PETER H. BURKARD
BURKARD INTERNATIONAL LAW OFFICE
898A Heritage Village
The new German Insolvency Statute (Insolvenzordnung)
1. Entry into force of the new Insolvency
In 1994, the German Bundestag
(Federal Parliament) adopted the new Insolvency Statute (Federal Law Gazette
[BGBI.] Part I, 1994, pp. 2866 et seqq.) which entered into force
on 1 January 1999. The Insolvency Statute has replaced the previous
Bankruptcy and Settlement Codes (Konkursordnung and Vergleichsordnung)
as well as the Act on Collective Enforcement (Gesamtvollstreckungsordnung)
in the new Länder, and has created a uniform insolvency statute for
all of Germany.
2. Objectives pursued by the new insolvency
The reform of the law on insolvency
serves not only to reharmonise the law as it stands within Germany in the
area of insolvency, but especially implements the results of a long and
intensive discussion which subjected the practicability of the two-tier
law on bankruptcy and settlements to a critical examination. Now that the
German Insolvency Statute has come into force, there is only one insolvency
procedure. This is adapted towards settling creditors' claims in the best
way possible. The procedure may lead to either the reorganisation or the
liquidation of an insolvent enterprise. If the debtor is a natural person,
he/she may be discharged from his/her remaining obligations on the basis
of a special consumer insolvency procedure; this kind of discharge from
residual debt was previously unknown under German law.
3. Course of the insolvency procedure
in the case of insolvent enterprises
a) The procedure is initiated
at the request of the debtor or of a creditor if the debtor is insolvent.
If the debtor him/herself applies, the procedure may already be initiated
if there is only a risk of insolvency. In the case of legal entities, over-indebtedness
also constitutes grounds for initiation.
4. The consumer insolvency procedure
b) An insolvency administrator is generally
appointed when the proceedings are initiated. The court may, however, also
leave the power of disposal with the debtor, who is then placed under the
supervision of a creditors' trustee.
c) At the latest three months after
proceedings have been initiated, the creditors' meeting decides on the
basis of a report prepared by the insolvency administrator whether the
enterprise is to be liquidated or continued for the purpose of reorganisation.
d) The new legal tool of the "insolvency
plan" is available for the reorganisation of the debtor, which in many
respects is modelled on the reorganisation plan under U.S. law ("Chapter
Xl"). The insolvency plan can be submitted either by the debtor or by the
insolvency administrator; the creditors vote on the plan in groups.
e) The secured creditors are involved
in the new insolvency procedure. Moveables supplied whilst retaining title
may not be removed from the enterprise during the first stage of the proceedings.
Moveables which have been assigned for security reasons are realised by
the insolvency administrator; the administrator takes the cost of determining
the securities, the realisation costs and the turnover tax from the proceeds
of the realisation. The rights of the secured creditors may be restricted
by an insolvency plan.
f) In cases of the liquidation of the
insolvent enterprise, all unsecured creditors are settled with the same
quota. The rights giving a prior claim to settlement under the law as it
previously stood have ceased to apply. Employees retain the protection
afforded them by insolvency money, which covers wages lost for the period
of three months. Furthermore, as a rule employees must be given a lump
sum when works are closed ("redundancy payment scheme").
The consumer insolvency procedure
consists of three phases:
a) The debtor must initially
seek an out-of-court settlement with his/her creditors. He/she is supported
in this by a debtors' advice centre, a solicitor, a notary, tax advisor
or comparable suitable individual.
5. International insolvency law
b) If this attempt to reach an agreement
is unsuccessful, the court insolvency proceedings follow. In a first step,
the court attempts once more to arrive at an agreement between the creditors
and the debtors on the basis of a debt reorganisation plan submitted by
the debtor. Here, it may also substitute the approval of individual creditors
under certain preconditions if the content of the plan is suitable.
c) If no debt reorganisation plan is
prepared, a simplified insolvency procedure is carried out. If the debtor
then settles with his/her creditors to the best of his/her ability for
another seven years, he/she is discharged from his/her remaining obligations.
International insolvency law
has not been regulated in detail by the reform. Important principles of
international insolvency law are however contained In Article 102 of the
Introductory Act to the Insolvency Statute (Einführungsgesetz zur
Insolvenzordnung) corresponding to the European Convention on Insolvency
Proceedings, which Germany has already signed, but which still needs to
be transposed into domestic law:
a) Foreign insolvency proceedings also
cover the debtor's domestic assets if the courts of the state in which
the proceedings were initiated have international jurisdiction (this is
the case if the debtor has his/her headquarters or the centre of his/her
main interests in the foreign state), and no breach of public policy has
b) In spite of the recognition of foreign
proceedings, special insolvency proceedings may be initiated in Germany
relating to the debtor's domestic assets.