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.
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.
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.
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.
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.