A look at corporate, personal and, where relevant, partnership insolvency proceedings in Germany, with a brief description to explain key features, as part of our Dictionary of Insolvency Terms in EU Member States. In particular, we highlight who controls the procedure and whether it is likely to be accompanied by a moratorium to prevent enforcement.
(Ordinary) insolvency proceedings
- Insolvency proceedings that can be opened by petition of the debtor or a creditor in relation to a legal entity (juristische Person), all forms of German partnerships or a natural person (except consumers).
- The insolvency court appoints a preliminary insolvency administrator (vorläufiger Insolvenzverwalter, selected/appointed by the court and creditors’ committee) and typically orders that any enforcement action against the debtor during the insolvency proceeding, including secured creditor enforcement, is prohibited (except for enforcement against real property).
- A statutory moratorium applies by law, once the formal insolvency proceedings are opened by the court.
- The court will open insolvency proceedings if the debtor is facing (impending) illiquidity and/or, for companies only, is over-indebted (überschuldet), and as long as the costs of the insolvency proceeding are covered.
- In the preliminary proceedings the court typically orders that any actions by the directors are subject to the approval by the preliminary administrator (vorläufiger Insolvenzverwalte). Alternatively, the court may order that the preliminary administrator takes control of the debtor’s assets. Upon the formal opening of insolvency proceedings, the power of administration and disposal over the debtor’s assets is vested in the administrator to achieve a sale of the company as a going concern or to liquidate the company.
- After the insolvency administrator has paid creditors or distributed the available assets/proceeds to creditors, the insolvency court will conclude the insolvency proceeding.
Debtor-in-possession (DIP) proceedings
- Insolvency proceedings in which a debtor (being a legal entity, juristische Person), all forms of German partnerships or a natural person (except consumers) applies to the court for permission to manage and dispose of its insolvent estate itself under the supervision of a supervisor (Sachwalter).
- DIP proceedings are often, but not necessarily, combined with an insolvency plan proceeding.
- Management remains in place, normally supported by a restructuring officer. The debtor retains control of its assets, subject to the supervision of the court-appointed (preliminary) supervisor (vorläufiger Sachwalter). The person proposed to be appointed as (preliminary) supervisor is typically put forward by the debtor and approved and appointed by the court.
- There is a moratorium during DIP proceedings (and insolvency plan proceeding, if any), which precludes any enforcement action, including by secured creditors.
- Self-employed persons are entitled to apply to be released from their debts (Restschuldbefreiungsverfahren), which does not apply to company/partnership debtors
Insolvency plan proceeding
- A special type of insolvency proceeding available to companies, all forms of German partnerships and natural persons aimed at restructuring the debtor with the support of its creditors. It may be applied in addition to an ordinary insolvency proceeding or a DIP proceeding, see above.
- The proceeding provides a flexible mechanism for debtors to regulate repayment of debts due to secured and unsecured creditors to realise and distribute assets.
- Commenced when the debtor or an insolvency administrator (in case of DIP proceedings the court-appointed supervisor, Sachwalter) submits a draft restructuring or insolvency plan to the insolvency court. Only the legality of an insolvency plan is reviewed by the court.
- Classes of creditors vote to approve the plan, which must also be approved by the court. A simple majority by value and by number in each class must vote in favour of the plan for it to be approved. If any class of creditors votes against the plan, the court may override that decision, if it concludes that those creditors would not be prejudiced by the plan. Once approved, the plan binds all creditors.
Protective shield proceedings
- Preliminary insolvency proceedings that create a moratorium to give a debtor (being a legal entity, juristische Person, all forms of German partnerships or a natural person) an opportunity to develop an insolvency plan to be implemented in a subsequent DIP / insolvency plan proceeding, while enjoying protection from enforcement by its creditors.
- The debtor continues to manage and dispose of its assets while preparing an insolvency plan under the supervision of a preliminary supervisor (vorläufiger Sachwalte), supervised by the insolvency court.
- The court may order a stay on all creditor enforcement action for up to three months, at the debtor’s request.
- As one of the prerequisites for protective shield proceedings, the debtor must demonstrate that creditors will not be prejudiced by the proceedings.
Consumer insolvency proceedings
- The only insolvency proceedings available to consumers.
- Before instigating consumer insolvency proceedings, the consumer must try to reach a compulsory out-of-court settlement (außergerichtlicher Einigungsversuch) and has the option of pursuing a judicial debt settlement plan (gerichtlicher Schuldenbereinigungsplan), or residual debt exemption proceedings (Restschuldbefreiungsverfahren).
- During attempts to reach a settlement, a moratorium protects the debtor from creditor action.
- The court appoints an administrator (Insolvenzverwalter) to take over control of the debtor’s assets/income with the aim of repaying creditors. The moratorium continues while the administrator is in control of the assets.
- Among the prerequisites for the court to appoint an administrator, the consumer must not benefit from any receivables arising from employment relationships and must be insolvent, ie facing (impending) illiquidity.
- A creditor holding security over real property belonging to a company, any type of partnership or individual may apply for a forced sequestration. The property is administered by an administrator appointed by the court following the creditor’s application.
- The secured creditor’s debt is satisfied out of any income deriving from the property, such as rents from tenants, after deducting ongoing costs including public charges and enforcement costs. This form of foreclosure is often costly.
Forced public auction
- The judicial sale of real property. The procedure entails the local court effecting a compulsory sale of real property owned by a company, any type of partnership or individual by way of public auction following an application for foreclosure by a creditor holding security over the property.
- The secured creditor’s debt is satisfied from the sale proceeds. The secured creditor may not reject bids of at least 70% of the determined market value in the first auction and 50% in the second auction (to the extent that the property does not sell at the first auction, or if a bid of less than 70 was rejected in the first auction). As auction sales tend to generate lower proceeds, it is possible for a debtor and security holder to agree to sell the property out of court. However, a creditor cannot do this without debtor consent.
Verwertung verpfändeter Geschäftsanteile
Share pledge enforcement
- A share pledge granted by a company is enforced by way of a sale of the shares in a public auction run by a court or an auctioneer.
- Shares may be sold in a private sale if the price for the pledged shares is determined on a stock exchange or the parties agree otherwise.
EU Directive Implementation
The EU Directive on Restructuring and Insolvency1 requires Member States to incorporate minimum common standards into their national restructuring and insolvency laws by 17 July 2021, with an option to extend that deadline by one year. The intention of the Directive is to reduce barriers to the free flow of capital stemming from differences in Member States’ restructuring and insolvency frameworks, and to enhance the rescue culture in the EU.
Notable features required to be included in Member States’ national laws include:
- An effective preventive restructuring framework to enable debtors experiencing financial difficulties to restructure at an early stage, with a view to preventing insolvency and ensuring their viability.
- A stay of up to four months extendable to up to 12 months to support negotiations of a restructuring proposal, which should prevent individual enforcement action and include rules preventing the withholding of performance, termination, acceleration or modification of essential contracts.
- An ability to cram down dissenting classes of creditors.
- Adequate protection for financing needed to allow the business to survive or to preserve the value of the business pending a restructuring, and for new financing necessary to implement restructuring plan.
Provision for honest, insolvent entrepreneurs to have access to a procedure that can lead to a full discharge of their debts (subject to limited exceptions) within three years.
Implementation in Germany
The requirements of the Directive were implemented in Germany by the Act on the Further Development of Restructuring and Insolvency Law (Gesetz zur Fortentwicklung des Sanierungs – und Insolvenzrechts – SanInsFoG).
In addition to amendments to existing laws, including the Insolvency Code (Insolvenordnung – InsO), the SanInsFoG introduced the Law on the Stabilization and Restructuring Framework for Enterprises (Gesetz über den Stabilisierungs – und Restrukturierungsrahmen für Unternehmen – StaRUG), a law which came into force on January 1, 2021 and introduces a pre-insolvency restructuring procedure implementing the requirements of the Directive.
The StaRUG closes the gap that previously existed in German law between pre-insolvency restructuring, which is only possible with the consent of all creditors, and restructuring in insolvency proceedings, which is often costly, value-destructive and damaging to a company’s reputation, by providing a pre-insolvency procedure that enables restructuring at this early stage even against the will of obstructing creditors.
In implementing the requirements of the Directive, the "German Scheme" includes, in addition to the possibility of a judicial plan vote and the judicial preliminary examination of issues relevant to the restructuring, the possibility of a moratorium and the judicial confirmation of the plan. The involvement of the court is only necessary for specific features. The respective court proceeding may be confidential or public
The "German Scheme" provides the possibility of implementing restructuring measures against the vote of individual creditors (cram down within a class) and even creditor groups (cross-class cram down).
However, the "German Scheme" does not make use of the possibility to terminate executory contracts or to provide super-senior financing under the plan
In order to be able to make use of the German Scheme, the centre of main interest must be located in Germany. A sufficient connection to Germany does not provide jurisdiction for the German Scheme (TBC as opposed to eg a sufficient connection to England for the use of the English Scheme Arrangement and the English Restructuring Plan, and to the Netherlands for the use of the WHOA).
Most of the provisions of the Restructuring Update Act entered into force on 1 January 2021. The most notable exceptions are the provisions regarding public restructuring matters, which will enter into force on July 17, 2022.
Recognition of foreign insolvency processes
EU Regulation on Insolvency Proceedings
The EU Regulation on Insolvency Proceedings2 applies to all EU Member States except Denmark, hence also in Germany, and requires that the collective insolvency proceedings which are listed in Annex A to the Regulation occurring in another EU Member State are automatically recognised, including the powers and authority of an insolvency practitioner appointed in such proceeding.
Recognition of third country insolvency processes
In Germany, third country insolvency proceedings may be recognized in accordance with § 343 German Insolvency Code (InsO). The recognition is automatic if the foreign proceeding satisfies the requirements of an insolvency proceeding under German law. However, the foreign proceeding is not recognised in Germany if the foreign court opening the insolvency proceeding lacks jurisdiction based on the application of German insolvency law or if the recognition would lead to results which are contrary to public policy.
No court application is required for the recognition of foreign insolvency proceedings.
The recognition is examined as an incidental question and upon objections in the course of any relief sought. Sections 336 et seq. InsO also provide specific choice of law rules inter alia for employment relationships, for real property governed by the law of the state in which the proceedings are located, for set-off as well as transaction avoidance.
Insolvency changes in response to COVID-19
For more information on changes to insolvency law in Germany as a result of the COVID-19 pandemic please see our Guide to changes in insolvency law in response to COVID-19.
Law stated as at 24 September 2021.
Contact: Dietmar Schulz
1 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132.
2 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast).