Insolvency Glossary

 

Even for experienced business journalists, many insolvency administration terms are often incomprehensible. That is why we have listed and briefly explained the most important keywords regarding insolvency practice below.

If you think there are terms missing from this list, please This e-mail address is being protected from spambots. You need JavaScript enabled to view it us a short note to this effect so we can consider adding them.

> Right of segregation
> Grounds for a claim
> Rescue company
> Rights of recovery
> Selection of an insolvency administrator
> Duration of an insolvency procedure
> Self-administration
> ESUG
> Fiscal privilege
> Continuation
> Creditor
> Creditors' constituency
> Creditors' committee
> Insolvency Statute
> Insolvency filing
> Insolvency opening
> Insolvency funds
> Insolvency assets
> Insolvency plan
> Insolvency schedule
> Delayed filing of insolvency
> Subordinated creditors
> Ratio
> Trustee
> Restructuring
> Debtor
> Secured creditor
> Special rights of termination
> Transferred restructuring
> Pre-selection lists
> Preliminary insolvency procedure




Rights of segregationA “segregation” concerns securities that creditors (banks) have received for a credit. In view of these securities, they are entitled to “separate satisfaction” after insolvency opening. This means that they, and not the creditors as a whole, are preferentially entitled to the revenues from the recovery of these securities.  Creditors who can claim separate satisfaction are insolvency creditors, provided that the debtor is also personally liable to them. However, they are only entitled to a proportional satisfaction from the insolvency estate provided that they relinquish a separate satisfaction or are omitted from it.
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Grounds for a claim
The grounds for lodging or applying for an insolvency procedure are inability to pay, threat of inability to pay and excessive indebtedness.
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Rescue company
The most frequent form of restructuring in an insolvency procedure is “transferred restructuring”. In this case, not the company itself is sold but rather the business operations (asset deal). These are then “transferred” to a new company: the “rescue company”.
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Rights of recovery
In German insolvency law, all creditors are treated equally. However, there are certain exceptions. For example, there are “rights of recovery” if assets don’t belong to the insolvent company (e.g., in the case of leasing). Then the owner may “recover” these. Someone who can enforce a claim that an object is not part of the insolvency assets based on a material or personal right is not an insolvency creditor. This person’s claim for recovery of the object is determined based on laws that also apply outside of the insolvency procedure.
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Selection of an insolvency administrator
An insolvency administrator is appointed in judicial independence by an insolvency judge, who selects the insolvency administrator based on a pre-selection list that he/she maintains. However, who is and is not included in this list is not uniformly governed. Therefore, the VID has long required nationwide criteria in order to ensure that only suitable applicants are appointed.
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Duration of an insolvency procedure
The duration of the insolvency procedure is not specified. However, as a rule the minimum duration is two to three years. Things can go considerably faster with insolvency plan procedures.  However, if there are drawn-out legal disputes associated with the insolvency procedure or if longer deadlines must be complied with (e.g., guarantees), then an insolvency procedure can take five years or more in individual cases.
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Self-administration
With self-administration, the insolvent company is managed by the previous executive management in an opened insolvency procedure. Instead of an insolvency administrator, the responsible insolvency court appoints a “trustee” who counsels and supervises the executive management.
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ESUG
The Act Serving the Further Facilitation of the Reorganization of Enterprises (Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen) revises important aspects of the Insolvency Statute adopted on 1 January 1999. In particular, it should become easier to restructure a company by means of an insolvency plan (see “Insolvency plan”). In addition, the insolvency courts should be concentrated at fewer locations in order to make the work of the courts even more professional. The extent to which the intended far-reaching co-determination of creditors impacts the independence of the insolvency administrator is being disputed. The ESUG is expected to take effect in 2012.
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Fiskal privilege
The State Treasury uses fiscal privilege to improve its position vis-à-vis other creditors – especially suppliers and employees. Similar attempts to assert their own privilege were also made in recent years by social insurance agencies. The aim of fiscal privilege is to circumvent the principle of equal treatment of all creditors that is entrenched in the Insolvency Statute. The VID, in cooperation with legislators and associations, helped successfully prevent several such similar attempts.
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Continuation
When business operations continue during an insolvency procedure, this is called continuation. In individual cases – e.g., when no buyer is found – insolvency administrators continue insolvent businesses for many years. However, continuation is only possible as long as the insolvent company does not report any losses.
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Creditor
Creditors are all parties who have a claim against an insolvent company, i.e. banks as well as workmen, service providers, employees and many more.
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Creditors' constituency
In an insolvency procedure, the creditors are collectively represented by the creditors’ constituency, which makes the important decisions in an insolvency procedure.
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Creditors' committee
In addition to the creditors’ constituency, the insolvency court can appoint a creditors’ committee that counsels and supervises the insolvency administrator in the capacity of a supervisory committee.
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Insolvency Statute
The German Insolvency Statute replaced the “Bankruptcy Act” on 1 January 1999 and for the first time placed the focus on restructuring insolvent companies. The Insolvency Statute has become an exemplary insolvency statue model worldwide.
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Insolvency filing
The company itself as well as its creditors can file for insolvency. The insolvency is filed with the local responsible insolvency court, which then frequently appoints a preliminary insolvency administrator.
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Insolvency opening
The preliminary insolvency procedure ends with the insolvency opening (see “preliminary insolvency procedure), which initiates the actual insolvency procedure. The administrative powers and power of disposal are transferred to the insolvency administrator.
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Insolvency funds
Employees of an insolvent company have a right to “insolvency compensation payment” – usually simply called “insolvency funds” – for the duration of the preliminary insolvency procedure. The insolvency funds cover the salaries of the employees affected by the insolvency for up to three months. The insolvency funds are paid out by the Federal Employment Agency but are not financed by it but rather by a special contribution that is paid by all German limited liability companies. The insolvency funds are not paid until the preliminary insolvency procedure has ended. Therefore, as a rule the insolvency administrator engages in advance financing.
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Insolvency assets
The insolvency assets are the assets of an insolvent company.
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Insolvency plan
In general, the insolvency plan is a restructuring plan with which the company itself is restructured during an insolvency procedure – in contrast to a “transferred restructuring”, where only the business operations are restructured and transferred to a new company.
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Insolvency schedule
The insolvency administrator enters the creditors’ claims he received into the insolvency schedule.
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Delayed filing of insolvency
When an insolvency is not filed in a timely manner by the executive management, and it is thus “delayed”, there is a delayed filing of insolvency. This is considered a statutory offence punishable by fine or imprisonment.
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Subordinated creditor
Subordinated creditors are creditors who are not satisfied until all other creditors have been satisfied. This includes in particular the company’s partners, including shareholders.
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Ratio
The ratio is the percentage at which the creditors are reimbursed for their claims at the end of an insolvency procedure.
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Trustee
See “Self-administration".
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Restructuring
“Restructuring” in the context of an insolvency procedure means that a company or business operations is/are retained. A sale to an investor or a restructuring of the company is also in the insolvency procedure.
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Debtor
The “debtor” is the insolvent company or, in the case of a private company or freelancers, the entrepreneur.
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Secured creditor
Secured creditors are creditors who have secured their claim, for example through collateral or a security. Secured creditors therefore have priority for repayment of their debt claims (“privileged creditor”). These are generally credit institutions and suppliers.
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Special rights of termination
In order to simplify the restructuring of insolvent companies, the insolvency administrator has special rights of termination during the insolvency procedure. For example, he can exert these rights to prematurely terminate continuing obligations such as rental and leasing agreements or contracts with suppliers.
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Transferred restructuring
See “rescue company”.
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Pre-selection lists
See “Selection of an insolvency administrator”
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Preliminary insolvency procedure
The preliminary insolvency procedure is the time period between application for the insolvency procedure and the insolvency opening. During this procedure a court-appointed expert checks whether there are grounds for opening an insolvency procedure. In addition, the responsible insolvency court usually also mandates security measures so that no creditor is placed at a disadvantage due to a change in the debtor’s assets. This is the task of the preliminary insolvency administrator, who is usually also simultaneously appointed as an expert. The preliminary procedure takes up to three months.
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