Insolvency or over-indebtedness

An over-indebtedness under insolvency law exists if the debtor's assets no longer cover the existing liabilities. Cause for insolvency or over-indebtedness is often a lack of or inadequate crisis management. It usually leads to payment difficulties turning into insolvency.

What to do in the event of existing or impending insolvency or over-indebtedness depends on the legal form the company and its specific situation :

• Corporations companies, such as GmbHs, and companies in which no natural person has unlimited liability as a personally liable partner, such as a GmbH & Co. obliged to file for insolvency . In the event of insolvency or over-indebtedness under insolvency law, there is only a maximum period of 3 weeks to eliminate the reason for opening insolvency proceedings. If this does not succeed, the management is legally obliged to file for insolvency.
• Self-employed persons who, as (former) sole traders or (former) partners in a partnership, are personally liable for liabilities that have arisen, can file an file for insolvency due to (imminent) insolvency. The question in each individual case is whether or when it makes sense to file for insolvency in order to settle debts.

Types of insolvency proceedings

Standard insolvency proceedings - business operations Insolvency proceedings concerning a business operation serve to satisfy the creditors jointly. The business operation does not necessarily have to be broken up. Instead, the Insolvency Code also offers options for maintaining the business.

Standard insolvency proceedings - natural person Regular insolvency proceedings serve to debt relief of natural persons, i.e. people who

• are self-employed or
• were self-employed and still have outstanding claims from their self-employment as an employee or
• were self-employed and have unmanageable financial circumstances. Unmanageable here means more than 20 creditors or more.

Probate insolvency proceedings The subject of the estate insolvency proceedings is the assets of the estate, whereby the purpose of the proceedings - unless they are requested by a creditor - is generally to limit the liability of the heirs to the estate.

Applying for insolvency proceedings

Insolvency proceedings are only upon application opened. Certain companies are required to file for insolvency, for example GmbHs and GmbH & Co KGs. The application must be filed with the insolvency court in writing or declared in the minutes of the court registry. Creditors and the debtor themselves are entitled to file an application.

The application may be withdrawn as long as insolvency proceedings have not yet been opened. If the application is withdrawn, the costs of the proceedings are imposed on the applicant. The courts usually decide on the insolvency application within approx. 4 to 12 weeks.

In the event of insolvency or over-indebtedness, the managing directors or managing directors or the liquidators pursuant to § Section 15 a of the Insolvency Code (InsO) without undue delay, but no later than 3 weeks after the occurrence of insolvency or over-indebtedness, to apply for the opening of insolvency proceedings. The 3-week period is only to be understood as a maximum period that must not necessarily be used. If the application is culpably delayed or if the application is not filed correctly, the applicant is even liable to prosecution. There is also a risk of liability with their private assets . Liability of the managing directors for insolvency-related obligations is governed by the Limited Liability Companies Act (GmbHG).

The third-party application by a creditor is only admissible is only admissible if the creditor fulfills certain requirements. The creditors must:

• provide a summonable address and, if applicable, the legal form and representative of the debtor
• demonstrate a legal interest in the opening of insolvency proceedings
• substantiate a claim that is due.

It should be noted here: The claim must

• not be completely insignificant, e.g. overdue interest and reminder costs are not sufficient if the principal claim has been settled.
• The claim must not be misused as an unfair means of pressure, for example to harm the defendant as a competitor.
• The claim must also substantiate a reason for opening the proceedings, i.e. insolvency or over-indebtedness.

According to § Section 54 InsO not subject to advance payment ; the costs are covered from the insolvency estate after the proceedings are concluded or invoiced to the parties liable for the costs. In addition to the debtor, the petitioning creditor is always liable for the costs incurred until the proceedings are opened. The amount of the administrator's fees are set out in the Insolvency Remuneration Ordinance (InsVV) regulated. The remuneration of the expert is primarily based on the time spent on his work.

The possibility of deferral of the procedural costs applies in accordance with § Section 4 a (1) sentence 1 InsO only applies to natural persons who discharge of residual debt and whose assets are not sufficient to cover the costs of insolvency proceedings.

Appointing an insolvency administrator

If insolvency proceedings are opened, the insolvency court an insolvency administrator . A natural person who is suitable for the individual case, in particular someone who is knowledgeable in the business and independent of the creditors and debtors, is appointed as the insolvency administrator. This person is to be selected from the group of all persons willing to take on insolvency administrations. The administrator shall receive a certificate of appointment. Upon termination of the office, the certificate returned to the insolvency court.

At the first creditors' meeting following the appointment of the insolvency administrator, the creditors may elect another person to replace the insolvency administrator.

The insolvency administrator is subject to the supervision of the insolvency court. supervision of the insolvency court . The court may request individual information or a report on the state of affairs and management from the insolvency administrator at any time. The insolvency court may dismiss the insolvency administrator from office for good cause.

To appoint the insolvency administrator, please contact the competent local court as the insolvency court.

Grounds for insolvency

Insolvency proceedings can only be opened if there are grounds for opening them. There are three grounds for opening proceedings:

• inability to pay
• imminent insolvency and
• over-indebtedness in the case of a legal entity.

Insolvency according to § 17 InsO

The debtor is insolvent if he or she is not in a position to meet the payment obligations due. This is generally assumed to be the case if the debtor has stopped making payments. ceased payments payments. The decisive factor for the question of insolvency is the due date of the liabilities . Deferred liabilities are not due. However, a serious demand is not necessary in order to assume maturity, i.e. there does not have to be a reminder.

Typical indications for an inability to pay are

• Non-payment of suppliers
• Non-payment of wages, salaries and social security contributions
• Discharge of bad checks
• bill protests
• foreclosures or the existence of enforcement applications and
• applications to make an affidavit in lieu of an oath.

Impending insolvency according to § 18 InsO

Insolvency is imminent if the debtor will probably not be able to meet the existing payment obligations by the due date. the due date to fulfill them. The debtor should make use of the option of filing an application for debtor-in-possession proceedings due to imminent insolvency in particular if restructuring opportunities for the ailing company, as the earlier an application for insolvency is filed, the better the chances are.

Over-indebtedness according to § 19 InsO

In the case of legal entities - or if there is no natural person as a personally liable partner in a partnership - over-indebtedness can also be a reason for opening insolvency proceedings. According to Section 19 (2) InsO, over-indebtedness exists if the debtor's assets no longer cover the existing liabilities, unless the continuation of the company as a going concern is predominantly probable under the circumstances.

In addition to the question of arithmetical overindebtedness - If the assets shown on the assets side of the balance sheet are smaller than the liabilities shown on the liabilities side, the going concern prognosis is decisive for the assessment of the insolvency grounds of over-indebtedness. Companies that are arithmetically overindebted can avoid the obligation to file for insolvency if they can draw up a positive going concern forecast and provide evidence of this.

Employee claims, for example to salary, vacation pay, pension contributions

The opening of insolvency proceedings against the employer's assets does not affect the employer's obligation to pay contributions to health, pension, long-term care and unemployment insurance . Particular attention must be paid to the punctual payment of employee contributions. There is a risk of criminal liability under § 266a paragraph 1 of the Criminal Code (StGB) if they are not transferred to the institutions on time. There are also duties of disclosure and the obligation to provide correct and complete information in connection with employer contributions to social insurance, cf. § Section 266a (2) and (3) StGB . Only the contributions to accident insurance can be waived if the employees were released from work after the opening of insolvency proceedings until the timely termination of their employment relationship.

To protect employees from loss of wages, under certain conditions the Federal Employment Agency pays out insolvency money . The period covered by the insolvency allowance generally comprises the last 3 months prior to the court ruling on the opening of insolvency proceedings or the rejection due to lack of assets, the so-called insolvency event. Pursuant to §§ 165 et seq. of the German Social Code (SGB) III, the insolvency allowance is generally in the amount of the net pay is paid. Within a cut-off period of 2 months after the insolvency event, employees can apply for insolvency money from the relevant employment agency, cf. § Section 324 (3) sentence 1 SGB III .

Protective shield proceedings

The protective shield proceedings can be applied for by a debtor under certain circumstances in the run-up to insolvency proceedings at the same time as filing for insolvency. Protective shield proceedings in accordance with § Section 270 b InsO is a special case of self-administration prior to the opening of insolvency proceedings. It is intended to make it easier for the debtor to restructure the company by taking action at an early stage. This is a procedure for the preparation of a restructuring through an insolvency plan in combination with self-administration. Self-administration means the continuation of the company by the debtor itself under the supervision of a trustee.

The prerequisite for protective shield proceedings is that the application must be accompanied by a reasoned certificate from a tax consultant, auditor, lawyer or a person with comparable qualifications experienced in insolvency matters is submitted with the application. This certificate must state that

• there is a threat of insolvency or over-indebtedness, but no insolvency and
• the restructuring is not obviously hopeless.

The court may not appoint a provisional insolvency administrator during the protective shield proceedings and may not withdraw the debtor's authority to dispose of their assets. The debtor is granted a maximum period of 3 months to draw up an insolvency plan. to draw up an insolvency plan plan. Once this period has expired or the protective shield order has been lifted by the court, the insolvency court decides whether to open insolvency proceedings. During the protective shield phase, it is typically decisive whether or not the debtor gains the trust of the contractual partners and creditors in the possibility of restructuring.

Restructuring paths

In addition to liquidation, restructuring options can also be considered in insolvency proceedings. The prerequisite for this is ability to restructure . The following restructuring methods are possible transferring restructuring and the insolvency plan proceedings are possible. Preparations for this should be initiated as early as possible. In particular, the protective shield proceedings before the opening of insolvency may be suitable.

Under transferring restructuring refers to the acquisition of a company or part of a company by a new person or company. The new company is unencumbered from existing liabilities of the insolvent company, with the possible exception of employment relationships, § Section 613 a of the German Civil Code (BGB). The previous legal entity itself can be restructured by means of insolvency plan proceedings. A plan is drawn up in accordance with certain regulations, according to which the continuation and satisfaction of creditors is to take place, cf. §§ 217 following InsO .

Discharge of residual debt

Debtors who have been granted discharge of residual debt are not denied residual debt discharge after 3 years This is made possible by the Act to Shorten Residual Debt Discharge Proceedings, which applies retroactively to all applications from October 1, 2020.

The discharge of legal debt is available to all natural persons open to all natural persons. This means that self-employed persons, freelancers and private individuals can apply. However, in the case of the insolvency of a limited liability company (GmbH), legal debt discharge is not possible as the GmbH is a legal entity.

The debtor who files an application for discharge of residual debt has already applied for gainful employment when the insolvency proceedings were opened. gainful employment to make an effort. For the next 3 years, the resulting attachable earned income or the equivalent earnings must be assigned to a trustee. Compulsory and enforcement measures by individual creditors are not permitted during this so-called period of good conduct are inadmissible. If the debtor does not pursue gainful employment or does not make sufficient efforts to do so or is convicted of insolvency offenses, the discharge of residual debt may be denied. An insolvency offense is, for example, delaying insolvency.