Corporate insolvency: reasons, statistics and process

7 Aug

 

A corporate insolvency, in contrast to a private bankruptcy, draws much wider circles. Personal bankruptcy is a drastic cut for the person and family concerned. In a corporate insolvency, however, significantly more people are affected.

In addition to the employees, whose jobs are massively endangered, a corporate insolvency also affects the suppliers and customers of the company.

The legal basis for a corporate insolvency, also known as rule insolvency, can be found in the Insolvency Act. This came into force on 1 January 1999.

The causes of a corporate insolvency

The causes of a corporate insolvency

Basically, the reasons for insolvency, also called bankruptcy in the earlier language regime, are obvious. The company had more expenses to pay than at the end of the day revenues were in the books. If a company can no longer pay more than 90 percent of its outstanding bills, it is talked about insolvency.

Impending insolvency becomes apparent if the occurrence of insolvency is foreseeable. The period of impending insolvency may not exceed twelve months.

The third reason for bankruptcy is over-indebtedness. Thus, the law describes the condition that the gearing can not be canceled by normal business operations.

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The bankruptcy petition

The insolvency application can be made by the company itself, but also by a creditor. The competent court examines both the application and the existing assets. If one of the three causes mentioned above is the basis for the bankruptcy petition, the court usually gives the petition.

The prerequisite is usually that assets, that is, the bankruptcy estate, exceed the value of 3,000 euros. Bankruptcy assets include not only objects but also open claims against clients. If this is not the case, the company may file a claim for deferment of the costs of the proceedings so that the insolvency proceedings can be initiated.

If the assets are insufficient to cover at least the costs of the proceedings and the deferral is refused or not applied for, the courts reject the insolvency petition for lack of assets.

The insolvency procedure

If the petition for corporate insolvency has been accepted, the competent court will appoint an insolvency administrator to continue the business. As part of the opening of the bankruptcy proceedings, an insolvency plan will be prepared, which provides for how the company can be rehabilitated. The basis for the insolvency plan is the insolvency code.

However, divergent regulations may be made, for example the segregation of certain goods in order to satisfy the claims of certain creditors.

The insolvency plan reflects the actual state of the company and defines certain groups of creditors. The groups are divided into segregated creditors, creditors without special security of claims and employees.

Separate creditors have been provided with special collateral that can be liquidated outside the bankruptcy estate in order to meet the claims of these special creditors separately.

Once the insolvency plan has been drawn up, it will be presented to the creditors, employees (if any, represented by the works council), the debtor and the insolvency administrator in a court hearing.

Corporate insolvencies by industry and company age

Corporate insolvencies by industry and company age

 Young businesses are about the same affected by bankruptcies. Things are different at traditional companies

Deadlines and responsibilities (infographics)

Deadlines and responsibilities (infographics)

From the occurrence of insolvency must be filed within three weeks with the competent court of insolvency. If this deadline expires, the competent bodies of the company make themselves guilty of the offense of insolvency.

In the case of a legal entity, the managing director or executive board is the liability, and the owner is the owner of a private company. If the penalty for insolvency transfer exceeds 90 daily rates, the person responsible is considered a criminal record. In addition, the managers make themselves liable for damages due to the failure of the creditors.

Managing directors are also personally liable if they conclude contracts with third parties after the insolvency is reached.

Why are many insolvency applications filed late?

The reasons for a late bankruptcy report, according to Euler Hermes, a credit insurer, mostly in errors of management. The following chart shows the most common misjudgments:

 There are defined deadlines to register a corporate bankruptcy. But for different reasons they are often not kept

 

The assessment, as can be found in the first three points of the diagram, shows that those responsible here almost blue-eyed deal with an impending insolvency as a precursor to bankruptcy.

Bankruptcies in Germany in absolute terms

Bankruptcies in Germany in absolute terms

The chart below shows how many companies, but also consumers, went bankrupt in the period between October 2014 and October 2015.

 Young businesses are about the same affected by bankruptcies. Things are different at traditional companies

The number of corporate insolvencies was relatively stable and fluctuated around 2,000 bankruptcy petitions per month during the investigation period.

Special feature of partnerships

If a partnership, such as a craftsman, faces bankruptcy, he can deregister the trade. At this moment, the bankruptcy no longer applies, he can file a petition for personal bankruptcy.

Thus, after six years, there is again the possibility of a debt-free reboot. The deregistration of the business enterprise saves the former entrepreneur now the settlement by a insolvency administrator.

Special features of legal persons

The special feature of a legal entity, a limited liability company or AG, lies less in the insolvency proceedings, but rather in the risks for the executing bodies, ie managing directors and board members.

Paragraph 35, para. 1 of the Industrial Code provides a special treat for this group of people: “The exercise of a trade is to be prohibited by the competent authority in whole or in part, if there are facts, the unreliability of the trader or one with the management of the business contracted person in respect of that trade, provided that the interdiction is necessary for the protection of the general public or the employees on the holding. “

This situation is fulfilled according to prevailing case law

  • Disregard of tax and social security obligations, ie open payments in these areas
  • Affidavit on property (warrant to enforce the declaration)
  • Lack of motivation and no professional responsibility
  • Lack of economic capacity (no financial resources)
  • Ongoing criminal or regulatory offenses

Especially the social insurance institute again and again commercial prohibition proceedings for former representatives of a company. However, no commercial proceedings may be instituted during ongoing insolvency proceedings.

Managing a GmbH are in a particularly critical situation. In the case of outstanding contributions to social security, the institutions have the opportunity to sue the unpaid contributions in a civil procedure from the private assets of the managing director.

The workers in the corporate insolvency

The workers in the corporate insolvency

Of course, a particular focus of corporate insolvency is on employees. First of all, they are obliged to continue their work. In return, employees are entitled to their wages, any gratuities or special payments, if these are regulated in the employment contract.

However, the insolvency administrator also has the right to indemnify employees. Often, in this case, the salary continues to be paid due to the lack of available liquidity. The open wages and salaries are then as a mass liability to the total claim against the insolvent company.

To prevent bankruptcy resulting in numerous personal bankruptcies of employees, employees can apply for so-called insolvency money. This service is paid by the public sector, the Federal Employment Agency. The benefit period is limited to three months. As compensation for earnings, no income tax is payable on the insolvency benefit. All are entitled to subscribe

The financing of the insolvency money is made by an employer contribution. In order to be entitled to insolvency money, the company must be deleted from the commercial register or trade register, that is, have ceased the activity. The right to insolvency also exists if the procedure was rejected for lack of assets.

Termination during the insolvency proceedings

An insolvency procedure means a notice period which may differ from the contract of the employee. The insolvency administrator has the right to terminate the employment relationship with a notice period of three months to the end of the month. This regulation differs from collective agreements or individual contracts.

The three-month period also lasts if a collective or individual contract provides for non-cancellability, for example on the basis of length of service.

Similarly, a shortened termination is permitted. Was the provisional insolvency administrator, for example, in January to 31.8. terminated, the final insolvency administrator may after the opening of the procedure quite in February to 31.5. cancel the employment contract. The employee can in this case the lost salary for the period from 1.6. until 31.8. sue. However, the chances of success are low, since the wage is included in the sum of the claims against the company.

Operating terminations are also possible. Reasons for this may be the decommissioning of the business, the closure of sub-areas (BAG, judgment v. 16. 5. 2002, NZA 2003 p. 93) or the intended sale by the insolvency administrator. Here the facts are sufficient that the buyer provides no concept for a further employment (BAG, judgment v. 20. 3. 2003, NZA 2003 S. 1027).

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Net loan amount in EUR: Running time : 12 months 24 Months 36 months 48 months 60 months 72 months 84 months 96 months 108 months 120 months

The reconciliation of interests

If there are drastic changes in the company, which also provide for the dismissal of employees, the insolvency administrator and works council will strike a balance of interests for the named employees, who will receive a redundancy.

However, the skewer is turned around here. The Insolvency Act provides for a simplification of the burden on the company in this case (§ 125 InsO). The employee must explain how to achieve the reconciliation of interests and prove that his dismissal is not socially justified (§ 1 (2) KSchG).

 

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