German Insolvency Law

The reform of the German insolvency law is one of the major legislation projects in the area of business law. It is being carried out in three steps. The Law for the Further Facilitation of the Restructuring of Enterprises (Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen, ESUG) is effective since 2012. The German legislator passed the Law on the Foreshortening of Consumer Insolvency and Residual Debt Exemption Proceedings and the Strengthening of the Creditor's Rights (Gesetz zur Verkürzung des Restschuldbefreiungsverfahrens und zur Stärkung der Gläubigerrechte) in the summer of 2013. It is expected to come into effect in June 2014. The last step, the legislation concerning the facilitation of trust insovencies, is currently being discussed.

ESUG regulates the establishment of a preliminary creditors’ committee as soon as practicable after the debtor’s filing for insolvency if the debtor meets two of three thresholds (EUR 4.84m balance sheet total, EUR 9.68m turnover, annual average of 50 employees). In all other cases, the insolvency court may establish a preliminary creditors’ committee upon request of the debtor, a creditor or the preliminary insolvency administrator. The insolvency court is required to consult the preliminary creditors’ committee when appointing the preliminary insolvency administrator and when allowing or refusing the debtor’s application for self-administration. By unanimous vote, the preliminary creditors’ committee can even bind the court to appoint a certain person as preliminary insolvency administrator (subject to independency of the administrator). In case the immediate protection of the estate after the insolvency filing requires the court to appoint a preliminary insolvency administrator prior to establishing a creditors’ committee, the new law allows the preliminary creditors’ committee (once established) to substitute – by unanimous vote – its candidate for the court-appointed preliminary insolvency administrator. It is now expressly provided that a candidate does not lack the required independence merely because he has been proposed by the debtor or a creditor. Cases of pre-filing advice will still be subject to close exaniation. ESUG now also allows to include the debtor’s shareholders in the insolvency plan (debt equity swap). Furthermore, the insolvency court may allow the debtor to self-administrate under the supervision of a trustee. If the debtor files for insolvency and applies for self-administration, the court allows it a period of up to three months to prepare and submit an insolvency plan, provided the debtor is not yet illiquid and submits an expert opinion that the contemplated restructuring is not evidently futile. The creditors’ interest is protected by the preliminary creditors’ committee, which can request the court to terminate the umbrella proceedings and appoint a preliminary administrator. The hurdles for individual creditors’ remedies against an insolvency plan which has received the votes of the majority of the creditors have also been increased.

The reform of the consumer insolvency rules is meant to give entrepreneurs and consumers a second chance faster than before in case of their bancruptcy if they clear part of their debt and the procedural costs. The creditors also benefit from this revision, since the debtors now have a clear incentive to pay as much as they possibly can.