Entrepreneurs may be able to avoid bankruptcy by anticipating difficulties - if they keep a close eye on the financial situation of their business.
German insolvency law, as enshrined in the Insolvency Code , does much to support and promote restructuring.
If a business or the owner of a business becomes insolvent, or a business is overindebted, insolvency proceedings can be initiated by filing for insolvency; legal persons are even obliged to do so. The Insolvency Code differs between:
- Procedure (Insolvency procedures): With a regular procedure, the insolvent business is generally broken up in order to release as much money as possible through the sale of individual items or rights or even of parts of the company, and this money can then be paid out to the creditors in the insolvency proceedings. The distribution of the monies to the creditors follows the detailed instructions of the Insolvency Code. Jobs are generally only retained if related parts of the company are sold as a whole.
- Insolvency procedures (Insolvency procedures): Going-concern procedures help to prevent a company being broken up and instead restructure and maintain it. Already prior to the opening of proceedings, the debtor may, within a three month period, draw up a type of “protective shield proceedings” as a reclamation concept, which later may be used as an insolvency plan. If the restructuring of the company is successful, a large proportion of jobs can often be saved. Those involved can reach agreements that deviate from the specifications of the Insolvency Code, particularly with regard to the distribution of monies to the creditors. An insolvency court ensures that smaller creditors are not disadvantaged here. Under certain circumstances, self-administration by the company’s previous management is possible.
- Consumer insolvency procedures (Small business owner insolvency procedures): Consumers and creditors must first try to reach an amicable settlement with the support of a publicly acknowledged credit counselling centre, lawyer, notary or tax advisor. If no settlement is possible, the debtor may apply to the insolvency court to have the consumer insolvency procedure initiated. Through this procedure, a small business owner can be granted exemption from his debts (exemption from residual debt); this requires a probationary period of 6 years.
The body responsible is the district court (insolvency court), in most cases the district court covering the business’s registered office.
Coping with bankruptcy
The insolvency administrator will dispose of the debtor’s assets. Taking into account decisions taken by the creditors’ meeting/committee, the insolvency administrator takes the fundamental economic decisions in the proceedings (restructuring, continuation of the business, liquidation), notably within a going-concern procedure.
Entrepreneurs having experienced bankruptcy should not lose confidence in their ability to embark on a new business.
Bankruptcy procedure: a step-by-step guide
The federal justice portal provides a one-stop shop for finding the addresses of courts and judicial authorities.
The Application to file for bankruptcy must be submitted to the relevant court. In most cases it is the district court covering the business’s registered office.
An application for the granting of exemption from any residual debt should also be submitted by natural persons (entrepreneurs). Otherwise the court must inform the debtor about this possibility. Once notified, the debtor then has two weeks in which to submit his application.
The insolvency procedure differentiates between:
The insolvency court, particularly when arranging safeguard measures and the opening of proceedings, makes its decisions by resolution and publishes them on the central internet platform of the federal states (Länder).
In addition to satisfying creditors’ claims, restructuring the debt-ridden business is one of the insolvency court’s main concerns. Restructuring can take place as part of an insolvency plan, but also outside through so-called ‘restructuring by transfer’.
If the debtor’s business cannot continue operating, liquidation becomes an option. This can occur either within a planning procedure via a so-called ‘liquidation plan’ or outside of this.