan can contain capital measures (capital reduction/increase), a debt–equity swap, or the transfer of share or membership rights.

3.5 Can secured creditors’ claims be compromised? Are deficiency claims treated differently?

As far as the claim is covered by the collateral’s value, the claim cannot be compromised without the consent of the secured creditor. Deficiency claims (where the value of the collateral is insufficient to cover the claim) are treated as unsecured claims.

3.6 Can creditors propose competing plans?

Only the debtor has the authority to propose a restructuring plan under StaRUG.

3.7 What level of court or other third-party supervision is there of the process(es)?

The involvement of the court is basically limited to a supervisory role. The court can appoint a restructuring officer (Restrukturierungsbeauftragter) if the debtor applies for such appointment or if it is legally required. A restructuring officer has specific obligations, for example, to inform the court if circumstances appear that justify the termination of the restructuring case.

The debtor can also ask the court to appoint a restructuring moderator (Sanierungsmoderator). The restructuring moderator conciliates between the debtor and the creditors in order to find a solution for overcoming the financial difficulties of the debtor.

4.1 What is the applicable law that provides for clawback and/or antecedent transaction claims?

Clawback claims (Insolvenzanfechtung) are part of the German Insolvency Code (Insolvenzordnung (“InsO”)). They are regulated in sections 129 to 147 of the InsO.

However, similar rules can also apply outside of an insolvency proceeding if a creditor enforces a title against a company and is confronted with detrimental acts of the company.

4.2 What are the relevant “look-back” periods for claims?

The relevant “look-back” periods for clawback claims are dependent on the background of the contested action and can go back up to 10 years before the filing of the insolvency application.

4.3 Who can pursue the claims?

Clawback claims can only be brought by the insolvency administrator. In the case of a self-administration proceeding, however, the right is transferred to the monitor.

4.4 What remedies are available and how do they operate in practice?

The insolvency administrator can bring clawback actions on the following grounds:

• Within three months before the filing of insolvency, a transaction or an act can be contested under simplified conditions in the case of a congruent or incongruent coverage (sections 130, 131, InsO). This especially applies if the other party was aware of the insolvency grounds or if the party was (at the specific date) not entitled to the satisfaction/security received.
• Transactions made up to 10 years before the insolvency filing can be challenged if the debtor acted with the intent to disadvantage creditors and if the other party was aware of this intent (section 133, InsO).
• Gratuitous transactions (e.g. gifts) that were made within four years before the insolvency can be challenged (section 134, InsO).
• Two other reasons for clawback action are transactions that directly disadvantage insolvency creditors (section 132, InsO) and repayments or securities of shareholder loans (section 135, InsO).

Once a transaction is successfully challenged, the insolvency administrator can demand that the addressee of the clawback action returns the asset or its value to the insolvency estate. If the asset cannot be returned, monetary compensation is typically required.

4.5 What defences are available?

The burden of proof for the clawback claim lies with the insolvency administrator. The defences depend on the specific legal grounds of the clawback claim. In general, the addressee of the clawback action can demonstrate that he/she acted in good faith and was unaware of the debtor’s financial difficulties. For example, the ordinary course of business transactions is less likely to be challenged. It is also possible to show that the act was not detrimental to the creditors (e.g. because of existing securities) or that the addressee provided equivalent value in return.

4.6 Is there a general right of action in respect of transactions defrauding creditors or Actio Pauliana claims?

An Actio Pauliana does not exist as a specific action but is basically part of all clawback actions, especially the clawback action under section 133 of the InsO.

4.7 Who can pursue the claims?

No Actio Pauliana claims exist, see Question 4.6, above.

4.8 What remedies are available and how do they operate in practice?

No Actio Pauliana claims exist, see Question 4.6, above.

4.9 What defences are available?

No Actio Pauliana claims exist, see Question 4.6, above.

As soon as legal grounds for insolvency are given, the director/manager must file for insolvency. If they fail to do so in good time, they may be personally liable. This duty only affects persons with the power to represent the company, such as managing directors or members of the board.

5.1 What are the duties of directors and managers?

Directors have fiduciary duties which require a knowledge of the financial situation of the company. In the case of an insolvency, the director must file for insolvency within a specific period of time to avoid personal liability.

5.2 What claims can be brought against directors and managers arising from breaches of those duties?

Directors can be held personally liable for payments made from the company’s estate after the occurrence of insolvency (illiquidity or over-indebtedness). Such liability does not apply to payments which are consistent with the due care of a prudent and conscientious director.

5.3 Who can pursue the claims?

Liability claims against managing directors are pursued by the insolvency administrator, who acts in the interests of all creditors.

In specific circumstances, creditors have a direct claim against the managing director as well.

5.4 Do directors have, at any time, a strict obligation to file for insolvency and, if so, when does that arise?

If insolvency grounds exist, the director must file for insolvency without undue delay. The insolvency application must be filed, at the latest, three weeks after the commencement of illiquidity and six weeks after the commencement of over-indebtedness.

Illiquidity (Zahlungsunfähigkeit) is assumed if the company has insufficient funds to pay more than 90% of the mature liabilities. Other grounds for insolvency include over-indebtedness (Überschuldung). Over-indebtedness requires that the debtor’s assets do not cover the existing obligations, unless there is a positive continuation forecast for the next 12 months (positive Fortführungsprognose).

In the case of imminent illiquidity, the director can file for insolvency but does not have a legal obligation to do so.

5.5 Can directors and managers be found liable for the increase in sums owed to creditors after a company becomes insolvent?

No, but “new” creditors (from the time after the company became insolvent) may bring claims for damages against the director. It is a tort law claim based on the delay of insolvency.

Claims by “old” creditors resulting out of the delay of insolvency can only be pursued by the insolvency administrator.

5.6 In what other circumstances can directors and managers be found liable directly to creditors of the company?

Directors may be personally liable for withholding tax and social security contributions.

There might also be a criminal liability for bankruptcy offences (such as fraudulent transfers or concealment of assets) or deliberate delays in filing for insolvency.

The insolvency administrator has the authority to investigate the debtor’s assets and liabilities, gather information about the company’s affairs and report findings to the court and creditors. Creditors can access court records related to the insolvency proceedings.

6.1 What information can be obtained by office holders in respect of a debtor’s property, information and affairs?

The directors have the obligation to give the insolvency administrator information regarding any subject that is related to the insolvency proceedings. This includes, in particular, any existing assets of the company. Beyond that, the insolvency administrator is authorised to collect information from third parties.

6.2 How is that information obtained in practice?

The directors normally collaborate within the proceedings, so the information is exchanged in this process. The insolvency administrator also interacts with the creditors in order to clarify their claims. Public registers also help in gathering information. Furthermore, the insolvency administrator may request access to bank accounts or information from other parties.

6.3 Can the court assist in obtaining that information and how does that work in practice?

If necessary to provide truthful statements, the insolvency court orders the debtor to make a declaration in lieu of an oath for the records to the effect that the debtor disclosed any demanded facts truly, correctly and completely. In the case of a company this obligation rests with the directors.

The court may also subpoena debtors/directors and detain them if they (still) refuse to cooperate.

7.1 Is the UNCITRAL Model Law on Cross-Border Insolvency adopted?

The UNCITRAL Model Law on Cross-Border Insolvency was not directly adopted in Germany. Instead, Germany has created its own regulations on cross-border insolvency within the framework of the InsO.

As a Member of the European Union (EU), Germany is also bound by the EU Regulation on Insolvency Proceedings (EU Regulation 2015/848). This regulation provides a framework for recognising and enforcing insolvency proceedings across EU Member States, facilitating cooperation among office holders.

7.2 Is it possible to recognise office holders from other jurisdictions?

Foreign insolvency proceedings can be recognised in Germany under section 335 et seq. of the InsO. The recognition of the foreign proceedings automatically leads to the recognition of the office holder.

7.3 What is the process and what are the conditions for recognition?

Insolvency proceedings opened in one EU Member State are automatically recognised in Germany as far as they are not contrary to public policy.

With respect to non-EU proceedings, the foreign court must have jurisdiction based on a German law perspective and the foreign proceeding must not violate German public policy (section 343, InsO).

The foreign insolvency administrator proves the appointment by presenting a certified duplicate of the judgment or certificate by means of which he has been appointed. The insolvency court may require a translation, which must be certified by a person authorised to do so in the state in which proceedings have been opened (section 347, InsO).

7.4 What information can be obtained by office holders in respect of a debtor’s property, information and affairs?

The office holders’ powers are governed by the law of the state in which the insolvency proceedings are opened (lex fori concursus).

7.5 What steps can a foreign office holder take to recover assets belonging to the debtor?

The administrator may exercise all administrative rights under the law of the state in which the insolvency proceedings are opened with regard to domestic assets (lex fori concursus). An exception applies if a territorial proceeding has been initiated in Germany pursuant to Article 34 et seq., EU Regulation 2015/848 or section 354, InsO. In such case, there are also regulations for the collaboration between the two office holders.

While the general powers of the office holder are governed by the law of the opening state, the office holder must observe German law regarding the realisation of assets (e.g. property law).

7.6 Is a foreign office holder able to bring clawback claims or fraudulent transaction claims?

A transaction may be contested if the conditions for contesting insolvency are met under the law of the state in which proceedings were opened, unless the opponent demonstrates that the law of another state is relevant to the transaction and the transaction is by no means contestable in accordance with this law.

8.1 Can a foreign office holder take appointments?

Insolvency administrators are appointed by the competent insolvency court. For this reason, it is nearly impossible for a foreign office holder to take an appointment in Germany.

Depending on the scope of the insolvency proceeding (revenue, total assets, employees), a creditors’ committee might be mandatory. The creditors’ committee has the right to make a suggestion regarding the selection of the insolvency administrator; such suggestion is binding for the insolvency court if it is unanimous and if the suggested person is not unqualified.

8.2 What are the conditions for becoming an office holder?

The insolvency court must select and appoint an independent natural person who is suited to the case at hand (section 56, InsO). The insolvency administrator must be particularly experienced in German (insolvency) business affairs and must be independent of the creditors and of the debtor. Normally insolvency administrators are attorneys, tax accountants or auditors.

8.3 What are the main rules of professional conduct?

Insolvency administrators must act independently. They are obliged to treat all creditors equally and may not derive any personal benefits from their position.

Insolvency administrators provide information about their actions and decisions, especially to creditors and the insolvency court. Furthermore, they are obliged to prepare detailed reports on the management of assets and the use of funds.