1.4 A Brief Introduction into German Insolvency Law |
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1.4.1 Objectives of German Insolvency Law
As indicated above, the main purpose of German insolvency law is to ensure a fair satisfaction of the creditors of an insolvent company. Under the original Bankruptcy Code which regulated insolvency cases until 1999, equal satisfaction of the creditors was to be achieved solely by liquidation of the debtor’s assets and distribution of the proceeds. Under the Insolvency Code such liquidation is still the most important aspect of the insolvency procedure. However, the new statutory framework has brought a shift in perspective. Apart from liquidation of the debtor’s assets, the current insolvency law also allows for debtor and creditors to reach an arrangement by means of a so-called insolvency plan procedure in order to enable the company to reorganize and to continue its business.
1.4.2 Reasons for Opening Insolvency Proceedings
PursuanttoSec.16InsO,openinganinsolvencyproceedingrequirestheexistenceof specific reasons (Insolvenzgründe). The InsO stipulates three such reasons, i.e., (1) illiquidity of the debtor, (2) over-indebtedness and (3) so-called imminent illiquidity.
1.4.2.1 Illiquidity
Illiquidity (Zahlungsunfähigkeit) refers to a situation of cash-flow insolvency, where the debtor is unable to pay her/his debts on the date of maturity. Illiquidity, therefore, requires a mature debt, as well as the inability to discharge the debt. Whether or not a company is considered illiquid has to be determined for a period of time encompassing three weeks, rather than a particular date.
Exceptions are made for such liquidity shortages which are only temporary or which are limited in their volume:
•First, temporary liquidity shortages may constitute an ‘illiquidity’under Sec. 17 InsO only where the debtor’s funds available for the next three weeks do not cover the debts becoming due in the same period.
•Second, ‘illiquidity’does not apply where the inability to discharge mature debts relates to not more than 10% of total matured debts and there is no substantial likelihood that the uncovered amount will increase beyond this threshold in the near future.
Once occurred, illiquidity can be avoided, e.g., by executing a formal stand-still agreement (which technically eliminates maturity) or by reaching an informal agreement with certain lenders about a temporary forbearance of their claims (which does not).
1.4.2.2 Over-indebtedness
The insolvency reason of over-indebtedness (Überschuldung) requires a negative net asset position (balance-sheet insolvency).40 A negative net asset position is
40 As part of the Financial Market Stabilization Act (Finanzmarktstabilisierungsgesetz) which entered into force on 18 October 2008 as a reaction to the financial crisis, the definition of over-