Law

Recent changes in German insolvency law – position of creditors in preliminary proceedings strengthened

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By Dr. Karl Friedrich Dumoulin, FPS Rechtsanwälte & Notare

With effect from 1 March 2012, new provisions were implemented in German insolvency law. They strengthen the position of creditors in preliminary proceedings prior to the appointment of an insolvency administrator and the commencement of insolvency proceedings. Creditors of the debtor in insolvency now have the following options to influence the appointment of the insolvency administrator.

 

1. Options of individual creditors

Individual creditors may propose to the insolvency court a suitable (preliminary) insolvency administrator (cf. Section 56 (1) of the German Insolvency Act). However, the court is not bound by such a creditor's proposal.

2. Options of the preliminary creditor committee

According to Section 22a (1) of the Insolvency Act, it is compulsory to set up a preliminary creditor committee (vorläufiger Gläubigerausschuss) in the opening proceedings if the debtor in insolvency met at least two of the following three conditions in the preceding financial year: (i) at least EUR 4.84 million balance sheet total after deduction of a deficit on the assets side within the meaning of Section 268 (3) of the German Commercial Code, (ii) at least EUR 9.68 million turnover in the 12 months before the final date of accounts, (iii) an annual average of at least 50 employees.

If the debtor in insolvency does not meet these requirements, pursuant to Section 22a (2) of the Insolvency Act, a creditor is entitled to demand the setting up of a preliminary creditor committee. Besides, the preliminary insolvency administrator or the debtor in insolvency can make such an application.

However, even if the threshold pursuant to Section 22a (1) of the Insolvency Act is met or if an application is made according to Section 22a (2) of the Insolvency Act, a preliminary creditor committee may not be set up if (i) the business of the debtor in insolvency has already been shut down (cf. Section 22a (3) of the Insolvency Act), if (ii) it is economically unreasonable to set up a preliminary creditor committee in view of the existing assets of the debtor in insolvency or if (iii) the delay – due to setting up a preliminary creditor committee – will economically be detrimental to the financial situation of the debtor in insolvency.

Through the preliminary creditor committee, the creditors can influence the appointment of both the preliminary insolvency administrator in the opening proceedings and later of the (final) insolvency administrator after commencement of the insolvency proceedings. Furthermore, the preliminary creditor committee shall support and supervise the insolvency administrator (cf. Section 69 of the Insolvency Act).

In order to adequately take into account the interests of all kinds of creditors concerned, the preliminary creditor committee shall be made up of creditors with preferential rights as well as creditors with the highest amounts of claims against the insolvency debtor and those with only minor claims and an employee's representative (cf. Section 67 (2) of the Insolvency Act).

In detail, the following rules apply:

2.1 Definition of a profile for the (preliminary) insolvency administrator

In accordance with Section 56a (1) of the Insolvency Act, the court has to hear the preliminary creditor committee before appointing a (preliminary) insolvency administrator. The preliminary creditor committee shall comment on the requirements which the (preliminary) insolvency administrator has to meet and on the person of the administrator unless – again – there is a risk that such a hearing may be detrimental to the economic situation of the debtor in insolvency. Consequently, the preliminary creditor committee can determine a profile of the (preliminary) insolvency administrator by a resolution of the majority (for further details, cf. Section 72 of the Insolvency Act) and therefore participate in the selection of the (preliminary) insolvency administrator.

2.2 Proposal of a specific person as (preliminary) insolvency administrator

The court may only deviate from a unanimous proposal of the preliminary creditor committee if the proposed person is not suitable for the position of a (preliminary) insolvency administrator. It must, however, base the appointment of the insolvency administrator on the requirements as to his person resolved upon by the preliminary creditor committee.

As mentioned above, in urgent cases (risk of detrimental change in the financial situation of the debtor in insolvency), the court may refrain from hearing the preliminary creditor committee. However, in such cases, the preliminary creditor committee in its first meeting may – by unanimous resolution – replace the (preliminary) insolvency administrator appointed by the court with its own candidate (Section 56a (3) of the Insolvency Act).

3. Participation after opening of the insolvency proceedings

After the opening of the insolvency proceedings and appointment of an insolvency administrator, the creditors may replace the insolvency administrator with their own candidate in their first meeting after the appointment of the administrator (Section 57 of the Insolvency Act). In this respect, the law has not been changed.

Summary

The reform strengthened the position of creditors in insolvency proceedings, particularly during the early stage of the opening proceedings where important decisions are usually made. It remains to be seen how the new law will be handled in practice and how often a preliminary creditor committee will have to be installed due to the threshold of the business size provided for in Section 22a (1) of the Insolvency Act.

However, the introduction of the preliminary creditor committee and its early and extensive participation rights in insolvency proceedings are very positive steps towards ensuring the creditors' influence in insolvency proceedings. The filing for insolvency should, therefore, be properly prepared as it should contain all necessary information which the court will require. In the event that the applicant carefully selects suitable persons for the preliminary creditor committee, it can avoid a delay in the appointment of the committee.


 

Dumoulin 121x160pxDr. Karl Friedrich Dumoulin
FPS Rechtsanwälte & Notare, Dusseldorf, Frankfurt, Berlin, Hamburg, Germany
E: This email address is being protected from spambots. You need JavaScript enabled to view it.; W: www.fps-law.d

 

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