Insolvency application: no obligation

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The legislator has restricted the obligation to file for insolvency for all companies in Germany without exception.

An alternative to “continuing to operate until insolvency” can be restructuring by means of “structured insolvency”.

German companies would be allowed to continue operating over-indebted, without going bankrupt. The relevant statutory provision is § 19 II of the Insolvency Code, which now reads: ‘Over-indebtedness exists if the debtor’s assets no longer cover the existing liabilities, unless the continuation of the business is predominantly probable under the circumstances.'” “The amendment to the Insolvency Code means, first of all, that any manager of a corporation whose company has fallen into a state of over-indebtedness no longer has to fear being penalised for missing the deadline for filing for insolvency or being liable with his private assets,” analyses Munich-based specialist lawyer Dr Johannes Fiala. The most important prerequisite for this, however, is that an independent tax advisor or auditor has attested to a positive prognosis for the continuation of the company, preferably in writing. In addition, it would be advisable to initiate the reorganisation and to ensure legal support.

For entrepreneurs or business managers, this offers an option to review their own business model even after the occurrence of over-indebtedness, to discontinue unprofitable activities and to eliminate the over-indebtedness through further restructuring measures. The state continues to receive tax payments from over-indebted companies. Those creditors whose claims are not backed by loan collateral are at a disadvantage – if bankruptcy does occur. Consequence: No business partner can any longer rely on the fact that he is dealing with a solvent company with a strong credit rating. Distrust in the economy is increasing, supplier credits are tending to be restricted and banks are also more reluctant to provide new credit.

Measures against indebtedness

Corporate restructuring offers a possible alternative. German insolvency law – the Insolvency Code (InsO) – is actually, at its core, a restructuring code. The insolvent company can be preserved and restructured as such. This is then done by means of an “insolvency plan” – a complex reorganisation plan based on certain requirements of the Insolvency Code. Another possibility is the “transferring restructuring”. In this process, the economically profitable parts of the insolvent company are transferred to a “rescue company”, which can then continue to operate without the legacy burdens of the insolvent company. In order to enforce a reorganisation, an insolvency administrator has numerous special rights and tried and tested instruments at his disposal.

According to Burkhard Jung, chairman of the board of the “CMS Societät für Unternehmensberatung AG”, he could get rid of existing contracts without any major problems and thus eliminate many existing old burdens. In addition to rental, lease and supply contracts, these also include employment contracts. A company restructuring through a “structured insolvency” starts at an early stage, ideally a few weeks before the insolvency filing. A “restructuring due diligence” is used to carefully examine whether the core of the company is at all capable and worthy of continuing as a going concern. If this is the case, the development of the remediation concept begins. It creates the basis for the entrepreneur to retain influence on the further course of the insolvency proceedings and for all restructuring options to be exhausted. In the restructuring concept, the ideal company is first defined, i.e. the company that is to stand at the end of the restructuring process. The ideal company is depicted in a comprehensive business plan.

Structured insolvency” also includes planning how to move from the current state to the ideal society. This initially covers the period of provisional administration, i.e. the first four to twelve weeks after filing for insolvency. For this purpose, it is particularly important to prepare a meaningful controlling system. A whole series of insolvency-related peculiarities must be taken into account, such as the assumption of personnel costs through the payment of insolvency benefits, as well as the discontinuation of payments from individual continuing obligations, depreciation, interest on loans, etc.

If the restructuring concept is sound, the court-appointed insolvency administrator will generally agree to be bound by it. According to Jung, this way the renovation can be completed after four to six months. What is required, however, is that entrepreneurs and companies have first tried, or at least examined, an out-of-court restructuring: “Only then does ‘structured insolvency’ make sense.” It is obvious that a medium-sized company cannot manage such a complex restructuring process without consulting. When choosing a restructuring advisor, it is important that the selected advisor has a good command of the complicated rules and regulations of German insolvency law and, ideally, can point to a number of successful restructurings.

by Dr. Johannes Fiala

by courtesy of (published in BäKO magazine 05/2009, page 39)

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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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