insolvency proceedings

Table of Contents: Insolvency Proceedings – Everything Important at a Glance

  1. Reasons and Legal Situation
  2. bankruptcy petition
  3. types of insolvency proceedings
  4. course of the insolvency proceedings
  5. Special features of insolvency administration
  6. Liabilities and rights in ongoing insolvency proceedings
  7. insolvency avoidance and alternatives
  8. insolvency crimes
  9. Insolvency proceedings as an opportunity
  10. Summary of the insolvency proceedings
  11. Perspectives after insolvency

Things to Know About Insolvency

What does insolvency mean?

Insolvency occurs when a debtor can no longer pay his debts . This applies to private individuals, companies and corporations .

Definition and Basics of the Insolvency Code (InsO)

The Insolvency Code (InsO) regulates the procedure in cases of insolvency and over-indebtedness in Germany .

It defines the course of insolvency proceedings and enables both the dissolution and the restructuring of companies. The aim is to collectively satisfy creditors by realising the debtor's assets or through alternative solutions, such as continuing the company.

The Act to Further Facilitate the Restructuring of Companies (ESUG, Federal Law Gazette I 2011, 2582) improves the conditions for the restructuring of economically troubled companies.

There are special regulations for natural persons and former self-employed persons, such as the consumer insolvency procedure . The InsO allows destitute debtors to defer the costs of the procedure and opens up the possibility of discharge from residual debt .

The insolvency procedure has two main objectives:

  1. The creditors of a debtor are satisfied jointly by realising his assets and distributing the proceeds.
  2. Honest debtors are given the chance to free themselves from their remaining debts and make a fresh economic start.

Reasons and legal situation for insolvency

1. Reasons for insolvency

  • Insolvency can be triggered by insolvency or excessive indebtedness .
  • Imminent insolvency entitles the applicant to file for insolvency, but does not oblige him to do so.

Insolvency occurs when a company is unable to pay at least 90 percent of its outstanding liabilities within three weeks.

2. Legal situation for consumers and self-employed persons

Consumers and self-employed persons can voluntarily file for insolvency if they are unable to pay or are over-indebted .

  • However, there is no obligation .
  • If the application is delayed, it may jeopardize the discharge of residual debt.
  • Creditors can request that discharge of residual debt be refused if the debtor has intentionally or negligently impaired the satisfaction of creditors.

3. Legal situation for legal entities

  • Legal entities (e.g. GmbH, AG) are obliged to file for insolvency in the event of insolvency or over-indebtedness .
  • In case of impending insolvency, there is only a right to apply, but no obligation .
  • The management of the company is responsible for submitting applications on time.

4. Risks of late application

  • A late application may lead to legal consequences .
  • In the event of default, creditors can request that discharge of residual debts be refused.
  • Debtors should review the application early to avoid legal and financial risks.

The insolvency application: facts and legal situation

1. Who can file for insolvency?

Debtor: The application can be submitted by the insolvent company itself, e.g. by sole proprietors, self-employed persons or freelancers.

Companies: In the case of partnerships and companies, managing directors or personally liable partners are entitled to submit applications. In the case of stock corporations, members of the supervisory board may also submit the application, and in the case of associations, members of the board of directors may do so.

Creditors: Under certain conditions, creditors can also file an application. They must prove the debtor's insolvency with credible evidence, e.g. through unsuccessful seizure attempts.

2. Where is the insolvency application filed?

Competent court: The application must be submitted to the local court that has jurisdiction over insolvency matters. This is usually the court at the company's registered office.

Application forms: The forms are available directly from the responsible insolvency court .

Please note that in practice, insolvency applications filed without expert assistance are often rejected due to incomplete or incorrect information.

For this reason, it is strongly recommended that you consult an experienced expert or a professional advisory agency . They will check all the information, ensure that the application is submitted correctly and, if you wish, accompany you throughout the entire insolvency procedure.

3. Instructions on how to apply

Obligations for legal entities: In the case of legal entities (e.g. GmbH, AG), every legal representative is obliged to submit the application on time if there is a reason for insolvency.

Creditor's application: The creditor's application requires special care and evidence in order to stand up in court.

4. Risks of failure to submit an application

A late or missing application in the event of insolvency or over-indebtedness can have serious legal consequences , especially for managing directors and board members .

First Steps in the Event of Insolvency

1. Filing for insolvency

Entrepreneurs who can no longer meet their financial obligations file an application for insolvency with the competent court .

Creditors can also apply for insolvency proceedings if they can prove the debtor’s insolvency.

2. Preliminary insolvency proceedings

The court opens preliminary insolvency proceedings and appoints an insolvency administrator.

The entrepreneur loses control over his company and is no longer allowed to do business.

The insolvency administrator takes over the management of the company until the final decision on the opening of proceedings is made.

3. Examination by the insolvency administrator

The insolvency administrator checks whether the company's assets are sufficient to cover the costs of the insolvency proceedings .

During this phase, payment obligations are frozen and bailiffs are not allowed to carry out any enforcement measures.

4. Decision of the Court

Opening of insolvency proceedings:
If the assets cover the costs of the proceedings and there is a reason for insolvency, the court opens the ordinary insolvency proceedings. The insolvency administrator takes over all rights of the company and creditors can file their claims .

Rejection due to lack of assets:
If the company cannot cover the costs of the proceedings, the court will refuse to open the insolvency proceedings. The business will be closed and creditors will get nothing. Natural persons may be entered in the debtors' register, which can result in a business ban.

5. Aim of the insolvency proceedings

The insolvency administrator attempts to restructure the company or to sell its assets in order to pay off debts to creditors.

Types of insolvency proceedings: overview and explanation

1. Standard insolvency proceedings

For companies, self-employed persons, freelancers:

  • Debt settlement and best possible satisfaction of creditors through realization of assets, sale or restructuring of the company.
  • Classic insolvency proceedings with judicial control and insolvency administrator are the characteristics.

2nd protective shield procedure

For companies that are still solvent but at risk of insolvency:

  • An auditor, lawyer or tax advisor must confirm the ability to continue as a going concern.
  • No insolvency administrator, but a trustee is appointed.
  • The entrepreneur remains able to act and draws up a restructuring plan.
  • No enforcement measures during the protective shield period.

3. Self-administration

Companies that wish to actively participate in the restructuring process can restructure under self-administration.

  •  The entrepreneur retains management and responsibility.
  • A trustee monitors the proceedings
  • Advantage: Up to 40% cost savings compared to standard insolvency proceedings.

4. Insolvency according to plan (restructuring procedure)

Suitable for companies with the aim of a planned restructuring.  

  • Creating a detailed plan for partial repayment of debt.
  • Corporate restructuring or orderly liquidation.

5. Personal insolvency and discharge of residual debt

The following applies to natural persons, consumers and former self-employed persons:

  • Three years until discharge of residual debt.
  • Debt freedom after completion of the procedure.

6. Insolvency proceedings for self-employed persons and small business owners

This must be taken into account for self-employed persons who continue to operate their business.

  • Creditors cannot access future income.
    Possibility for a stress-free restart.
    Entry in the Schufa is deleted after six months.

7. Insolvency proceedings for corporations (GmbH, AG)

For GmbH, UG, AG and comparable companies:

  • In the event of insolvency or excessive indebtedness, managing directors must submit an application within three weeks.
  • Implementation of standard insolvency proceedings.

8. Insolvency proceedings for sole proprietorships

Sole proprietors who are insolvent must consider the following:

  • The goal is to be discharged from residual debt.
  • The application for discharge of residual debt must be combined with the application for insolvency.

9. Insolvency proceedings for former self-employed persons

Persons with manageable financial circumstances (maximum 19 creditors, no wage claims)

Consumer insolvency or standard insolvency, depending on the extent of the creditors' claims.

The release of self-employment

Self-employed people who want to continue their work during insolvency proceedings require a permit . The insolvency administrator can approve the self-employed activity, meaning that future income is no longer subject to the insolvency estate.

Process of insolvency proceedings: Structured overview

1st assessment phase

After receiving the insolvency application, the insolvency court checks the admissibility of the application. The application is admissible if there is a reason for insolvency (e.g. insolvency or excessive indebtedness) and the costs of the proceedings are covered. Without these requirements, the application will be rejected.

2nd Reporting Date and Creditors' Meeting

At the reporting date, the insolvency administrator presents the company's financial situation and the restructuring options. The creditors' meeting decides on the next steps, e.g. whether to close down or continue the company (Section 157 of the Insolvency Code). This phase lays the foundation for the liquidation.

3rd exam date

Two weeks to three months after the opening of the proceedings, the registered claims of the creditors are examined. Recognized claims are included in the insolvency table, disputed claims are not taken into account. The registration deadline for claims is not an exclusion deadline, and subsequent registrations are possible.

4th winding-up phase (liquidation)

In this phase, the debtor's remaining assets are sold. The company's claims are collected, the insolvency estate is distributed and liabilities are paid off. The insolvency administrator implements the decisions of the creditors' meeting, works through the insolvency plan and adjusts the insolvency table. Any remaining amounts are distributed to shareholders . Depending on the size of the company, this phase can last from months to years .

5. Final distribution

At the end of the liquidation phase, the final distribution of the insolvency estate takes place. The creditors receive a final payment in accordance with the distribution procedure. This usually marks the end of the insolvency proceedings.

6. Cancellation of the proceedings and discharge of residual debt

When the proceedings are lifted, the good conduct phase (residual debt discharge phase) begins. The debtor regains the authority to dispose of his assets. At the end of this phase, residual debt discharge can be applied for, whereby remaining debts are forgiven.

7. Opening of ordinary insolvency proceedings

The proceedings are initiated by the insolvency opening order . From this point on, the debtor loses the right to dispose of his assets (Section 80 InsO). The assets are placed under the control of the insolvency administrator.

Special features of insolvency administration: Overview

1. Insolvency plan: An instrument for restructuring

The insolvency plan procedure is an effective tool for restructuring companies. It enables debtors, creditors and the insolvency court to work together to find a solution.

  • Requirements: The company must be economically viable and the management must not raise any doubts about its competence and integrity  
  • Feature : In contrast to the transfer of the company, the original company owner remains in existence.
  • Application: The insolvency plan can be submitted together with the insolvency application.

2. Insolvency fund levy: calculation and exemption

The insolvency fund levy serves to finance employees’ claims in the event of insolvency.

  • Calculation: It is based on the current and one-off salary, which is also subject to pension insurance.
  • Mandatory: Companies must pay the levy for all employees, including mini-jobbers and temporary employees, regardless of their pension insurance obligation.

3. Dismissal due to lack of assets

Insolvency proceedings will be dismissed for lack of assets if the debtor's assets are not sufficient to cover the costs of the proceedings .

  • Result: The company is liquidated and the remaining assets are converted into cash.
  • Note: In such cases, insolvency proceedings do not offer any possibility for restructuring.

The following liabilities and rights apply during ongoing insolvency proceedings:

1) Liability of the Managing Director

Managing directors are liable with their private assets if they intentionally or negligently violate their duties and the company suffers damage as a result.

The care of a prudent businessman serves as the basis for assessing a breach of duty.

Consequences: Breaches of duty can have significant financial consequences for the managing director .

2) Business insolvency:

Rights and obligations of employees

Employees are protected by legal regulations, even in the event of insolvency.

Employees have the following rights:

  • Entitlement to wage and salary payments until insolvency proceedings are opened.
  • Entitlement to severance pay in the event of dismissals for operational reasons.
  • Protection against dismissal: Even during insolvency, dismissal for operational reasons must be based on urgent operational requirements.

creditors' claims and their enforcement

Creditors must register their claims with the insolvency administrator after the opening of the proceedings in order to be taken into account.

Registration:
The claim filing requires the submission of documents justifying the claim and proof of security

Advantages of security rights:

Creditors with security rights have better chances of satisfying their claims in insolvency proceedings

Examples of security rights:

  • Retention of title and extended retention of title
  • transfer of ownership by way of security
  • Liens (e.g. landlord or contractor liens).
  • assignment of claims
  • ...

insolvency benefit from the Federal Employment Agency

Insolvency benefit is a benefit provided by the Federal Employment Agency that compensates employees for the loss of earnings during the last three months before their employer went bankrupt.

The claim exists if insolvency proceedings have been opened, dismissed due to lack of assets or business operations have been discontinued.

Employees must submit the application within two months of the insolvency event.

The insolvency benefit is paid gross and directly by the employment agency , without deductions for social security contributions.

Employers finance the insolvency benefit through a statutory levy. In urgent cases, an advance payment is possible to bridge financial bottlenecks.

insolvency avoidance and alternatives

Ways to Avoid Insolvency

Entrepreneurs can often avoid bankruptcy if they react in time to declining sales or rising costs.

An out-of-court restructuring offers options such as partial payment agreements with creditors or attracting new investors through a convincing restructuring concept. The prerequisite is that there is no obligation to file for insolvency.

Alternatively, out-of-court debt settlement enables debts to be reduced or restructured through negotiations with creditors.

This method is more discreet, faster and avoids the costs of legal proceedings. It can also help restore creditworthiness and provide a sustainable foundation for future financial stability.

Early warning systems and crisis management: Clear strategies for effective liquidity planning

An early warning system helps companies to identify potential crises early and to initiate measures in good time. It offers tools for identifying financial risks and avoiding liquidity bottlenecks. Structured crisis management ensures the ability to act even in difficult situations.

goals of liquidity planning

Liquidity planning shows when payments are due and whether the company is able to meet its obligations. The aim is to ensure financial stability. It requires precise recording of all cash flows and regular review of the planning.

Steps to Liquidity Planning

  • Analyze the current financial situation: Record all income and expenses.
  • Determine the planning depth: Define how detailed the planning should be.
  • Check maturity congruence: Coordinate receivables and liabilities in terms of timing.
  • Use prospective values: Base planning on future forecasts.
  • Conduct deviation analysis: Regularly monitor the differences between planning and reality.
  • Select planning tool: Use spreadsheets or specialized software.

Bankruptcy Crimes: Common Offenses and Responsibilities

1. Delaying insolvency

The late filing of an insolvency application. The limitation period only begins when the obligation to file for insolvency ends.
Responsible: Managing directors of GmbHs or UGs (limited liability).

2. Withholding social security contributions

Entrepreneurs do not pay employee contributions to social security, although they are obliged to do so.
Responsible: All employers.

3. Bankruptcy

Concealment, destruction, damage or removal of assets of the insolvency estate.
Carrying out loss-making, speculative or difference transactions.
Credit purchases with subsequent loss transfer.
Recognition or feigning of non-existent rights to the insolvency estate. Lack of or incorrect accounting and destruction or concealment of accounting documents.
Responsible: Sole proprietors, freelancers, registered merchants (eK), managing directors of GmbHs or UGs (limited liability).

4. Violation of accounting obligations

Incorrect, missing or incomplete accounting. This includes:
Concealment or destruction of accounting documents.
Recognition of fictitious rights to the insolvency estate.
Responsible: Sole proprietors, freelancers, registered merchants (eK), managing directors of GmbHs or UGs (limited liability).

5. Tax evasion

Entrepreneurs fail to pay taxes or do so late, especially payroll and sales tax. This often occurs in crisis situations.
Responsible: Sole proprietors, freelancers, registered merchants (eK), managing directors of GmbHs or UGs (limited liability).

6. Credit fraud

Deception when applying for loans, sureties or guarantees. Examples include providing false information to suppliers or banks.
Responsible: Sole proprietors, freelancers, registered merchants (eK), managing directors of GmbHs or UGs (limited liability).

7. Violation of the obligation to provide information to shareholders

Managing directors or board members do not inform shareholders or partners about losses of at least half of the registered or share capital. Negligent omissions are also punishable.
Responsible: Managing directors of GmbHs or UGs (limited liability), boards of AGs.

Insolvency proceedings as an opportunity

An insolvency procedure offers companies the opportunity to overcome financial problems and restore their ability to do business. It is not necessarily the end of a company, but can be used as a new beginning.
 Companies can regain their financial stability through orderly restructuring .

reorganization and restructuring

Insolvency proceedings open up ways to restructure. Two common procedures are:

Self-administration:

The management largely retains control and manages the restructuring process.

protective shield procedure:

It protects the company from creditors while a restructuring plan is being developed.

In both cases, the management of the company remains with the current management.

Early application is crucial

Submitting an application early increases the chances of success of the restructuring considerably. Hesitation often worsens the financial situation and reduces the scope for action.

advice from experts

Experts such as lawyers, tax consultants or auditors support the assessment of the financial situation and accompany the process. They help to choose the right path and achieve the best results.

An insolvency procedure should not be seen as a failure, but as an opportunity for renewal.

Examples of successful corporate restructurings

1) Apple – Return to Success

Apple was on the verge of bankruptcy in the late 1990s. Steve Jobs returned to the company, revamped the product line, and focused on innovative products like the iMac. These moves transformed Apple from a struggling company into one of the most valuable corporations in the world.

2) Porsche – Renewal through Strategy

Porsche was in a serious crisis in the early 1990s. The company introduced new models and expanded into new markets. This strategic reorientation made Porsche profitable again and cemented its reputation as a leading manufacturer of sports cars.

3) Escada – A fashion label saved several times

The fashion label Escada ran into financial difficulties several times. Experts from business and law helped to keep the company on the market through insolvency proceedings and strategic restructuring. (Source: Juve )

4) Märklin – The fight for survival of a traditional brand

The model railway manufacturer Märklin found itself in a critical situation in 2013. With the help of a restructuring plan, the company was restructured and stabilized. The effort led to sustainable profitability. (Source: Stuttgarter Nachrichten )

Summary of the insolvency proceedings

Insolvency is a complex but clearly defined process that includes both legal and economic aspects. The Insolvency Code (InsO) offers debtors and creditors a structured procedure that is geared towards two main goals : the best possible satisfaction of creditors and the chance of a new economic start for honest debtors.

Important aspects such as early application, specialised procedures such as self-administration and protective shield procedures as well as the possibility of discharge of residual debt are crucial for the successful process.

The analysis also shows that both private individuals and companies can benefit from individual regulations . The involvement of experts such as insolvency administrators, auditors and lawyers contributes significantly to the success of the planning and the procedure.

Successful examples such as Apple and Märklin demonstrate that insolvency or restructuring can also be used as an opportunity for restructuring and sustainable success .

Perspectives after insolvency

After bankruptcy, new opportunities open up for debtors, both privately and professionally. Companies can stabilize their business activities and make a fresh financial start through successful restructuring .

Private individuals benefit from debt relief , which allows them to start a new chapter debt-free. In addition, insolvent companies can become competitive again through restructuring and targeted adjustments . Support from consultants and experts as well as access to innovative financing models enables sustainable stabilization.

Self-employed and formerly self-employed people have the opportunity to start a financially secure future unburdened by legacy issues. A timely and strategically implemented insolvency should therefore be viewed as an opportunity for a fresh start.