Germany: Restructuring & Insolvency

There are two main types of real estate securities under German law, with the land charge (Grundschuld) being the most common and flexible instrument. It provides a determined amount to be paid out of a real estate property, without depending on a specific debt. The land charge is created by notarized agreement and registration in the public land register. The parties can agree to issue a land charge certificate, which makes it transferable by handing over the certificate. Otherwise changes to the land charge must be registered in the land register which requires the involvement of a notary. Without due notarization and registration of the creation or changes to the land charge in the land register, the land charge is void. Another common form of real estate security is the mortgage (Hypothek). It follows the principles and formalities of the land charge, but the charge is linked to a specific debt which makes it less flexible, as the debt can only be transferred jointly with the mortgage.

Where goods are delivered, commercial parties often agree on a right of retention (Eigentumsvorbehalt) in the purchase agreement. Under the retention right the seller remains owner of the sold asset until it receives the full purchase price. In the purchaser’s insolvency proceedings a right of retention entitles the seller to a separation and hand over of the asset (if still in the debtor’s possession), thereby not being limited to a quota on a payment claim.

Further, a security transfer can be agreed regarding any movable asset (Sicherungsübereignung), making it a common security for large volume commercial relationships and loans. In order to create an enforceable security, it is essential to identify the assets subject to the charge and to include a specific security purpose agreement. Depending on the purpose and use of the secured assets, the identification is done by listing each item, or if they are being processed or used (i.e. raw materials), by determining a specific location (Raumsicherung) or by marking them.

In practice important are also pledges over rights, such as receivables, bank account balances, company shares, and IP rights. Like the security transfer, the pledge must also include a specific security purpose agreement. All transferable rights can be pledged as a security and the formal requirements follow the transfer requirements of the relevant right. For example, a pledge over shares in a limited liability company (GmbH), the most common company form in Germany, requires the notarization of the pledge agreement. A pledge over IP rights can be agreed in writing. Bank accounts are commonly pledged, and the bank has to be notified. In an insolvency, a pledge over a right entitles the creditor to separate the right from the debtor’s other assets and demand transfer of the proceeds obtained by public auction of the right. The creditor is entitled to participate in the auction but cannot directly demand transfer of the right itself.

It is possible to create a pledge over receivables, but a security transfer is more common as it does not require notification of the creditor.

There is no public register containing information regarding pledges over movable assets and rights in Germany.

The practical issues secured creditors face in enforcing their security depend on the nature of the security and the provisions of the security document. The following issues are relevant in practice:

Real estate

Foreclosure sale (Zwangsversteigerung): A lender can enforce a land charge or mortgage by foreclosure sale. This requires an application to court presenting a valid title (i.e. an enforceable court decision or a notarial submission to immediate foreclosure) against the debtor and results in a public auction sale of the real estate property where the lender receives the proceeds less the costs.

Forced administration (Zwangsverwaltung): A secured creditor or insolvency administrator may apply to court for forced administration. The court appoints an administrator (Zwangsverwalter) who takes over the administration of the property and the right to receive and distribute all income from it, in particular from rental payments. The administrator pays out the proceeds to the creditor, deducting the costs of the administration.

Freehand sale (freihändiger Verkauf): If both parties agree and the asset has a market value, the asset can be sold in a so called “freehand sale”. Instead of a public auction, an authorized agent, notary or bailiff may sell the asset. As the procedural requirements of the freehand sale are less cumbersome than those for a foreclosure sale or forced administration, the proceeds of the sale are often significantly higher.

Movable property, rights and receivables

Where movable assets, rights and receivables are concerned, the secured party can enforce in the security subject to the security purpose agreement and the legal provisions applicable to the security and asset. This may in some cases mean a hand-over of the asset to the secured party, but mainly a public auction (i.e. for shares in a GmbH) or a freehand sale. If the debtor files an insolvency petition, the insolvency court can order that secured creditors may not realise their security on movable property owned by the debtor. After the opening of the insolvency proceedings, only the insolvency administrator is authorized to sell encumbered movable assets in his possession and to collect claims that have been assigned as security. The proceeds from such claims are then distributed to the secured party, reduced by the costs for the enforcement and a fee for the administrator.

The opening of insolvency proceedings always requires a reason (Eröffnungsgrund). There are three insolvency reasons:

Illiquidity (Zahlungsunfähigkeit): Illiquidity is given if a debtor is not able to fulfil its due payment obligations. According to case law of the German Federal Civil Court, illiquidity occurs if the debtor is not able to pay at least 90% of its total due liabilities within three weeks. If the debtor has stopped making payments, illiquidity is presumed by law and has to be rebutted by the debtor should a creditor file an insolvency petition against the debtor.

Over-indebtedness (Überschuldung): This insolvency reason is only applicable to legal entities and partnerships in which no individual has unlimited liability. Over-indebtedness as an insolvency reason has two requirements:

(i) the debtor’s assets no longer cover its liabilities

(ii) there is no positive going-concern prognosis.

In practice, entities in larger corporate groups often have a balance sheet deficit due to a cash pool or other financing structure. For these entities, the deficit is usually remedied by a cash injection or some form of parent guarantee. Otherwise, the directors of a debtor of an entity with a balance sheet deficit need to prepare a viable business concept in order to prove the going-concern prognosis of the business. Such concept must show the intention of the shareholders and directors to continue the debtor’s business and include a restructuring concept on the basis of which a liquidity plan can be drawn up for the current and following financial year.

Imminent illiquidity (drohende Zahlungsunfähigkeit): A debtor is considered to be imminent illiquid if it is likely to be unable to meet its due payment obligations. Imminent illiquidity grants the debtor a right, but no obligation, to file for insolvency, but not creditors. The inclusion of imminent illiquidity as insolvency reason is intended to encourage businesses to file for insolvency early and thereby start a restructuring process.

If an illiquidity or over-indebtedness occurs, the directors of a legal entity are obliged to file for insolvency without undue delay, but at the latest within three weeks of the occurrence of the insolvency reason. Should the directors have resigned, the shareholders and/or members of the supervisory board are obliged to file for insolvency. A late insolvency filing has severe civil and criminal law consequences for directors under German law (see question 14).

The German legislator mitigated the consequences of the Coronavirus outbreak for businesses by issuing a new law (Gesetz zur Abmilderung der Folgen der COVID-19-Pandemie im Zivil-, Insolvenz- und Strafverfahrensrecht) which has come into force retroactively on 1 March 2020. Under certain conditions, the obligation to file for insolvency is suspended until 30 September 2020 (with a possibility of extension). For the duration of the suspension, the prohibition of payments made by directors is relaxed so that the debtor is able to maintain its business operations. The liability for lenders in delayed insolvency filing is restricted for new credits granted during the suspension period. At the same time, the administrator’s right to challenge pre-insolvency transactions is considerably restricted, particularly regarding the repayment of new credits granted during the suspension period and any collateral granted in this context. In addition, the creditor’s right to file for the debtor’s insolvency has been significantly restricted.

Liquidation and restructuring of a business are both carried out under German insolvency law in an in-court insolvency procedure. There is no formal out-of-court restructuring proceeding under German law.

Opening proceedings: Upon receipt of an insolvency filing, the insolvency court will review the admissibility and merits of the filing, specifically whether it is competent, an insolvency reason exists and the estimated insolvency estate will suffice to cover the costs of the proceedings. In more complex cases, the court will appoint an expert to assess the admissibility of the petition and order preliminary security measures, such as

(i) the appointment of a preliminary insolvency administrator or trustee who monitors the management of the business by its management during the opening proceedings,

(ii) restrictions for the debtor to dispose over its assets,

(iii) restrictions for enforcement measures against the debtor,

(iv) appoint a preliminary creditor committee, or other suitable measures.

For operating businesses, the German Employment Agency takes over the employees’ salaries for a maximum of three months before the opening of insolvency proceedings. This opens possibilities for an in-court restructuring and therefore in many cases insolvency proceedings are opened only three months after the insolvency filing. During this time, it is not uncommon to initiate an investor process if a sale of the business as a whole or in parts is an option, in order to transfer the business shortly after the opening of the proceedings.

Opened insolvency proceedings: If the court admits the proceedings, it issues a formal opening order, appoints an insolvency administrator or trustee (in debtor in possession (DIP) proceedings, please see question 8 for a detailed description) and determines the date of the first meeting of the creditor assembly, which takes place within six to eight weeks of the decision to open insolvency proceedings. Insolvency proceedings are public proceedings and published in an online register as well as the commercial register of the debtor.

Upon his or her appointment, the insolvency administrator obtains the sole power to manage the debtor’s business and dispose over its assets. The administrator is responsible to achieve the best outcome in the interest of all of the creditors. He or she is monitored by the creditor committee, the creditor’s assembly, as well as the insolvency court.

During the first assembly, the insolvency administrator will report on the debtor’s financial situation and present the options for maintaining or liquidating the business or an insolvency plan (see question 8 for a description of insolvency plan proceedings) and the creditors resolve on how to take the proceedings forward. Regular insolvency proceedings last until the complete liquidation of all of the debtor’s assets and the distribution of the insolvency quota to the creditors. They usually extend over several years. Interim distributions are possible, but not mandatory and largely depend on the liquidity of the insolvency estate and complexity of the case.

The German Insolvency Code divides creditors into five groups: privileged creditors, secured creditors, regular insolvency creditors, and subordinated creditors.

Privileged creditors have first priority over all other claims. This rank applies to all creditors who obtain a claim with consent of the administrator after the opening of the insolvency proceedings. Employees still employed or newly hired after the opening of the insolvency proceedings also rank as privileged creditors. It is possible to incur privileged claims after the insolvency filing, but before the opening of the proceedings if the court grants a respective authorisation to the administrator or the trustee (in DIP proceedings).

Secured creditors: Secured creditors have a so called right to separate satisfaction (Absonderungsrecht) which means they can claim settlement of their claim from the proceeds of the sale of the security (see question 2 for details). If the secured creditor’s claim is not fully settled this way, they participate in the insolvency proceedings as regular insolvency creditors.

Regular insolvency creditors: Insolvency creditors are all unsecured and c not subordinated creditors. After liquidation all of the debtor’s assets, deduction of the privileged liabilities and costs of the proceedings, the insolvency creditors receive an insolvency quota of the proceeds.

Subordinated creditors are only creditors of claims for

(i) interest incurred during the insolvency proceedings,

(ii) costs incurred by creditors due to the participation in the insolvency proceedings,

(iii) specific public penalty payments,

(iv) a gratuitous performance such a donation or gift,

(v) shareholder loans or similar liabilities, which are particularly relevant in practice as they also include loan repayment claims of affiliated entities of the shareholder and under certain circumstances may extend to claims from the delivery of goods or service provision,

(vi) liabilities subordinated by agreement between the debtor and the creditor, unless the agreement explicitly provides for a higher rank.

Creditors with a right to separation may request the hand-over of an asset they own from the insolvency administrator. This would be creditors with a retention of title right or other parties who have granted possession or use of an asset to the debtor. These creditors do not participate in the insolvency proceedings and therefore have no voting rights in the creditor assembly (unless they have other claims against the debtor, of course).

Under the German Insolvency Code, the administrator, or in DIP proceedings, the trustee can challenge legal acts that were performed before the opening of proceedings and disadvantage the insolvency creditors. This enables the administrator/trustee not only to claw-back payments made and securities granted by the debtor to creditors, but also to undo transactions with mutual obligations.

There are a number of specific rights to challenge transactions which have different requirements and cover different time frames. The administrator/trustee can challenge transactions conducted

(i) up to one month before the insolvency petition, if the creditor was not entitled to receive the asset, for example if additional securities were granted or a payment was made early;

(ii) in the second or third month before the insolvency petition, if the creditor was not entitled the asset and if the debtor was illiquid or the recipient was aware that the transaction was harmful to the creditors;

(iii) up to three months before the insolvency petition, if the debtor was illiquid or had filed an insolvency petition and the creditor had knowledge of the illiquidity, or circumstances indicating an illiquidity, or of the insolvency petition;

(iv) up to one year before the insolvency petition regarding the settlement of shareholder loans or similar transactions;

(v) up to four years before the insolvency petition regarding assets transferred without consideration (for example transfer of goods for less than the fair value, gifts, and similar transfers); or

(vi) up to ten years before the insolvency petition, if the debtor acted intentionally to the harm of the whole of the creditors and the other party was aware of this intention.

If an insolvency administrator successfully challenges a transaction, each party is obliged to return the assets or advantages received. For the creditor this means that it has to return goods, payments or securities to the debtor and it will rank with its claim for compensation as a regular insolvency creditor.

Cash transactions (where the service or good provided and the compensation have equal value and have been exchanged within a short time period) are privileged under German insolvency law and cannot be challenged unless certain strict requirements for the challenge are met.

The opening of the insolvency proceedings stays all pending court proceedings and inhibits new litigation or enforcement proceedings. The administrator can elect to take up pending court proceedings or enter into new proceedings which is not uncommon to pursue claims of the debtor against its own debtors or when transactions are challenged. The enforcement of existing court orders or other titles against the debtor is also suspended. Only an ownership or other right to separation of a specific asset can be litigated in court against the debtor during the insolvency proceedings, as its creditor does not participate in the insolvency proceedings (see question 5). Enforcement from a property encumbered with a mortgage or land charge is not suspended, unless the insolvency administrator files a corresponding suspension request.

The stay caused by the insolvency proceedings does have effect in other jurisdictions, see European Insolvency Regulation 2015/848 and section 335 German Insolvency Code, but needs to be specifically recognised in some jurisdictions, particularly outside the EU.

Secured creditors holding a real estate security, such as a mortgage or land charge have the benefit of an exception to the general stay of proceedings in insolvency proceedings. However, the administrator may request the suspension of such enforcement for the benefit of all creditors of the insolvency.

German insolvency law does not provide for an out-of-court restructuring. Within the in-court insolvency, there are two specific special proceedings, the Debtor-in-possession or DIP proceedings (Eigenverwaltung) which is complemented by a pre-insolvency protective shield (Schutzschirm), and insolvency plan proceedings (Insolvenzplanverfahren).

 DIP proceedings: With the insolvency filing, the debtor may file for so called self-administration and request the court to appoint a (preliminary) trustee instead of an insolvency administrator. If this request is granted, the authority to manage the debtor’s business and to dispose over its assets remains with the debtor. The management remains in charge and oftentimes an additional director with restructuring expertise is appointed or hired as external counsel. The court-appointed trustee supervises the debtor’s management and monitors the financial situation of the debtor. The trustee is also entitled to challenge pre-insolvency transactions.

A DIP proceeding requires that there are no known disadvantages to the creditors in connection with the administration by the debtor itself. If a preliminary creditor committee is appointed (e.g. upon such recommendation by the debtor) and the committee resolves unanimously that the creditors are not disadvantaged by the DIP proceedings, the court must order accordingly. In practice DIP proceedings require preparation and ideally an (informal) agreement with the most important creditors and other stakeholders, such as suppliers.

The goal of DIP proceedings is the restructuring of the debtor’s business, either on its own by using advantages of the insolvency proceedings with regard to the termination of contracts, reducing debt and staff, or the sale of the business as a whole to a new investor.

 Protective shield: To support the restructuring of a business in the framework of DIP proceedings and encourage debtors to file for insolvency early, the legislator introduced a special procedure for the time period in between insolvency filing and the opening of the DIP proceedings. The protective shield prevents the court for a maximum period of three months to order security measures, such as the appointment of a preliminary insolvency administrator or limitations on its rights to dispose over assets. At the same time, it grants the right to request a moratorium to avoid of enforcement against the debtor and it enables the debtor to choose the trustee (as opposed to a court elected and appointed trustee or administrator which is the norm). Within the three month time period the debtor can prepare an insolvency plan and initiate steps to implement it. In addition to the requirements of the DIP proceeding, the protective shield proceeding can only be requested if

(i) the insolvency reason is either imminent illiquidity or over-indebtedness – the request is not permissible if the debtor is not able to pay on its due debts anymore or if it has stopped its payments; and

(ii) the restructuring of the business is not evidently without prospects of success.

These facts must be proven with a certificate issued by an independent renowned insolvency expert who cannot be identical to the requested trustee.

 Insolvency plan proceedings: An insolvency plan can be prepared by the debtor, the insolvency administrator or the trustee in DIP procedures. It usually provides for a restructuring of the debtor’s business, but can also provide for a transfer of the business as a whole or even a liquidation. The insolvency plan can provide for extensive measures deviating from the regular insolvency proceeding and may include far reaching provisions such as waivers, payment deferrals, corporate measures like debt-to-equity swaps, capital reductions or increases, sale of assets or shares, even the change of the debtor’s legal form. The plan is submitted to the court and if it meets the legal requirements, the creditors vote on the insolvency plan in the creditor assembly. The creditors are divided into groups whereby each group votes on the plan separately. The plan is considered accepted if the majority of the groups accept the plan and the court will then confirm the plan unless the creditor’s rights are not sufficiently considered or formal requirements are not observed. When the insolvency plan becomes legally binding, the insolvency proceedings are terminated and the plan is implemented, unless the insolvency plan provides otherwise.

Before an insolvency filing and whilst a debtor is in a financial crisis, lenders are restricted by a liability risk vis-à-vis other creditors for delaying the insolvency filing (see the exceptions during the applicability of the mitigation measures against the Corona crisis, question 3). Thus, lenders will usually require the debtor to obtain a restructuring opinion (Sanierungsgutachten) before granting a loan. Such opinion must set out restructuring measures and their chances of success and be prepared by an independent restructuring expert.

When the insolvency proceedings are opened, the administrator (or, in case of a DIP proceeding, the debtor itself) will obtain financing if the insolvency estate provides sufficient funds to repay a credit. The repayment claims are privileged if agreed after the opening of the insolvency proceedings or even before that if the court authorised the administrator or debtor to incur liabilities to the insolvency estate.

The insolvency proceeding leaves claims against non-debtor parties like guarantors or directors unaffected. The release of such claims always requires the secured party’s consent. This is often a reason for an entire group of companies to have to file for insolvency. Within an insolvency plan, the debtor would be released from any recourse claims of guarantors against the debtor.

Under the German Insolvency Code, the creditors are in principle represented by the creditor assembly. A creditor committee can always be formed voluntarily, if the debtor exceeds two of the following three thresholds, the court must appoint a preliminary creditor’s committee before the opening of the insolvency proceedings:

(i) more than an average of 50 employees in the last financial year,

(ii) a balance sheet sum of at least EUR 6 million, or

(iii) a turnover sales in the last twelve months prior to the insolvency application of more than EUR 12 million,

The creditor committee enables creditors to support and monitor the insolvency administrator in its management of the business. The administrator must obtain the committee’s approval for certain decisions, particularly the transfer of essential assets of the debtor’s business.

The committee usually consists of three to five or more members and individuals as representative of the creditor groups are members (i.e. the employees, financing bank, suppliers). The committee members may obtain advisers at their own cost. There are statutory fees the members receive for their participation and in larger insolvencies the members are entitled to a professional indemnity insurance funded by the insolvency estate. If the legal requirements for a mandatory creditor committee are not met, the question whether such committee is appointed is ultimately also a cost issue.

The opening of an insolvency proceeding has several consequences for existing contracts.

 For mutual contracts that have not yet been fully fulfilled by either party, the insolvency administrator has to decide whether to continue or terminate the contract (section 103 German Insolvency Code). If the administrator decides against the performance of a mutual contract, the other party is entitled to claim for non-performance only as an insolvency creditor. Contractual clauses in agreements restricting the administrator’s election right are invalid. However, more specific clauses regarding the consequences of insolvency on a mutual contract, e.g. in service and employment contracts or lease agreements, may provide for a deviating provision. In employment contracts where the debtor is the employer, employment relationships continue beyond the opening of insolvency proceedings and the insolvency administrator assumes the position of employer. Wages and salaries are paid from the insolvency estate.

 Where the parties have agreed on a retention of title in a mutual contract, special provisions apply: If the debtor has sold and transferred a movable item subject to a right of retention, the purchaser may demand performance of the purchase agreement. If, on the other hand, the creditor has sold and transferred to the debtor a movable item subject to a right of retention, the creditor may, in the event of non-performance by the insolvency administrator, remove the item from the insolvency estate without payment of fees. Other provisions apply for extended rights of retention, i.e. where the asset has been sold or processed.

If a creditor’s claim was due and enforceable before the opening of insolvency proceedings, it remains entitled to set-off. Otherwise a set-off of mutual claims is only possible to a very limited extent after the opening of insolvency proceedings and often the subject of dispute in insolvency proceedings.

Sale of business or assets: In the period between the insolvency filing and the opening of the proceedings – which can last three months or even longer – neither the debtor nor a preliminary insolvency administrator are entitled to sell the business as a whole or make significant disposals regarding the debtor’s assets of any kind. As soon as insolvency proceedings are opened, the newly appointed insolvency administrator may enter into a sale and transfer agreement regarding the debtor’s business, parts thereof, or otherwise sell material assets. If appointed, the creditor committee’s, otherwise the creditor assembly’s prior consent must be obtained. The sale of assets or the entire business can also be provided for in the insolvency plan.

 Transfer of unencumbered assets: The insolvency administrator in principle transfers the debtor’s assets free and clear from claims and liabilities of third parties. If the insolvency administrator mistakenly sells assets encumbered with third party rights, the secured party can demand the transfer of the compensation claim against the buyer or claim damages against the administrator.

 Securities: The administrator is entitled to sell and transfer the majority of secured movable assets and real estate in the administrator’s possession, but has to settle the secured claim from the proceeds. Therefore in the framework of the sale of a business as a whole, a consent to release the security needs to be obtained from the secured party as otherwise only an encumbered transfer is possible.

In DIP proceedings, the above principles apply, but the debtor remains authorised to dispose over its assets. The insolvency court may order that the trustee’s consent is required for certain or all of the debtor’s transactions.

 Credit bidding: There is no legal framework for credit bidding or a similar institution under German law. For some cases a similar result can be achieved as the secured party is entitled to participate in the public auction or freehand sale of the encumbered asset and then able to set-off its secured claim against the purchase price for the asset.

 Pre-pack sales: German insolvency law does not provide for pre-pack sales. In practice the time period of three months between the insolvency filing and the opening of the insolvency proceedings can be used to initiate an investor process and arrange for a sale and transfer of the business as a whole or parts thereof. The transfer can then take place as soon as the proceedings are opened. This also allows the debtor and the investor to benefit from the salary payments funded by the German Employment Agency.

Directors of a legal entity are legally obliged to file for insolvency within a maximum of three weeks from the occurrence of an insolvency reason (illiquidity or over-indebtedness without going-concern prognosis, see question 3). There are strict liability provisions under civil and criminal law for delayed insolvency filing. Particularly, the directors of a legal entity may not make any payments from the occurrence of the insolvency reason on, with only some very limited exceptions (see question 3 regarding the exceptions currently in force due to the Corona crisis). Any payments made in breach of this provision can be claimed back from the insolvency administrator after the opening of the insolvency proceedings. This is relevant in practice, as insolvency administrators must act in the interest of the creditors as a whole and are therefore obliged to review and assert these claims against the directors. Directors are also personally liable for unpaid social security contributions, and wage taxes as well as unpaid VAT. The directors furthermore are obliged to inform the shareholders if 50% or more of the registered share capital has been lost, and call an extraordinary shareholder meeting. A breach of this obligation can also make the directors personally liable under criminal and civil law.

In principle, the shareholders of a limited liability company or stock corporation are not liable for the company’s debts. However, certain acts may trigger a “piercing of the corporate veil”, such as severe interventions, i.e. withdrawal of the company’s funds in an amount which causes an insolvency reason to occur. The same principles apply for third parties which are generally not liable for company debts with limited exceptions, i.e. where guarantees, contractual assumption of liability or control agreements exist, factual directorship or other severe interventions or tortious acts have been conducted.

There is no release for directors or other stakeholders when a company enters an insolvency or restructuring process. In fact, the administrator is obliged to conduct a detailed review and assert such claims against directors, shareholders, lenders or other stakeholders if he gains knowledge of circumstances that imply the existence of such claims.

Germany is party to the Recast European Insolvency Regulation 2015/848. Pursuant to this Regulation, all EU member states shall recognize openings of insolvency proceedings by a competent court in an EU member state. Exceptions apply in cases where the effects of a recognition would violate the national public policy.

As a general rule, the recognition of insolvency proceedings in other states takes place without formal proceedings in Germany. Formal proceedings may apply if the court opening the proceeding is not considered as competent or if major principles of German law would be breached.

Germany did not adopt the UNCITRAL Model Law on Cross Border Insolvency or the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments and is currently not considering any adaptation.

In German insolvency law, local jurisdiction is determined by the centre of main interest, or COMI, of the debtor (section 3 German Insolvency Code, Art. 3 EIR 2015/848). The COMI is presumed to be at the registered seat of the debtor. Only if the debtor can prove successfully to the court that its main administration is actually conducted from another place and that this is visible for third parties, a German court will admit insolvency proceedings at that place. In principle a debtor domiciled in another state may request the opening of insolvency proceedings in Germany. While a number of cross-border group insolvencies has been conducted from Germany, German courts are now critical of pulling foreign insolvencies to Germany and, in case of doubts or concerns of their local jurisdiction, examine the COMI very closely and request detailed information.

In principle, separate insolvency proceedings are opened for each group entity, an insolvency administrator (or trustee in DIP proceedings) is appointed for each entity. There are no joint insolvency proceedings for a group or several group entities.

However, a new law regarding group insolvencies (Gesetz zur Erleichterung der Bewältigung von Konzerninsolvenzen) came into force in 2018 and has somewhat centralised and co-ordinated group insolvency proceedings. When a group debtor files an insolvency petition and the court admits the petition, the proceedings of other group entities can be opened at the same court and even with the same judge. In the past, judges have appointed the same administrator/trustee for a group. Now, even if the insolvency administrator or trustee is not the same for all group entities, these administrators/trustees have a co-operation and information obligation. The same applies for creditor committees which also typically are only appointed for one or for the most important entities of a corporate group. Now, it is possible to appoint a group creditor committee. In addition to these provisions, special group co-ordination proceedings can be requested by the debtor, the administrator/trustee or the creditor committee. The court will upon such request appoint an independent group co-ordinator who ensures the co-operation between the administrations.

German insolvency law contains both debtor and creditor friendly elements and is overall balanced, if not slightly creditor friendly. Other stakeholders, particularly the shareholders of the debtor, lose all influence in the insolvency proceedings.

The declared goal of the German Insolvency Code is stated in its section 1 as the joint satisfaction of the creditors. The creditors as a group have extensive rights to influence the insolvency proceedings. Particularly, a creditor can initiate the insolvency proceedings by filing an insolvency petition. Through the creditor assembly and the creditor committee, the creditors also have further rights of participation. In the assembly the creditors may resolve on the removal of the insolvency administrator, the termination of DIP proceedings, the insolvency plan and other important matters. In the committee the creditors continuously monitor and are informed on the proceedings, their prior consent is required for important measures within the proceedings such as the sale of a business as a whole. Other institutions, such as the right to challenge pre-insolvency transactions of the debtor, the directors’ criminal and civil liability for late insolvency filing and their personal liability for payments made after the occurrence of an insolvency reason, the cram-down of the shareholders or certain creditors in the framework of an insolvency plan also benefit the creditors.

At the same time, German insolvency law is becoming more debtor-friendly and for company insolvencies focused on the preservation of a business. This trend is set to continue. At the EU level, Directive (EU) 2019/1022 on preventive restructuring frameworks came into force in June 2019. This directive contains regulations to simplify and introduce corporate restructuring measures before in-court insolvency proceedings. To this end, the directive provides for various mechanisms and means to help identify economic imbalances in companies at an early stage and avert the threat of insolvency. The German legislator must translate these new regulations into national law within of two years.

Generally, the German Insolvency law is not influenced by major socio-political factors and the state mostly remains in a neutral position.  In the current crisis caused by the outbreak of the Corona Virus, the state has made available a large number of support for debtors in order to preserve businesses and employment.

In order to mitigate the economic impact of the Covid-19 pandemic on businesses, numerous financial aid measures have been set up at federal and state level and most of them have now been implemented and are paid out. They include in particular a special program of the Kreditanstalt für Wiederaufbau (KfW) which includes up to 90% guarantees for loans granted by the debtor’s bank, a direct participation for syndicated loans, and an express loan. There are also guarantee programmes at federal and state level to secure up to 90% of bank loans granted to the debtor and numerous programs (e.g. Immediate Coronavirus Aid) for smaller enterprises and self-employed individuals. All of the German governments financial aid measures are coordinated with the “Temporary_Framework” for state aid measures adopted by the European Commission on 19 March 2020 (as amended on 3 April 2020 and 8 May 2020). The Commission already approved most of the federal government’s financial aid measures in March 2020.

Significant amendments to the insolvency law have been made due to the Corona crisis – see end of question 3.

German insolvency law was comprehensively reformed and improved in 2012 by the ESUG (Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen) and with the Directive (EU) 2019/1022 on preventive restructuring frameworks of June 2019, German insolvency law will undergo further changes.

Since then, the far-reaching improvements of the ESUG have been perceived as largely positive in practice. The insolvency plan procedure has proven itself in practice and the scope of application for plan solutions has been considerably expanded.

Also, German law bonds can be restructured outside formal insolvency proceedings by majority vote under the German Bond Act. Until a pre-insolvency restructuring proceeding is introduced, any other out-of-court restructurings are only possible with the consent of all creditors and due to recent court decisions, not without liability risks for the management, creditors and advisors.