An important principle in German Civil Law is: You have to have money. That means that if you bought something or used a service, you are not released from your obligation to pay even if you do not have any money. If you do not have any money, you have to get it, i.e. earning it or, if necessary, by taking out a loan so that you can fulfil your payment obligation.
However, every principle has its limits and it is the Insolvency Law that comes into play when the debtor is unable to pay his debts, even if he uses his entire assets. It governs the legal relationship between the creditors and the illiquid debtor. The legal basis of the Insolvency Law is contained in the Insolvency Statute. It contains provisions describing when a debtor is to be regarded as being insolvent and the procedure to be applied in such cases.
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A debtor is insolvent if he is illiquid, his illiquidity is imminent or if he is over-indebted (insolvency grounds). The most common ground in practice is the illiquidity. According to the definition of the German Federal Supreme Court (BGH), the debtor is illiquid if he cannot pay at least 10% of his due and seriously demanded debts within three weeks from his own funds or by borrowing. If the debtor is illiquid, an insolvency petition can be filed by either the debtor or a creditor.
In the case of legal entities and companies for which the personally liable shareholder/partner is not a natural person, there is even a duty to file an insolvency petition if an insolvency ground exists. This duty usually lies with the managing director but can also, in certain cases, lie with a shareholder/partner. Persons who have this duty can be sued for damages or in certain cases even face criminal prosecution if they breach this duty.
If an insolvency petition is filed, the Insolvency Court first checks if there is actually an insolvency ground. If that is the case, the insolvency proceedings are opened and an Insolvency Administrator (official receiver) is appointed. The Insolvency Administrator has the sole power of administration and disposal of the assets of the insolvency debtor. He seizes the debtor’s assets and collects unpaid claims of the insolvency debtor as part of the insolvency assets. A main task of the Insolvency Administrator is to recover any assets that the debtor has given away before the insolvency proceedings by claiming unlawful insolvency avoidance by the debtor.
In such case of insolvency assets recovery, many are left completely speechless when they suddenly get mail from the Insolvency Administrator. That is usually the case when they received money or assets from the debtor during the insolvency crisis although they knew, or must have assumed, that the debtor was illiquid or that the illiquidity was imminent. No later than then should a lawyer be employed to help in the dispute with the Insolvency Administrator.
To avoid such consequences from an insolvency of a party to the contract, it is advisable to take into account a possible insolvency before contract conclusion and agree on suitable security.
Graduate in Tax Affairs,
Consultant for International Tax Law
Former tax inspector of the german tax authority