Insolvency

What does insolvency mean?

Insolvency means that a person or company is insolvent or overindebted. In the case of insolvency, the debtor can no longer service its liabilities because it does not have sufficient liquid funds. In the case of over-indebtedness, the liabilities exceed the assets and there is a negative going concern prognosis for the company. In such a case, insolvency proceedings are intended to resolve the situation in an orderly manner.

The aim of insolvency proceedings

The purpose of insolvency proceedings is to find the best possible solution for all parties involved. This includes:

1. Creditor protection: Ensuring that the creditors (i.e. those to whom the debtor owes money) are satisfied in the best possible way. This means that the debtor's existing assets are distributed fairly.
2. Refurbishment: If possible, the company should be reorganised. This means that attempts are made to make the company solvent again through restructuring measures so that it can continue to exist and jobs can be saved.
3. Debt cancellation: In the case of personal insolvency, the aim is to give the debtor a ‘second chance’ after a certain period of time by cancelling part of the debt (residual debt discharge).

Course of insolvency proceedings

1. File for insolvency
   • Self-application by debtor or third-party application by creditor
2. Examination by insolvency court
   • Examination of the admissibility and completeness of the application
   • Decision on the opening of proceedings
3. Opening resolution
   • Court issues opening order
   • Appointment of an insolvency administrator
4. Security measures
   • Securing of assets by the insolvency administrator
5. Meeting of creditors
   • First meeting of the creditors
   • Information on the debtor's financial situation
   • Election of the creditors' committee (if necessary)
6. Insolvency administrator determines assets
   • Compilation of the list of assets
   • Valuation of assets
7. Examination of receivables
   • Registration of claims by creditors
   • Examination and determination of claims by the insolvency administrator
8. Realisation of assets
   • Sale or realisation of assets
   • Allocation of the proceeds to the insolvency estate
9. Distribution of the insolvency estate
   • Distribution of proceeds to creditors in accordance with the Insolvency Code
   • Payments on account (if sufficient funds are available)
10. Final distribution
    • Final distribution of the remaining funds to the creditors
11. Discharge of residual debt (for private individuals)
    • Possibility of residual debt discharge after a period of good behaviour (3 years)
12. Termination of the procedure
    • Final report of the insolvency administrator
    • Cancellation of the insolvency proceedings by the court
13. Post-procedure phase (if necessary)
    • Further measures for the discharge of residual debt or settlement of liabilities

These steps provide an overview of the typical course of insolvency proceedings in Germany. The exact procedure may vary depending on the type of proceedings (e.g. standard insolvency, consumer insolvency) and the individual circumstances.

Who can file for insolvency?

In principle, an insolvency application can be filed both by the debtor himself and by creditors. However, the notary is not responsible for insolvency applications; in particular, the application does not have to be notarised! Here are the various options in detail:

1. Self-application (debtor): Debtors who are insolvent or over-indebted can file for insolvency themselves. This applies to both private individuals and companies.
2. Third-party application (creditor): A creditor who has a claim due against the debtor can file for insolvency if they can credibly demonstrate that the debtor is insolvent. Creditor applications are often found among companies, but private individuals can also be forced into insolvency by their creditors.
3. Obligation to file for insolvency: In the case of legal entities in particular, there is an obligation to file for insolvency within three weeks of becoming insolvent or overindebted. This obligation lies with the representatives of the company, e.g. the managing directors of a GmbH or the management board of an AG.
4. Other authorised parties: In some special cases, other parties may also be entitled to file for insolvency, for example the heirs or the estate administrator in the context of estate insolvency proceedings.

How is an insolvency petition filed?

1. Forms and documents:
2. The forms and documents required vary depending on the type of proceedings (consumer insolvency, standard insolvency, corporate insolvency). These forms are available from the relevant insolvency courts and can often also be downloaded online.
3. Essential contents of the application:
4. Debtor details: Complete details of the debtor, such as name, address and, if applicable, company details.
5. Presentation of the asset situation: A detailed list of all assets and liabilities.
6. Reasons for insolvency: Presentation of the reasons for insolvency or over-indebtedness.
7. Proof of claim (for third-party applications): The creditor must prove his claims and the reason for assuming insolvency

Where is the insolvency petition filed?

The application for insolvency must be filed with the local courts responsible for insolvency matters. As a rule, the insolvency court in whose district the debtor company has its general place of jurisdiction has local jurisdiction. This is usually the registered office.

You can find out which insolvency court is responsible here: https://www.justizadressen.nrw.de/de/justiz/suche

What deadlines must be met?

There are various deadlines to be met in insolvency proceedings that affect the debtor, the creditors and the insolvency court. Here is an overview of the most important deadlines:

1. Application by debtor (own application):
   • In the event of insolvency or over-indebtedness, the debtor (especially legal entities) is obliged to file for insolvency within three weeks.
2. Application by creditor (third-party application):
   • Creditors can file for insolvency at any time if they have a claim that is due and can credibly demonstrate that the debtor is insolvent.
3. Opening order of the insolvency court:
   • The insolvency court examines the application and usually decides on the opening of proceedings within a few weeks. The exact period depends on the complexity of the case.
4. Meeting of creditors:
   • The first creditors' meeting usually takes place within six weeks of the opening of insolvency proceedings.
5. Claim registration:
   • Creditors must register their claims within a deadline set by the court. This period is usually two to three months from the order to open proceedings.
6. Exam date:
   • The examination date at which the filed claims are examined is set by the court and usually takes place a few weeks after the filing deadline.
7. Reporting date:
   • The report meeting, at which the insolvency administrator reports on the status of the proceedings, often takes place at the same time as the first creditors' meeting.
8. Good conduct phase (for private individuals):
   • The good behaviour phase lasts three years.
9. Discharge of residual debt (for private individuals):
   • The application for residual debt discharge must be submitted no later than six months after the end of the good behaviour phase.
10. Realisation phase and distribution of the insolvency estate:
    • The insolvency administrator has no fixed deadline for the realisation of the insolvency estate, but this takes place during the course of the proceedings. The proceeds are distributed to the creditors successively after the assets have been realised.
11. Final distribution and termination of proceedings:
    • The final distribution and termination of the proceedings take place after the insolvency estate has been fully realised and the distribution has been completed, which can take several months to years, depending on the complexity of the case.

What legal consequences can occur if I fail to file for insolvency?

Failure to file for insolvency in good time can have serious legal consequences, particularly for the management of companies. Here is an overview of the most important legal consequences:

1. Liability of the management:
   • Creditors can hold the managing directors or board members of companies (e.g. GmbH, AG) personally liable for the damage incurred if the managing directors/board members are late in filing for insolvency. This liability can extend to all liabilities of the company that arose after the insolvency or over-indebtedness occurred.
2. Consequences under criminal law:
   • Procrastination in insolvency: Delayed filing of an insolvency application can constitute the criminal offence of delaying insolvency. In Germany, § 15a InsO applies and provides for a fine or imprisonment of up to three years.
   • Other criminal offences: In addition to delaying insolvency, other criminal offences such as fraud, embezzlement, bankruptcy, breach of accounting obligations or favouring creditors or debtors may also be relevant.
3. Professional and trade bans:
   • Trade licence: In the event of serious breaches of duty, the competent authority can impose a trade ban. This means that the persons concerned are no longer allowed to carry on a trade for a certain period of time.
   • Occupational bans: In particular for professional groups such as lawyers, tax consultants or auditors, such a failure can lead to a professional ban.
4. Loss of claims to residual debt discharge:
   • Consumer insolvency: In the case of private individuals, a late application can jeopardise the entitlement to residual debt discharge, especially if the omission is considered to be deliberate discrimination against the creditors.
5. Limited refurbishment options:
   • Prosecution and execution: Creditors can initiate further enforcement measures as long as insolvency proceedings have not been opened, which can further aggravate the financial situation of the company or the person concerned.
   • Loss of restructuring opportunities: Timely application often enables reorganisation measures and better control over assets. A late application can significantly impair these opportunities.
6. Negative impact on the company:
   • Loss of confidence: Customers, suppliers and business partners may lose confidence in the company, which can lead to further economic difficulties.
   • Business interruptions: A disorganised insolvency can lead to abrupt business interruptions and thus to a complete loss of the company.

We always recommend that you consult a specialist insolvency lawyer, as an incorrect, incomplete or untimely insolvency application can sometimes have criminal consequences (see above)!

You can also find further information here.