Prologue

The provoking title, which is creating the impression, that the author never has heard something about bankruptcy, shall demonstrate that most of all managers, if they had no chance before to get their own sorrowful experience, are overstrained with this issue when it comes up for the first time like a skilled employee, who becomes a department leader in his company without any preparation. He has to jump into unknown cold water. For the manager it is the first grapple with the death of an enterprise, and who likes to work on such an issue without being forced on it? Moreover, in most cases a desperate survival fighting has occured, before this situation came up. So it´s a turn around in thinking by 180°.

I have made this experience and therefore want to give a first impression to those guys, who are faced with such a situation. My experience is based on the legal situation up to the end of 1998, i. e. bankruptcy on the basis of the old law for bankruptcy and composition proceedings in Germany. The new law for insolvency has been changed in most paragraphs. For example, there is no longer existing a special law for composition proceedings, nevertheless I believe that my experience, written on the following pages can also be helpful under the new legal situation.

This essay shall not supersede a good commentary book for the German law for bankruptcy proceedings, but shall support the reader with own practice experiences. Practice people and theorists, who are reading this essay are invited, to send their comments and amendments to my e-mail address dbm.Dirk.Brauckmann@t-online.de .

After filing the bankruptcy proceedings the court normally charges an administrator or trustee, and he normally may be a good legal adviser, but in most cases not involved in the business of this special case. He is no manager. Trustee and management therefore have to start a symbiosis to get a reasonable result in this blundered situation of the company.

Each managing director of a GmbH or an AG should know in minimum the legal basis, which obliges him to file a legal procedure of insolvency in cases of too high indebtedness or inability to pay in a period of three weeks. For an AG it is Par. 92 AktG and for the GmbH Par. 64 GmbHG. In the Par. 401 AktG and 84 GmbHG you will find the laws for punishment, if the MD´s don´t start these procedures in time. The result can be 3 years in prison or high fines.

The often case of inability to pay comes up in fact, if the bank accounts are empty or credit-lines have been terminated and payments to creditors are no longer possible. The infrequent case of too high indebtedness without inability to pay has to be discovered by calculation. Very often people are closing their eyes not to be faced with this situation, and by artificial high evaluation of their assets they try to avoid the state of too high indebtedness. From the legal point of view the too high indebtedness has started, if the assets don´t cover the liabilities anymore. Easier to discover this situation in the balance sheet is by comparing whether the accumulated loss is higher than the equity. The special case of too high indebtedness without inability to pay needs the precondition that banks or creditors have granted your company with high credits or advanced payments for your operational business and no adequate performance can be balanced against these credits.

If one of these two cases has occured than you only have the three weeks already mentioned, to try a recovery without filing an insolvency. This period is too short and only in few cases you may have the luck to convince your banks or suppliers to grant your company with fresh money for getting your company back into a save position. A recovery of a company has to start much earlier, if it shall be successful without filing a bankruptcy proceeding. I assume that a recovery in time has not been tried or has not been effective and now your company is faced with termination of business. What has to be done in this case?
 

Filing an insolvency and organizational  matters to be done

1. Try to estimate whether the liquidation of your company´s assets will achieve a quota of 35% of the debts or more to satisfy the creditors (Par. 7 VerglO). When estimating the values you have to take the so called statement of liquidation, for which you have to calculate your assets in the same way as for an auction. You don´t believe, which small value is behind your assets, if an auctioneer has to evaluate them. Office furnitures with a new value of about DM 8.000,- passed in our company later on to a purchaser for DM 800,-. If you meet this quota of 35% by a calculation which is logical for a third party, you are allowed to file for composition proceedings. You should consider, that during composition proceedings the responsibility will stay with you, although the decisions are only made by the preliminary trustee for composition proceedings.

2. Formulate your proposal for composition proceedings and calculate the quota for the judge at the public court for insolvencies on that way that he can follow your calculation without difficulties. Think about the time frame in which you want to liquidate the assets which are not on hand in cash. If the time frame needs more than one year, the quota has to be 40% or more (Par. 7 VerglO). Please consider in detail whether you really want to file for composition proceedings. Normally all trustees will lead this procedure to a case of bankruptcy, if it is not obvious that compositon proceedings are possible, because finally bankruptcy is there business. But as a kind of preparation composition proceedings are always most welcome, because they get time to learn the situation of the company without taking over the full responsibility.

3. Try to investigate who is the assigned judge at the public court. Ask him for a short-term meeting to present your application personally. Perhaps you may have an own idea, who could be designated as your trustee. Be keen enough, to issue your proposal. Although the judge is free in his decision, he will possibly accept your proposal. May be, that he will ask you for a desired trustee.

4. The court designates a preliminary trustee for composition proceedings. If he didn´t contact you before the application, he will do this now in the short term, for clarifying and ordering the necessary organizational matters. At the same time the court will issue a general interdiction for alienating to the company, i.e. that the company is not allowed to act further on without the approval of the trustee.

5. After filing composition proceedings you will get from the court the edict to serve them with the following documents:

• Formulating the proposal for composition proceedings
• complete list of all creditors and debtors (from you accounting and also if there are any, which are not known in the accounting department)
• Creating a statement of assets, which include all assets and liabilities without the equity. Under the liabilities you also have to include the eventual liabilities like guarantees and bonds
• Description how to fulfil the quota of composition proceedings

7. The trustee will start with the following steps:

• information of all the employees in a company´s meeting about the situation of the company and about the limitations during an insolvency. You should issue a instruction to employees together with the trustee how to work under these conditions, because if not, the staff will go back to its offices or fabrication without any orientation.
• Opening a special account for payments under composition proceedings at the company´s bank. From the date of filing the insolvency all payments and expenditures have to be effected only from this account. Instruct the head of your accounting to record all payments of this account (in and out) in a seperate Excel- table.
• Information of the business partners that your company has filed for an insolvency with the request to issue all their claims against the company to the public court. Debtors have to transfer payments only to the special account of the trustee.
• Organization of power of attorney: Because with filing the insolvency you have lost the right for disposing and signing in company´s matters, it is in the own discretion of the trustee, whether he will allow you and some employees as his deputies to sign in a limited frame any obligations and issues, which will lead to payments. Finally it is the question how far he will trust you and your leading managers that you will act for increasing the assets instead of decreasing. He personally is liable, that from the begin of the insolvency the asset situation will not get worse.
• In our case it was useful that for the ongoing business during insolvency a special form for approval was created.
• All events approved by the trustee with this special form should be listed in a separate table. Because the approvals should pass your desk before, instruct your secretary to record all the approved events and to control the information back to the according employees. She is going to be the turntable of your company and will get a lot of attention of her colleagues.
• If a power of attorney is given to you and some of your employees by the trustee it is necessary, that this written document is sent to your business partners for example together with purchase orders, because otherwise the business partners become suspicious and will not execute the orders, if they are signed by yourself and not by the trustee.
• My recommendation is, that the trustee gives a confirmation to all the business partners, that all obligations after filing the insolvency will be fulfilled. During composition proceedings this statement will still be issued by the management, if the trustee agrees. Under bankruptcy only the trustee can issue this statement. Obviously this statement can only be given, if the liquidity of the company and the remaining business allow such a statement.

9. Remedy of salaries under bankruptcy: A possibility to save liquidity of your company is the transfer of the obligation for the monthly salary payments to the public authority for employment. This can be done for the last 3 months before bankruptcy by applying the Par. 141 a AFG on beforehand. During composition proceedings the trustee is looking for an interim financing by a bank, which has had no business contacts with your company before, because otherwise it would get the status of a creditor. This bank may finance the salaries of the employees of the last three months by getting assigned the demands of each single employee on getting remedies of salaries under bankruptcy against the public authority of employment. In this case it is necessary that each single employee will assign its personal demand to the bank, because this demand cannot be required by the company but only from each employee. If you are entering this way it is rather sure that your company will enter into bankruptcy after three months, because otherwise the demand for payment of these three months salaries will not arise against the public authority and the claim of the involved bank becomes a claim under composition proceedings. For this claim the trustee and the MD´s are personally liable, if the assets of the company do not cover it. It may become a problem that you and the trustee have to clarify this procedure with the public authority for employment before. On the other hand the court should not become aware of the threatening bankruptcy, because in this case the court has to terminate the composition proceedings immediately. Please keep this in mind.

10. Social Plan under bankruptcy/composition proceedings: Up to Dec. 31, 1998 the law for social plan under bankruptcy was still existing. The important details are, that for single employees in each case not more than 2.5 monthly salaries are available in a social plan, but in total not more than 1/3 of the existing assets, available for the final distribution to the creditors. If such a social plan agreement is closed, it will be graduated with the grade of Par. 61 I KO. Your workers counsel will be keen to force nothing else than closing this social plan in the near future. Try to understand his claims reasonably.

11. Company´s pension agreement: If your company has had a company´s pension agreement, you should inform the Pensionssicherungsverein aG (pension insurance association) on the earliest way, that they can check and confirm the claims of the retired former employees and the future demands of your active people.

Address: PSVaG, Berlin-Koelnische-Allee 2-4, 50969 Koeln,
Tel.: 0221 93659-0, Fax: 0221 93659-195

12. Par. 613 a BGB: This paragraph which is indeed a big hurdle for new investors in the meantime has unfortunately advanced to european law. Maybe you have tried to find a new shareholder or  investor for your company during the last months, who on the other hand was not ready to take over all the employees of your company, than you may know the problems with this paragraph. If not, please try to become familiar with this matter, before you have to file the consequential bankruptcy proceedings.

If any, there is only a small chance to escape the incident of this paragraph. I want to inform you of a method which was practically used and which in fact led to a solution to limit or to avoid the negative effects of this paragraph and to continue the business of the respective company, although under legal aspects only with a big portion of luck.

The rule of Par. 613 a BGB says in fact, that all the employees of a company have the right in case of continuation the existing business in a new entity to decide whether they will be employed in the new or the old entity. This right even exists, if the old company is threatened by a bankruptcy or if this already has happened. This decision the single employee can force by a court case, if necessary.

Because a new owner very often wants to take over a company under reconstruction only with a declined amount of staff, in the past a lot of acquisitions foundered at this law, the companies didn´t survive and a considerable amount of jobs was erased.

To avoid this dilemma, the following solution is available:

• The old company founds a subsidiary before bankruptcy, which shall become the successor of the business.
•  Local public authorities and the old company also found a joint affiliate company for qualification, which takes over all the employees of the old company, for qualifying them with public subsidies, taking them into short-term work or finding new jobs for them. The remaining cost in case of short-term work are carried by the public authorities and the old company, each party at 50%.
• The employees are closing a contract with the old company and the new company for qualification, with which they agree to enter into the new company for qualification. It´s important to have a high percentage of employees who agree in this procedure. It has to be clear,  that the nonchanging employees will jeopardize the total project. The worst case for the people is a postponement of one year before starting unemployment, but in most cases it is the chance to find a new job  in the meantime.
• If the old company still needs workers for handling the old contracts under bankruptcy, it can rent people from the company for qualification via a different company in between, which is authorized to manage personnel renting. If this company has no authorization for managing personnel renting you have to consider that the same worker should not be rented more than twice.
• After filing the bankruptcy the old company sells the founded subsidiary to a new investor and also sells the original business to the subsidiary. This should be taken place not before three month after the people have agreed in changing to the qualifying company to avoid a legal objection by lawsuit. The selling of the business to a new investor needs of course the approval of the creditors represented by the board of creditors.
• The new investor is now able to hire those employees from the old staff, with whom he wants to continue the business. Possibly he also can hire some employees on a time limited basis, up to that date he recognizes whether the new company has entered into the market again.
• Also if only a third of the old staff can be employed again, it is an advantage for the labour market, for the economics and last but not least for the company itself. This situation is much better than all people have to become unemployed after a bankruptcy.
• In parallel the old company is handling its remaining contracts under bankruptcy conditions. Also for this kind of business some people can be employed, who with this job are not unemployed.
• The company for qualification in the meantime is qualifying the remaining employees and is trying to find new jobs for them by those steps. Moreover it can support the founding of new business units by obtaining subsidies for business foundations.

Moreover the model can only be forced through, if a bankruptcy is threatening, because in other cases the necessary pressure for getting the model through doesn´t exist.

Without thinking about during reading the paragraphs before you have exposed yourself with the situation of a consequential bankruptcy. In the following I assume that also in your case like in 95% of all cases of composition proceedings the consequential bankruptcy can not be avoided.
 

The Consequential Bankruptcy

The consequential bankruptcy normally starts with an information of the existing management board to the trustee in composition proceedings that despite of all efforts a solution for reorganization the company under composition proceedings was not to be achieved. The trustee will inform the court and will clarify with the according judge how to proceed with the date and the possibilities of a consequential bankruptcy. The court will file its decision of opening the bankruptcy, if the case will not be rejected right from the beginning because of missing assets.
The preliminary trustee of the composition proceedings is not automatically the receiver of the bankruptcy, but in most cases this will be, because the trustee has become familiar with the business and the details of the company.

Now the receiver has to put up a status of the assets under bankruptcy, which is structured like the status under composition proceedings, but is actual to the date of filing the bankruptcy. The creditors have to be informed. Additionally they are getting the period for filing their claims to the court. This period has the reason in getting a quick impression of the liability situation. Nevertheless, a creditor can file or correct its claims as long as the list of creditors has not been closed.

Claims under foreign currencies have to be calculated with the actual exchange rate to the national currency, i. e. DM or in future Euro. The exchange rate of the date, when the consequential bankruptcy has been filed, is applicable.

Moreover, together with the decision of opening the bankruptcy the court will inform of a date for a first creditor´s meeting. Also a date for public checking of the different claims is settled. During creditor´s meeting the receiver will give his first report about the situation of the company, during the date for checking the claims the filed claims will be stated, partly stated or rejected by the receiver. The present creditors will be informed about by the receiver with assistance of a deputy of the court. All creditors will be informed by the court of the status of their claims in writing. If once a claim is stated by the receiver, this is binding for him. Therefore the previous checking of the claims has to be done carefully.

Proceeding the business under bankruptcy by the receiver may be possible and will be executed very often. All liabilities which the receiver has accepted after opening bankruptcy are debts under bankruptcy and have to be paid by the company. The receiver is personal liable, but this is normally covered by a special insurance.

If the receiver wants to proceed with the business under bankruptcy, he has to inform all the contractual business partners. But in this case he has to fulfil the contracts, closed after opening the bankruptcy (see Par. 17 and 19 KO).

If creditors are increasing, decreasing or withdrawing their claims they have to inform the court of their rectification. Also a change in range or stating a range by the court will be done by a correction. Regarding the sequence of ranges see the explanations under composition proceedings above.

Organize your accounting under bankruptcy in that kind that all the changes during the case can be followed up. The court wants to see, what the cost of the case have been at the end and how the assets under bankruptcy have been changed. After one year a new status will be claimed by the court, which shows the changes in the meantime.  I recommend to create an extended or new accounting plan which fits to the stucture of the required status and beside your balance sheet and P&L to form a new report in your bookkeeping system which is called Status in Insolvency where the balances of the single accounts will enter in a different structure. You will save a lot of time in avoiding difficult tunings of your accounts at year´s end. Also the status like the balance sheet is a report of assets and liabilities at a single date. But the court also wants to see, how the assets have been changed during a period. Therefore, you also need a dynamic balance sheet. Try to collate this issue with your administrator right at the beginning.

An additional matter to be organized by the receiver is the inventory of the intangible assets by an auctioneer, listing it in a special table and auction the assets during a public sale. Don´t be surprised during the inventory of the low evaluation. If your employees are interested in purchasing some inventories this has to be approved by the auctioneer, because he is not interested in only selling the unattractive pieces, while the attractive inventories already have been sold to the employees.

Also during bankruptcy you have to consider audits of the tax authority and the social insurance auditors, especially if your company has still unpaid liabilities of social insurance fees, income taxes and VAT.

Beside this, I recommend to continue also under bankruptcy with the organizational methods, which I already have explained above. Therefore I don´t repeat them anymore.

As soon the bankruptcy comes to an end, the remaining cash will be distributed according to the following sequence:

• Liabilities during bankruptcy (obligations the receiver made on behalf of the company during the bankruptcy itself) 100%
• Cost of the bankruptcy (legal cost of the case itself like fees for the court and the receiver) 100%
• Liabilities already existing  before the date of filing the bankruptcy according to the legal sequence. The general rule is that any claim which is higher in the legal hierachy will be paid 100 % before the lower level gets something of the remaining cash. The quota for the last level is calculated after all higher claims could be fulfilled 100%. Attention:  According to the new insolvency law the sequence and rules for the different levels have been changed compared with the old bankruptcy law.

If you now have any additional questions regarding practice or if you want to make any notes because of own experience, I want to invite you to write this to my e-mail-address:
dbm.Dirk.Brauckmann@t-online.de, to send a faxcopy (+49 421 665764) or just to give me a ring. Interesting supplements I like to add to this essay.

Search for the applicable court responsible for your case under:
Insolvency courts in Germany
On this page you also will find trustees having their residence in the according town.

Interesting links regarding German insolvency law:
http://www.firma-ausland.de/insolvenzrecht.htm
http://www.insolvenzrechtonline.de/15.htm

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