It often happens that a company becomes bankrupt and can no longer meet its financial obligations. Then the question quickly arises as to whether insolvency proceedings can make sense.
What is bankruptcy?
Business insolvency refers to the insolvency of a business. The company can no longer satisfy the claims of the creditors and can therefore no longer meet its financial obligations. As part of insolvency proceedings, it is checked whether the company can be saved and the debts reduced, or whether closure is the only way out. However, the scenarios can vary according to chapter 7 bankruptcy, it is better to consult a professional bankruptcy lawyer.
In principle, insolvency proceedings are only opened if an application for the opening of proceedings is filed with the insolvency court. However, certain companies are required by law to file an application when a company can no longer meet its financial obligations.
Purpose of bankruptcy proceedings
The aim of the insolvency proceedings is to satisfy the creditors as a whole as best and evenly as possible. For this purpose, either the insolvent company is broken up by realizing the debtor’s existing assets and the proceeds are distributed, or a restructuring is carried out from the proceeds of which the creditors can be satisfied. The so-called “transferring restructuring” (the sale of the company) or the insolvency plan procedure are particularly suitable as reorganization methods. In insolvency proceedings, the principle of equal treatment of creditors applies. Individual creditors have no way of accessing individual assets. This act rules out a “creditor race” in the insolvency proceedings.
Who can file for bankruptcy?
The entrepreneur himself or his business partners, but also banks, tax offices and health insurance companies can apply for the opening of insolvency proceedings. The application must be submitted to the local courts responsible for insolvency matters. The insolvency court where the entrepreneur has his place of business is usually responsible. The relevant application forms are also available there. In the case of legal entities, any legal representative can submit an application.
A third-party application by a creditor is only admissible if it meets certain requirements. The applicant must provide documentation to prove the claim. In addition, it must be shown that the debtor is unable to meet this obligation. For example, the record of a bailiff about an unsuccessful attempt at attachment or the debtor’s asset information (formerly: affidavit) is sufficient for this.
In the case of legal persons and trading companies, every member of the representative body or every personally liable partner is entitled to file for insolvency. If the application is not submitted by all members of the representative body or all personally liable partners, the reason for opening must be made credible. In the case of the so-called lack of leadership, for example if the managing director has gone into hiding, every shareholder or every member of the supervisory board is entitled to submit an application.
Where is the insolvency application filed?
The application for insolvency must be filed with the local courts responsible for insolvency matters. Locally responsible is usually the insolvency court in whose district the debtor company has its general place of jurisdiction. This is usually the place of business.
The standard insolvency proceedings
It applies to all companies that they must carry out the standard insolvency proceedings, regardless of whether they are corporations, partnerships or self-employed or freelancers. A distinction must be made between the standard insolvency procedure and the consumer insolvency procedure, which is open to all private individuals without self-employed economic activity, but also to all formerly self-employed persons, provided they have fewer than 20 creditors at the time of opening and there are no claims from employment relationships. Standard insolvency is governed by different procedural rules than consumer insolvency.
The protective shield procedure
Entrepreneurs who find themselves in financial difficulties that are not just temporary and have good chances of restructuring should not wait until the company is insolvent. Even at this early stage, it can make sense to file for bankruptcy. For such cases, the insolvency code provides for self-administration proceedings, which offer the debtor the opportunity to restructure his company at an early stage. The protective shield procedure is a special case of self-administration. This is a preparatory procedure for a restructuring through an insolvency plan in combination with self-administration. The protective shield procedure is only carried out at the request of the debtor.
A company can slip under the umbrella if:
- Insolvency is imminent or the company is over-indebted and
- The rehabilitation is not obviously hopeless.
Both must be certified to the debtor. The certificate can only be issued by a tax consultant, auditor or lawyer experienced in insolvency matters or a person with comparable qualifications. It must be presented by the debtor when the application is submitted. If the company is already insolvent, protective shield proceedings are ruled out.
The advantages of the procedure are:
- The debtor retains control of his company,
- Short process duration of six to seven months until the conclusion of the self-administration process,
- Lower procedural costs lead to more assets and higher quotas for creditors,
- Increase in liquidity: no taxes and social security contributions are paid in the period between the application and the opening (three months)
The protective shield procedure is characterized by:
- The debtor has the right to propose the administrator.
- The debtor must draw up a restructuring plan within a maximum of three months.
- There is protection from enforcement for the duration of the preparation of the reorganization plan (maximum for three months).
- Claims from creditors can be converted into company shares (so-called dept-equity swap).
Costs of Procedure
The insolvency court only opens insolvency proceedings if the debtor’s assets are likely to be sufficient to cover the costs of the proceedings (court costs, expenses, costs of the insolvency administrator). If the debtor is a natural person, penniless and intends to obtain discharge of residual debt, the procedural costs can be deferred upon application. If the creditor wants to prevent the rejection due to lack of assets, he can make an advance on the costs of the assets, which must cover the entire expected costs of the insolvency proceedings.
