Mittwoch, 9. Oktober 2019

How Does A Typical German Bankruptcy Proeedure Look Like?

One of the main difficulties in the European Union considering bankruptcies is that there are not only 28 (soon to be 27) legal systems, but also 24 official languages. This is why we are looking for an AI-solution that helps you translate every court order automatically. You will hopefully see our first drafting within the next couple of weeks. 
Meanwhile, let us start by going through a simple case of a bankruptcy proceeding in Germany. I will link actual filings from First-Data as examples for relevant court dockets. 

I. The Bankruptcy Filing And Preliminary Bankruptcy Proceedings

Bankruptcy proceedings can basically be divided into the preliminary bankruptcy proceedings and the actual, formal, bankruptcy proceedings. Both stages are supervised by the bankruptcy court.

A bankruptcy must be filed by management as soon as any bankruptcy reason exists. If the filing is late (as are 80% of filings), this can lead to criminal prosecution. As matter of law, every bankruptcy filing has to be filed with the state prosecutors (see MiZI).

It is the job of management to know whether a bankruptcy reason exists. But: Bankruptcy can also be filed by creditors and – if necessary – by shareholders. I even know of a case where a court found that the supervisory board had to file, because management refused to do so.

However, the court does not automatically open bankruptcy proceedings after a filing. First, preliminary proceedings are opened: the court determines whether a bankruptcy ground actually exists. The court will therefore appoint a preliminary creditors’ committee and a preliminary bankruptcy administrator. For example, see the filing for Beate Uhse AG, where both was ordered by the court in Flensburg:

The court ordered Dr. Sven-Holger Undritz (White & Case) as preliminary administrator. Among his tasks were

a) to examine the jurisdiction of the court for proceedings (centre of the debtor's economic activity);

b) to examine whether there is grounds for opening formal bankruptcy proceedings;

c) to find out whether the debtor's assets will cover the costs of the proceedings;

d) see, if the prerequisites for self-administration are met (this is usually only done if management files and asks for self-administration).

A preliminary creditors’ committee was also established. Its most important right at this stage is to oversee the administrator and exchange him, if neccessary, after formal proceedings are opened.

II. Formal Opening And Creditor Meeting

Formal bankruptcy proceedings are opened by the court if, based on the assessment of the preliminary administrator, it arrives at the conclusion that bankruptcy grounds do in fact exist and there are sufficient assets to cover the costs of the proceedings. See here for a court order of a formal opening: 

If there are no bankruptcy reasons, the filing will be rejected. If there are, but the debtor does not have sufficient assets, the company will be liquidated. The court will order the necessary steps for that. For an example of insufficient funds, see here: 

Otherwise, the bankruptcy process is formally opened. Creditors now can no longer enforce their claims outside the bankruptcy proceedings (although this might already be the case after the preliminary filing). A (final) bankruptcy administrator will be appointed which in most cases will be same person as the preliminary one. He is now in charge of the debtor, unless self-administration is granted.
The first creditors’ meeting is no later than three months after the opening of the formal proceedings. There, the creditors decide how to proceed with the company. It can also instruct the administrator to prepare a bankruptcy plan. In a bankruptcy process, the creditors meeting is about the equivalent of the shareholders meeting outside the bankruptcy process. The creditors can influence the process, especially by confirming or exchanging the administrator.

Depending on the circumstances, a solution for the debtor is sought out, which can be anything from finding an investor, a sale of the company, a sale of the assets or simply a liquidation. Every case is different, which is why it is very important to have an administrator who has good business judgement.

III. Closing

If a solution is found and/or the (majority of the) creditors agree, the company will be released from administration and is basically a “normal” company again.

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