Insolvency Law – Creditor and Debtor Counselling
The firm does not deal with personal bankruptcies. If you have questions about personal bankruptcies, we can recommend law firms that deal with them.
Insolvency – formerly bankruptcy – has a bad reputation in Germany. But in fact, corporate insolvency is a very essential part of economic life, part of the cycle that is necessary to drive the national economy as a whole. A company that has no prospect of being profitable is neither a good employer nor a good debtor in the long run. This is true even for nonprofit corporations that were not established to make a profit but still need to be funded. Orderly insolvency proceedings are intended to preserve profitable companies that have become insolvent through no fault of their own (e.g. due to the insolvency of another company resulting in a substantial loss of receivables) or profitable parts of companies and thus also jobs, while liquidating unprofitable companies and parts of companies.. If companies or parts of companies are profitable, the insolvency administrator can sell them – if necessary after a certain restructuring phase. Thus, both the rescue of profitable companies and parts of companies and the liquidation of non-profitable companies and parts of companies simultaneously serve to increase the volume of the insolvency mass, which in turn serves to satisfy creditors. These are the objectives of insolvency proceedings, which are only imperfectly formulated in § 1 Sentence 1 of the German Insolvency Code (Insolvenzordnung – InsO).
Various provisions of the Insolvency Code are overlaid by provisions of the COVID-19-Insolvency Suspension Act. These are presented below.
Creditor Counselling
Effective creditor counseling does not begin after the debtor becomes insolvent, but long before. Ideally, it starts before any contract is signed. After all, every contractual party to whom rights and obligations are established can also become insolvent. Therefore, not only should the creditworthiness of the future debtor be checked before the contract is concluded, but the legal options that protect the creditor as much as possible should also be exhausted in the contract. This may be a reservation of title to the goods sold, a grant of right of use subject to a condition precedent, the obligation to transfer a collateral, the assignment of the debtor’s customer receivables and the like. All of this is subject to sound legal advice.
If payment stagnation already occurs on the part of the debtor, there are still security options available, although they cannot always deliver what they initially appear to promise. This is because in the event of subsequent insolvency, the insolvency administrator may, under certain conditions, recover such collateral as well as payments made by the debtor from the assets (so-called avoidance in insolvency – Insolvenzanfechtung). Which options actually exist and should be taken advantage of can only be determined on the basis of careful examination by a lawyer. This is since the creditor also runs the risk of exposing himself to criminal liability. Anyone who knows about the (impending) insolvency and nevertheless works in any way to ensure that the debtor gives him preferential satisfaction or provides security runs the risk of becoming liable to prosecution as a participant in a creditor’s favor (Gläubigerbegünstigung). Thus, any working towards the granting of incongruent collateral that goes beyond the required legal acts, namely the acceptance of performance, is criminal participation, as the perpetrator’s business partner is not protected (cf. NK-StGB/Urs Kindhäuser, 5th ed. 2017, StGB § 283c Rn. 21). Favoring a debtor (Schuldnerbegünstigung) would be punishable from the outset.
Creditors may also file for insolvency, § 14 InsO. This can be useful if the creditor is aware that the debtor, who is ready for insolvency, has so much liquidity at a certain point in time due to periodic inflows of funds that not only the costs of the insolvency proceedings are covered by it, but also a quota that is not only marginal can be expected. Only filing for insolvency prevents further money destruction in such cases.
Debtor Counselling
Each company or its management must be in a position to assess on an ongoing basis whether it will be able to meet its liabilities in the long term. If it occasionally defaults on payments, no action is required as long as the forecast shows that all liabilities can still be met. But there is a great danger for the company manager: from the onset of insolvency maturity (insolvency and over-indebtedness; not the threat of insolvency), there is a prohibition of payment to the detriment of the company’s assets. If payments are made nevertheless, the management may be held personally liable for compensation of the amount paid.
Insolvency, and not merely a temporary stagnation of payments, exists if the debtor is unable to procure the financial resources required to settle the receivables due within three weeks and to reduce the liquidity gap to below 10 % (see BGH of May 24, 2005 – IX ZR 123/04; BGHZ 163, 134, 138 et seq.; BGH of June 21, 2007 – IX ZR 231/04, ZIP 2007, 1469). This assessment is to be made solely on the basis of objective circumstances (see BGH dated 25. 5.2005 – IX ZR 123/04, BGHZ 163, 134, 140; BGH dated 12. 10.2006 – IX ZR 228/03, ZIP 2006, 2222).
To determine whether insolvency exists, the management must prepare a liquidity balance sheet. On the assets side, in addition to the available cash and cash equivalents (so-called assets l), the funds to be made liquid within three weeks (so-called assets II) are to be shown. On the liabilities side, the liabilities due and called in on the reporting date (so-called liabilities l) and the liabilities due and called in within three weeks (so-called liabilities II) must be included. Assets and liabilities are to be related. If the delta between assets and liabilities is below 10%, there is no insolvency yet; if it is above 10%, there is insolvency. The payment ban kicks in and the management must immediately file for insolvency.
A liquidity balance sheet must therefore be updated on an ongoing basis as long as the company is not in a position to repay its liabilities at any time.
Whether the insolvency ground of overindebtedness exists must also be examined. It stands independently alongside that of insolvency.
The law firm of Dr. Wente can advise on the examination of possible over-indebtedness, the preparation of the liquidity balance sheet and other details, but only after the conclusion of a mandate agreement and the payment of an appropriate advance on fees. We will always settle these accounts promptly, because otherwise we will also be threatened with financial damage if an insolvency administrator is able to demand not only the remaining advance payment.
COVID-19-Insolvency Suspension Act
The COVID-19 Insolvency Suspension Act (COVID-19-Insolvenzaussetzungsgesetz) temporarily suspends the liability-enforced and, in some cases, penalty-enforced three-week insolvency filing requirement until the December 31, 2020. However, this suspension applies only to cases in which the insolvency or over-indebtedness is due to the consequences of the COVID 19 pandemic and there are prospects for overcoming the insolvency.
The aim is to give companies that would otherwise be required to file an application the opportunity to avert insolvency proceedings by taking advantage of state aid, but also, if necessary, in the course of restructuring or financing agreements. To enable this, during the suspension of the obligations to file for insolvency, managing directors are only liable to a limited extent for payments they make after the company is ready for insolvency. Similarly, payments made to contractual partners during the suspension are only subject to rescission in insolvency to a limited extent. Moreover, new loans granted during the suspension of the obligation to file for insolvency are not considered to be an immoral contribution to the delay in filing for insolvency.
The ability of creditors to force insolvency proceedings by filing for bankruptcy has been restricted for three months. This protection period is also likely to be extended. However, it does not apply if the reason for filing for insolvency already existed on December 31, 2019.
Personal Bankruptcies
The firm does not deal with personal bankruptcies. If you have questions about personal bankruptcies, we can recommend law firms that deal with them.
