Next step towards Europe-wide harmonisation of insolvency law

The proposed Directive (Articles 4 et seq.) contains detailed minimum requirements for avoidance actions. The relevant time period for avoidance actions in respect of legal acts against no or a manifestly inadequate consideration is proposed to be one year, and the limitation period for claims resulting from legal acts that can be declared void is proposed to be three years from the date of the opening of proceedings. The four-year period stipulated in Section 134(1) of the German Insolvency Code and the three-year limitation period according to Sections 146 of the German Insolvency Code, 195 and 199 of the German Civil Code (calculated from the end of the year in which proceedings are opened) exceed the minimum requirements stipulated in the proposed Directive. It is, therefore, unlikely that any adjustments will be made to the avoidance provisions set out in Sections 129 et seq. of the German Insolvency Code.

The proposed Directive (Articles 13 et seq.) provides for cross-border rights to access registers to trace the assets belonging to the insolvency estate (“asset tracing”). Insolvency courts are to be given the power to search the national bank account register and, upon request of the insolvency practitioner, access bank account registers in other EU Member States where necessary for the purposes of tracing the assets belonging to the insolvency estate. The insolvency practitioner is to be given access to the national beneficial ownership register and to asset registers in other EU Member States (for example, land registers or vehicle, ship and aircraft registers). Certain adjustments can be expected in this respect, as the German Insolvency Code does not provide for any such access rights to date.

One of the key issues of the proposed Directive (Articles 19 et seq.) is the introduction of pre-pack proceedings, which are intended to facilitate the sale of the debtor’s business or part thereof as a going concern and largely reflect current M&A practice. The purpose of pre-pack proceedings is to allow contracts to be negotiated and the takeover to be prepared prior to the opening of insolvency proceedings (“preparation phase”) so that the transfer of the business can be carried out in a shortened process immediately after the opening of insolvency proceedings (“liquidation phase”). Adjustments to the German Insolvency Code can be expected.

According to the proposed Directive (Articles 36 et seq.), a legal entity’s directors are to be obliged to submit a request for the opening of insolvency proceedings with the court no later than three months after the directors became aware or can reasonably be expected to have been aware that the legal entity is insolvent. The proposal further provides for liability of the directors if they fail to comply wit the obligation to submit a request for the opening of insolvency proceedings. The provisions of Sections 15a(1), second sentence, 15b(4) of the German Insolvency Code correspond to the minimum requirements so that no adjustments to the German Insolvency Code are expected in this respect.

Another key issue of the proposed Directive (Articles 38 et seq.) is the introduction of simplified winding-up proceedings for insolvent microenterprises, i.e. enterprises which employ fewer than ten employees and whose annual turnover or balance sheet total does not exceed two million euros (2003/361/EG, Articel 2). The insolvency court is to conduct the proceedings electronically using standard forms. Such proceedings are to be opened even if the debtor has no assets or its assets are not sufficient to cover the costs. According to the proposed Directive, an insolvency practitioner may only be appointed if the debtor, a creditor or a group of creditors requests such an appointment and if the costs of the intervention of the insolvency practitioner are covered by the insolvency estate or by an advance on the costs. The creditors’ claims indicated by the debtor in the request for the opening of simplified winding-up proceedings are to be considered as lodged and deemed to be undisputed, as a rule. The assets are to be realised by the insolvency court through electronic auctions.

The proposed Directive (Articles 58 et seq.) defines minimum requirements for the working methods, function, rights, duties, powers, expenses and remuneration and liability of creditors’ committees. According to the current legal situation, the members of the creditors’ committee can already be held liable in cases of simple negligence, whereas the proposed Directive only provides for liability in cases of gross negligence or intent. Stricter liability provisions are permissible, however, as the proposed Directive only contains minimum requirements. Those minimum requirements are covered by the provisions of Sections 56a(2), 67 et seq., 160 of the German Insolvency Code. Consequently, no adjustments to the German Insolvency Code are expected in this respect.

Finally, the proposed Directive (Article 68) provides for the provision by each EU Member State of a key information factsheet written in clear, non-technical and comprehensible language and containing essential information about such Member State’s national insolvency law (opening of insolvency proceedings, lodging and verification of claims, ranking of claims, distribution process, duration of the proceedings), which will be published on the European e-Justice portal.

In its opinion dated 30 March 2023 (BR-Drucksache 25/23), the German Bundesrat welcomed the harmonisation objectives sought to be achieve by the proposal, as well as the regulatory approach of defining minimum requirements, expressing, however, reservations in particular about the introduction of simplified winding-up proceedings and opposing such proceedings using primarily the following arguments:

• Proceedings conducted without an insolvency practitioner would conflict with the regulatory function and the creditors’ interests, adversely affecting both the orderly conduct of the proceedings and the chances of settlement of the creditors’ claims. Insolvency proceedings conducted in accordance with the rule of law with special checks by the courts, insolvency practitioners and creditors’ committees would become less significant compared to simplified winding-up proceedings.
• The Bundesrat expressed doubts about whether this would lead to an increase in the settlement rate for creditors’ claims. The restriction of the right to assert claims resulting from legal acts that can be declared void and the absence of an insolvency practitioner who identifies assets belonging to the insolvency estate might prevent assets from being added to the insolvency estate. Also, there would be less motivation for directors to submit as soon as possible a request for the opening of simplified winding-up proceedings.
• Such proceedings would transfer the insolvency practitioner’s functions to the insolvency court and would lead to a considerable additional burden on the judiciary. The judiciary would have to increase its staff and set up the required infrastructure. The additional budgetary burden for the judiciary would be disproportionate to the costs saved in terms of the insolvency practitioners’ remuneration. The insolvency courts would be unduly burdened if they were responsible for realising the assets and distributing the proceeds, as the court staff is neither trained nor equipped for the performance of such tasks.
• Such winding-up proceedings should, in the opinion of the Bundesrat, only be conducted if the costs of the proceedings are covered. In view of the additional burden on the treasury that might otherwise arise, the basic concept should be adhered to, according to which the request for the opening of insolvency (or rather simplified winding-up) proceedings is denied for lack of assets and the company deleted from the register.

The EU Directive will probably not be adopted in its current draft version. There are likely to be amendments to it. The actual content of the adopted EU Directive remains to be seen. The German legislator will then have to transpose the adopted EU Directive into national insolvency law. It will be interesting to see how it uses its leeway in doing so.