How best to behave as a client in con­trac­tor insol­ven­cy (1) — The insol­ven­cy open­ing pro­ce­dure*

Atten­tion, insol­ven­cy! Have you ever expe­ri­enced this? Just a moment ago you were a nor­mal cred­i­tor and (pub­lic) client and had a nor­mal claim against a com­pa­ny, your con­trac­tor. But sud­den­ly the signs change. The nor­mal com­pa­ny becomes an insol­ven­cy debtor. And you become an insol­ven­cy cred­i­tor. I cov­er how insol­ven­cy law affects your rela­tion­ship as a client with bank­rupt con­trac­tors in sev­er­al posts. In this first arti­cle, I describe the process of open­ing insol­ven­cy pro­ceed­ings and, in par­tic­u­lar, the rea­sons for insol­ven­cy and the creditor’s options for exert­ing influ­ence at this stage.

The ini­tial sit­u­a­tion

Com­mer­cial con­trac­tors will work for you and your home. They may be insol­vent or over-indebt­ed. You may not sus­pect any­thing of the sort. Your con­trac­tor is no longer able to per­form — and you are wait­ing for him to deliv­er his con­trac­tu­al­ly owed ser­vices. But noth­ing hap­pens. He does­n’t get in touch any­more, lets him­self be denied. You ask your­self what you can do.

The insol­ven­cy pro­ceed­ings from the creditor’s point of view

First of all, it is impor­tant to visu­al­ize the process from the creditor’s point of view. It all starts with the insol­ven­cy peti­tion. This is received by the insol­ven­cy court. The court then exam­ines whether the insol­ven­cy pro­ceed­ings can be opened. We are in the insol­ven­cy open­ing pro­ceed­ings, i.e. the peri­od before the open­ing of the insol­ven­cy pro­ceed­ings. The open­ing of insol­ven­cy pro­ceed­ings is basi­cal­ly the case under two con­di­tions. First, there must be a rea­son for insol­ven­cy (insol­ven­cy or overindebt­ed­ness). Sec­ond, there must be suf­fi­cient insol­ven­cy assets to cov­er at least the costs of the insol­ven­cy pro­ceed­ings.

Insol­ven­cy peti­tion by the cred­i­tor

The cred­i­tor can already be involved in the insol­ven­cy pro­ceed­ings. This is when he files the insol­ven­cy peti­tion. To do so, they must, among oth­er things, demon­strate a cred­i­ble inter­est in legal pro­tec­tion. This requires two things in par­tic­u­lar: first­ly, the pre­sen­ta­tion of a rea­son for insol­ven­cy, i.e. the cred­i­ble demon­stra­tion of insol­ven­cy or overindebt­ed­ness. Sec­ond­ly, as a cred­i­tor, you must also show cred­i­bly that you have a due, enforce­able claim that has not been met.

Beware of abuse

What you should not do as a cred­i­tor: use the insol­ven­cy peti­tion as a means of pres­sure or abuse it for oth­er rea­sons. Insol­ven­cy serves the equal sat­is­fac­tion of all cred­i­tors and should not be used to pro­mote par­tic­u­lar inter­ests.

Get help!

There are var­i­ous rea­sons why pub­lic clients in par­tic­u­lar are well advised to file for insol­ven­cy if the con­di­tions for doing so are met. If you need sup­port for this — there are some pit­falls — feel free to con­tact us. We will do it for you.

Costs of fil­ing for insol­ven­cy

An impor­tant point when fil­ing an insol­ven­cy peti­tion is always who bears the costs if the peti­tion is set­tled or the cred­i­tor with­draws the insol­ven­cy peti­tion. First of all, please be aware that if you file the peti­tion and are suc­cess­ful, you are not oblig­ed to bear the costs. Instead, the insol­ven­cy estate bears the costs of the pro­ceed­ings.

In all oth­er cas­es, the legal sit­u­a­tion is less clear. This is because Sec­tion 31 (2) of the Court Costs Act pro­vides for a so-called sec­ondary bur­den of bear­ing costs on the peti­tion­ing cred­i­tor. This can become rel­e­vant, for exam­ple, if you as a cred­i­tor with­draw the insol­ven­cy peti­tion or the insol­ven­cy peti­tion is reject­ed for lack of assets.

Rea­sons for insol­ven­cy

The law rec­og­nizes three rea­sons for open­ing insol­ven­cy pro­ceed­ings, name­ly insol­ven­cy, overindebt­ed­ness and immi­nent insol­ven­cy. As a cred­i­tor fil­ing an insol­ven­cy peti­tion, you must sub­stan­ti­ate at least one insol­ven­cy ground with your peti­tion. Oth­er­wise, your appli­ca­tion will be reject­ed as inad­mis­si­ble. How­ev­er, the actu­al exis­tence of the rea­son does not depend on the time of fil­ing the appli­ca­tion, but on the time of the court deci­sion.

Illiq­uid­i­ty

A debtor is insol­vent if he is unable to meet his due pay­ment oblig­a­tions. In this respect, it is by no means nec­es­sary that your debtor no longer has any liq­uid­i­ty at all, i.e. can no longer make any pay­ments. On the con­trary, insol­ven­cy is already to be assumed in prin­ci­ple if the debtor is not in a posi­tion to set­tle at least 90% of his total lia­bil­i­ties due with­in three weeks. In oth­er words, if there is a gap of 10% for a peri­od of more than three weeks, insol­ven­cy must be assumed in most cas­es. Whether such a case exists can usu­al­ly only be deter­mined by means of a so-called liq­uid­i­ty bal­ance. The cred­i­tor can hard­ly ever draw this up. He usu­al­ly does not have the nec­es­sary insight into the inter­nal details of the debtor com­pa­ny.

For you as (pub­lic) client, this means that you can only decide on the basis of indi­ca­tions whether insol­ven­cy exists or not. Par­tic­u­lar­ly in the case of pub­lic projects, the fol­low­ing indi­ca­tions — which are not exhaus­tive — are rel­e­vant:

• Con­trac­tu­al part­ners, in par­tic­u­lar sub­con­trac­tors and sup­pli­ers, have bro­ken off their con­trac­tu­al rela­tions with the con­trac­tor.
• The con­trac­tor has stopped doing busi­ness, they no longer show up at the job site or office, they no longer deliv­er to you.
• Com­plaints reach you from your contractor’s employ­ees that they are no longer receiv­ing their wages.
• You receive infor­ma­tion from social secu­ri­ty agen­cies or the tax office that the con­trac­tor is delin­quent or pays late.
• The contractor/debtor declares to you that he is in cri­sis.

Overindebt­ed­ness

Let us now turn to the sec­ond impor­tant rea­son for insol­ven­cy, overindebt­ed­ness. Overindebt­ed­ness exists when the debtor’s assets no longer cov­er its lia­bil­i­ties. First of all, a so-called going con­cern prog­no­sis must be drawn up. A finan­cial plan is drawn up on the basis of a busi­ness con­cept, in which efforts to restruc­ture the busi­ness are also described. This shows the finan­cial devel­op­ment of the com­pa­ny in the fore­cast peri­od. The going con­cern fore­cast is then derived on this basis. The deci­sive fac­tor in this respect is cred­i­tor pro­tec­tion, i.e. the ques­tion of whether the com­pa­ny will gen­er­ate sur­plus­es and is there­fore viable.

Impend­ing illiq­uid­i­ty

The third rea­son for insol­ven­cy is immi­nent insol­ven­cy. In this respect, it is impor­tant for the cred­i­tor that, under cur­rent law, he can­not base an insol­ven­cy peti­tion on this ground for insol­ven­cy.

Secu­ri­ty mea­sures in insol­ven­cy pro­ceed­ings

The court may order pro­tec­tive mea­sures for the pur­pose of cred­i­tor pro­tec­tion and equal treat­ment of all cred­i­tors if the insol­ven­cy peti­tion is admis­si­ble. This means, for exam­ple: The court may appoint a pre­lim­i­nary insol­ven­cy admin­is­tra­tor, set up a pre­lim­i­nary cred­i­tors’ com­mit­tee, impose a gen­er­al ban on dis­pos­al on the debtor and impose a ban on enforce­ment. For such mea­sures to be tak­en, the court must deem the creditor’s insol­ven­cy peti­tion admis­si­ble. This requires the asser­tion and sub­stan­ti­a­tion of a cred­i­tor claim and a rea­son for insol­ven­cy.

Some­times the cred­i­tors are also con­tact­ed by an expert appoint­ed by the court. The task of the expert is to con­clu­sive­ly estab­lish the exis­tence of a rea­son for insol­ven­cy, but also to exam­ine whether the insol­ven­cy estate cov­ers the costs of the pro­ceed­ings and whether there are prospects of con­tin­u­ing the busi­ness. Some­times he turns to the cred­i­tors for infor­ma­tion, and it may be use­ful for you as a cred­i­tor to point out to him, for exam­ple, cer­tain own­er­ship rela­tion­ships or the like. This is because it is quite com­mon for the sub­se­quent­ly appoint­ed pre­lim­i­nary insol­ven­cy admin­is­tra­tor (who is often iden­ti­cal to the expert) to make mis­takes when deal­ing with the creditor’s rights to seg­re­ga­tion and sep­a­ra­tion. It may be pos­si­ble to avoid mis­con­cep­tions here by giv­ing the cred­i­tor sen­si­ble infor­ma­tion.

Prob­a­bly the most impor­tant safe­guard­ing mea­sure is the order of pro­vi­sion­al insol­ven­cy admin­is­tra­tion and the appoint­ment of a pro­vi­sion­al insol­ven­cy admin­is­tra­tor. For the cred­i­tor, the first deci­sive fac­tor is whether a strong or weak pre­lim­i­nary insol­ven­cy admin­is­tra­tion has been ordered. This is because it depends on this whether the pro­vi­sion­al insol­ven­cy admin­is­tra­tor has cre­at­ed debts to the insol­ven­cy estate when insol­ven­cy pro­ceed­ings are sub­se­quent­ly opened or whether he has only cre­at­ed fur­ther insol­ven­cy claims. If, as is often the case, there is a weak pre­lim­i­nary insol­ven­cy admin­is­tra­tion in con­junc­tion with a gen­er­al reser­va­tion of con­sent, the cred­i­tor should ensure that the pre­lim­i­nary insol­ven­cy admin­is­tra­tor con­sents to the debtor’s legal trans­ac­tions in a doc­u­ment­ed man­ner. It is also advis­able from the point of view of the prin­ci­pal (i.e. customer/contractor) in most cas­es (the indi­vid­ual case decides!) to no longer make advance pay­ments.

The secu­ri­ty mea­sures of the insol­ven­cy court inter­vene in the legal posi­tion of the cred­i­tor in many ways. He is well advised to know and under­stand them and to act accord­ing­ly.

*This legal tip is not a sub­sti­tute for legal advice in indi­vid­ual cas­es. By its very nature, it is incom­plete, nor is it spe­cif­ic to your case, and it also rep­re­sents a snap­shot in time, as legal prin­ci­ples and case law change over time. It can­not and does not cov­er all con­ceiv­able con­stel­la­tions, serves enter­tain­ment and ini­tial ori­en­ta­tion pur­pos­es and is intend­ed to moti­vate you to clar­i­fy legal issues at an ear­ly stage, but not to dis­cour­age you from doing so.