German Insolvency Law, with the latest reforms: Also, a lively comparison with emboldened Indian Insolvency and Bankruptcy Code, with special reference to Committee of Creditors.
Germany introduced the Bankruptcy Act, 1877 ranking itself as one of the topmost industrial nations which allowed its industries to opt for bankruptcy, if needed. After a long period, in 1999, with twenty years of discussions, hearings and meetings, Insolvency Statute replaced the relevant acts in erstwhile West Germany as well as the East Germany. Again, due to industrial distress, the above act was reformed with an update in 2012, 2014 and 2017. The full act can be referred at the following web site:
Name :(Insolvency Statute (Insolvenzordnung (InsO))
Let us look at the basic contour of the Insolvency Statute to have some essential understanding.
(Insolvency Code of 5 October 1994, page 2866 and last amended by article 19 of the Act of 2011, page 2854. Both pages from Federal Law Gazette)
There is only one primary insolvency procedure which applies to both the individuals and companies. Our discussions are meant for the procedure applicable to companies only.
What are the objectives of German Insolvency Code?
The objective of German insolvency proceedings (Insolvency Proceedings) may be summarized as under:
To satisfy creditors either by liquidation of the insolvent entity’s assets and distribution of the proceeds as per laid down norms, popularly known as “Liquidation Proceedings” or by reaching an arrangement by means of a suitable insolvency plan procedure to restructure the insolvency entity (Insolvency Plan Proceedings).
Who can initiate insolvency proceedings and on what basis?
The courts themselves cannot initiate insolvency proceedings but can act only on the basis of action initiated by the debtor or any creditor. The grounds on which application for insolvency can be filed are as under:
Any entity or creditor can initiate insolvency proceedings on the basis of the first two reasons but the entity alone can file under imminent illiquidity reason. Further, both civil and criminal proceedings can be undertaken by government if the management of any entity fails to file applications over illiquidity or over-indebtedness.
The application has to be filed in a competent local court by any eligible person.
What happens after filing?
Insolvency Proceedings will be initiated by the competent court if it feels that the entity being studied is in fact insolvent. It usually appoints an eligible preliminary administrator who either takes over insolvent entity’s management or supervises the continued operations of the management by its directors.
Interesting but true that preliminary administrator is called as weak administrator when the court does not impose any conditions on transfer of assets on the entity, and the duties of the administrator is determined by the court.
In case, the court imposes restrictions on the management of the entity like non- selling of assets, the temporary administrator to be called as “strong administrator” has a full right to step into the shoes of the management, take possession of the assets, continue the business of the entity and sell the goods of the entity and collect the claims against others. Basically, continue the entity as a going concern. It is obvious that the administrator works under the supervision of the court and reports regularly.
Appointment of Committee of Creditors
The insolvency court is expected to set up a Committee of Creditors if the debtor satisfies two of the following three conditions:
Previously, this restriction was strictly imposed but however, the court can still set up the committee upon filing of an application by a creditor, the preliminary administrator or the debtor himself/herself provided that all eligible members have given their approval.
Committee of Creditors
The members of the Committee of the Creditors (CoCe) include creditors with a right to separate satisfaction, the insolvency creditors having the maximum claims and the small sum creditors. The committee shall also include the representative of the debtor’s employees.
The creditors meeting is convened by the insolvency court. All creditors entitled to separate satisfaction, all insolvency creditors, the insolvency administrator, the members of the creditors, committee and the debtor are entitled to attend the meeting.
The time, place and agenda of the creditors meeting shall be published. Publication is not required if a creditors meeting adjourns negotiation
More information about the creditors’ committee
Let us learn more about various types of creditors with the following additional details.
As the name indicates these creditors prevail over others. They are the insolvency administrator (IA)/Court itself for cost, parties who entered into contracts with IA, and social plan creditors who manage special employment law agreements.
A right to separate satisfaction grants the creditor a right for preferred satisfaction with respect to an asset which forms part of the insolvency estate. By exercising the right to separate satisfaction, the secured asset will either be realized by the secured creditor itself (who may then keep the proceeds) or IA may return the money after realization of the assets.
We may enumerate some creditors with security over real estate, others with lien over the asset which is part of the insolvency estate, other creditors with security cover over tangible movable assets/receivables and governmental authorities’ dues over custom duties.
Ordinary insolvency creditors /unsecured creditors
These are creditors who had a claim against the debtor at the time insolvency proceedings were opened, such as bond holders, unsecured loan note holders or unsecured contractual parties (Insolvenzgläubiger)
The interests of subordinated creditors (nachrangige Gläubiger) will be addressed after all unsecured creditors have been paid in full. A debt is a subordinated one because it emanated from shareholder loan.
However, one who acquired less than 10% of registered capital and also not directors of the company (minority privilege), and restructuring privilege, an attempt by an investor to save the company by acquiring less than 10% of registered share capital and also gave loans to rescue the company from insolvency will not fall under subordinated creditors. (I would prefer to call the later investors as Samaritan for the company)
Let us continue with our narration of the insolvency company.
Lodgment of claims
Chapter 2 from InsO, the German Insolvency Code, from section 187 to 200 distills the process of accepting claims from creditors till final disposition of claims. Any one interested for finer details can refer the same. However, I have narrated in simple language the same for easy understanding.
An insolvency plan can be set up and submitted to the court only by the debtor or the administrator. The plan consists of two parts, namely, declaratory part and constructive part. The rehabilitation part is explained in the declaratory part while the impact of rehabilitation on the rights and claims of the creditors is dealt with in constructive part.
The most significant part of the plan is to divide the creditors into groups and how to deal with their claims.
Obviously, the plan needs the approval of the creditors who would be affected the most by its implementation and they would assemble in a meeting to decide its fate. The plan would be put to vote and a majority vote by groups is required to carry forward the plan. The debtor too is expected to approve the plan. Finally, the plan reaches the court for its final approval.
After the decision of the court gets legal binding, the plan gets an effective nod and the insolvency proceedings are terminated. The debtor recovers the power to transfer his assets. The constructive part of the insolvency plan may provide for surveillance of implementation of the plan by the administrator.
A lively comparison of Committee of Creditors between Indian Insolvency & Bankruptcy Code,2016 and German Insolvency Code (InsO):
Other than the high ranking obtained consistently by Germany (4th rank in case of insolvency by Ease of Doing business by World Bank for the year 2018), it ranks among the most powerful nation in the world in case of industrialization which has been possible due to its overall policies on establishment, nurturing, availability of man power, finance and infra structure. But as early as 1877, it thought of bankruptcy as one of the most relevant factors for its industrial growth, like India, today, which is counted among the best for its recent insolvency policies and immediate implementation. The purpose of this article is to have some interesting information about Germany which would help us in building a stronger Industrial India.