Regelinsolvenzverfahren (regular/standard insolvency proceedings)

The creditors or the management of a debtor company petition for the company to enter insolvency in circumstances where the company is insolvent or over indebted. Following the commencement of these proceedings, a preliminary administrator (and subsequently an administrator) is appointed to realise and distribute the assets of the company prior to it being dissolved.

Topic

Summary
What is the nature of the procedure?

The company is insolvent (ie illiquid (zahlungsunfähig) or over indebted (überschuldet)) or imminently likely to suffer from illiquidity (drohend zahlungsunfähig).

A creditor or the company’s management will commence the procedure by filing an insolvency petition with the insolvency court. A creditor’s petition must be based on either the company’s illiquidity or over indebtedness whereas a petition by management may also be on the grounds that the company is imminently likely to suffer from illiquidity.

The court will issue a first order on short notice appointing a preliminary administrator and ordering further safeguarding measures. The appointment of the preliminary administrator is at the court’s discretion; neither management nor the creditors can nominate a preliminary administrator.

The insolvency court will usually order the opening of main insolvency proceedings around three months after the first order (provided that the company is found to be insolvent and has sufficient assets to cover at least the costs of the proceedings). The administrator collects the company’s assets, realises them and distributes them in the prescribed order (see below).

Once all distributions have been made, the company will be removed from the commercial register.

Who can commence the procedure?

The company’s creditors or management. If the company has no management in place, the petition can (and under certain circumstances has to) be filed by the shareholder(s).

Are there any corporate thresholds?

If the company is insolvent, each member of management has a duty to file for insolvency. The petition should preferably be signed by all members of management, but this is not a requirement.

If management intends to file a petition on the basis that the company is imminently likely to suffer from illiquidity, the members of management should seek a shareholders’ resolution before filing to avoid personal liability.

Is there a moratorium?

The insolvency court’s first order following the insolvency petition is usually a stay of proceedings. Enforcement measures are suspended and the debtor company may no longer make payments. Any disposition of money or other assets requires the involvement of the preliminary administrator. Pending civil actions are suspended once the main proceedings are opened.

Who is in charge?

During the preliminary proceedings, the preliminary administrator is in charge, albeit subject to the terms of the court order. The order may give him:

  • full powers (in which case the powers of the directors cease)
  • limited powers (these powers will be listed in the order), or 
  • powers that allow him to exercise a controlling function (ie any legal acts of the directors are valid only if approved by the preliminary administrator).

When main proceedings are opened, the court-appointed administrator is in charge and all powers of the directors cease (if they haven't already done so). However, certain actions of the administrator require the sanction of the creditors’ committee or, if there is no committee, the creditors’ assembly (ie all creditors).

How are they selected, including voting thresholds?

The court appoints both the preliminary administrator and the administrator. The choice of administrator is at the court’s discretion and each court holds a list of candidates (mostly lawyers, but also accountants). Neither management nor the creditors can nominate a person as administrator. Since one of the criteria for an appropriate candidate is impartiality, courts tend to decline an administrator suggested by stakeholders.

At the first creditors’ meeting, creditors have the right to appoint a different administrator in place of the court appointed administrator. In practice, a new administrator is hardly ever appointed, as the first creditors’ assembly takes place (at the earliest) six weeks following the opening of the main proceedings.

Is there a plan? Who votes and what are the thresholds?

No. The administrator’s role is to collect the company’s assets, realise them and distribute the proceeds to creditors. However, the administrator or the company may present a plan. If a plan is presented, the proceedings continue as insolvency plan proceedings (Insolvenzplanverfahren).

 What can the plan do?

N/A

If not approved by the necessary majorities, can the plan still be approved? N/A
What is the exit route? Dissolution of the company.
What is the priority of payments?
  1. Costs of the proceedings (court fees, remuneration of the (preliminary) administrator and members of the creditors’ committee, if applicable)
  2. Preferential creditors (Massegläubiger) (ie creditors that became creditors only after the opening of the insolvency proceedings or by an act of the preliminary administrator with the necessary powers to enter into preferred obligations)
  3. Creditors secured by pledge, assignment of claims or title by way of security.)
  4. Unsecured creditors (pro rata), and 
  5. Subordinated creditors (ie shareholder loans).

Creditors with a right of separation (eg creditors that can claim that an asset does not belong to the insolvency estate) may claim that right at any time.

Is there a creditors committee? A creditors’ committee is not compulsory. There is no fixed number of committee members although typically there are around five members. The role of the creditors’ committee is essentially advisory, although the administrator requires committee approval for certain actions. In the absence of a creditors’ committee the creditors’ assembly (i.e. all creditors) must give the required approvals.
How involved is the court?

The court’s role is important at the outset. However, after main proceedings are opened, there is very limited court involvement.

How is the insolvency administrator paid? The administrator’s remuneration is codified (Insolvency Administrator’s Remuneration Code, InsVV) and calculated on the basis of the value of the insolvency estate. The administrator’s claims (as well as the court fees) are privileged claims (Masseverbindlichkeiten). If the estate is insufficient to cover all privileged claims, then the costs of the proceedings (including the insolvency administrator’s remuneration) must be satisfied upfront.
Are there any general comments on the use of this procedure?

Regelinsolvenzverfahren is the most frequently used procedure in practice. However, there are substantial reforms planned which will probably be implemented in the first half of 2011. The reform plans include an increase in creditor rights to influence the choice of administrator.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.