German Insolvency Procedure

The Insolvency Code (InsO)

German insolvency law is codified in the Insolvency Code (Insolvenzordnung, InsO), which replaced the former Bankruptcy Act (Konkursordnung), Composition Act (Vergleichsordnung), and Insolvency Avoidance Act on 1 January 1999. The InsO establishes a unified insolvency procedure applicable to natural persons, legal entities, and estates, with the objective of satisfying creditors’ claims through asset liquidation or a restructuring plan, while providing honest debtors with a discharge of remaining debts. The InsO has been substantially amended, most recently by the Act on the Further Development of Restructuring and Insolvency Law (2021) and the transposition of the EU Restructuring Directive (2019/1023).

Opening Requirements

Insolvency proceedings are opened by the Insolvency Court (Insolvenzgericht) upon application. The court examines the grounds for opening (Eroffnungsgrunde). Section 16 InsO establishes that opening requires: the existence of insolvency grounds and sufficient assets to cover the costs of the proceedings (or advance payment by the applicant).

Grounds for opening under Sections 17-19 InsO are:

• Illiquidity (Zahlungsunfahigkeit, Section 17 InsO): the debtor is unable to pay due debts. The debtor is generally presumed illiquid if it has ceased payments. Illiquidity is the most common ground for business insolvency.
• Imminent illiquidity (drohende Zahlungsunfahigkeit, Section 18 InsO): the debtor is likely to be unable to pay due debts at the time they fall due. This ground permits the debtor to file for insolvency before actual illiquidity, enabling timely restructuring.
• Over-indebtedness (Uberschuldung, Section 19 InsO): the debtor’s assets no longer cover its existing liabilities, unless the continuation of the business is more likely than not. Over-indebtedness applies only to legal entities (GmbH, AG, etc.) and does not apply to natural persons.

The application may be filed by the debtor or a creditor. The debtor is obliged to file for insolvency without delay, and in any event within three weeks of the occurrence of insolvency grounds (six weeks in certain cases). Failure to file in time constitutes a criminal offence under Section 15a InsO (insolvency filing delay) and may give rise to director liability.

Provisional Administration

Before the opening decision, the court typically appoints a provisional administrator (vorlaufiger Insolvenzverwalter). The provisional administrator’s powers depend on whether a strong (starker) or weak (schwacher) administrator is appointed. A strong administrator takes over the debtor’s power of disposal over assets; the debtor may no longer dispose of assets without the administrator’s consent. A weak administrator supervises the debtor but does not restrict the debtor’s power of disposal.

The court may impose security measures (Sicherungsmassnahmen) under Section 21 InsO to preserve the debtor’s assets pending the opening decision, including: (1) appointment of a provisional administrator; (2) restriction of the debtor’s power of disposal; (3) prohibition of enforcement by creditors; (4) sealing of business premises.

The Insolvency Administrator

Upon opening the proceedings, the court appoints a final insolvency administrator (Insolvenzverwalter). The administrator takes possession of the debtor’s assets, administers and realises the estate, and distributes the proceeds to creditors. The administrator is the representative of the estate, not the debtor; the administrator acts in the interest of the creditors as a whole, subject to the supervision of the creditors’ committee and the court.

The administrator must be independent and impartial. The administrator may be removed for cause. The administrator’s remuneration is determined by the court based on the value of the estate, calculated under the Insolvency Remuneration Ordinance (Insolvenzrechtliche Vergutungsverordnung, InsVV). The remuneration is a percentage of the realised assets, with surcharges for complexity and deductions for simplicity.

The administrator’s duties include: (1) taking possession of and securing the debtor’s assets; (2) continuing or discontinuing the debtor’s business; (3) preparing an inventory and valuation of the assets; (4) examining claims and deciding on their admission; (5) realising the assets through sale; (6) distributing the proceeds to creditors in the statutory order; and (7) reporting to the creditors’ meeting.

The Creditors’ Meeting

The creditors’ meeting (Glaubigerversammlung) is the principal self-governing organ of the creditors in the proceedings. The court convenes an initial report meeting (Berichtstermin) where the administrator reports on the debtor’s economic situation and the prospects for continuation or liquidation of the business. The creditors decide: (1) whether to keep the business running or close it; (2) whether to propose an insolvency plan; (3) the appointment of a creditors’ committee.

A creditors’ committee (Glaubigerausschuss) may be formed to supervise the administrator and represent the creditors’ interests between meetings. The committee comprises representatives of secured creditors, unsecured creditors, and employees. The committee must be consulted on material decisions and approves the administrator’s actions.

The Insolvency Plan Procedure

The insolvency plan (Insolvenzplan) under Sections 217-269 InsO is an alternative to liquidation. The plan may restructure the debtor’s business by modifying creditors’ rights, reducing debts, converting debt to equity, or providing for continued operation. The plan replaces the traditional liquidation procedure.

The plan consists of a descriptive part (darstellender Teil), explaining the restructuring measures, and a operative part (gestaltender Teil), specifying how the plan modifies the rights of creditors and other parties. Creditors vote on the plan in groups (secured creditors, unsecured creditors, subordinated creditors, etc.). The plan is adopted if: (1) a majority of voting creditors in each group vote in favour; (2) the majority represents at least half of the total claims in each group (Section 244 InsO). An obstruction prohibition (Obstruktionsverbot) permits the court to approve the plan over a dissenting group’s rejection if the dissenting creditors are not worse off under the plan than in liquidation (Section 245 InsO).

Discharge of Remaining Debts (Restschuldbefreiung)

The discharge of remaining debts (Restschuldbefreiung) under Sections 286-303 InsO allows natural persons to be released from their remaining debts after the conclusion of insolvency proceedings, enabling a fresh start. The discharge is available to any natural person, including former business owners.

The debtor must apply for the discharge and comply with obligations during a good behaviour period (Wohlverhaltensperiode): (1) the debtor must engage in gainful employment or seek employment; (2) the debtor must transfer attachable income to the trustee; (3) the debtor must not conceal assets or incur new unreasonable debts; (4) the debtor must not frustrate creditors’ recovery.

The good behaviour period was reduced from six years to three years by the 2020 reform (effective 1 October 2020). After three years, the court grants the discharge unless grounds for refusal exist. Grounds for refusal include: (1) criminal convictions for insolvency-related offences; (2) previous discharge within the last 11 years; (3) the debtor’s fraudulent or dishonest conduct; (4) violation of the debtor’s obligations during the good behaviour period. The discharge releases the debtor from all private debts; however, certain debts are excluded, including criminal fines, student loans, and maintenance obligations (Section 302 InsO).