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Dr. Alfred S. Farha, Zurich, Switzerland

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Galler Denes, Berlin, Germany




    New Insolvency Law

898A Heritage Village  

Federal Ministry of Justice

The new German Insolvency Statute (Insolvenzordnung)

1. Entry into force of the new Insolvency Statute
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 procedure
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.

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").

4. The consumer insolvency procedure
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.

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.

5. International insolvency law
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 been committed.

b) In spite of the recognition of foreign proceedings, special insolvency proceedings may be initiated in Germany relating to the debtor's domestic assets.


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