What are the German Insolvency Code’s objectives?

Historically, the objective of the proceedings provided by the Insolvency Code or its
precursory, the Bankruptcy Code (Konkursordnung, KO) has been the collective, non-
discriminatory satisfaction of creditors on a pro rata basis. To achieve this objective, the
proceedings provide a framework for the liquidation of the insolvent debtor’s assets by an
independent court-appointed insolvency practitioner, either by way of asset-stripping or sale
of the debtor’s entire business, followed by a distribution of the proceeds to the creditors.
Following an increasing trend towards strengthening the chances for a restructuring of the
debtor’s business as opposed to liquidating it, the Insolvency Code also provides for the
reaching of an arrangement with all stakeholders by means of an insolvency plan procedure
in order to reorganize the business and enable the enterprise to continue as a going concern.
More recent amendments to the Insolvency Code have aimed to extend the formerly scarce
use of the insolvency plan procedure and shift influence on the proceedings away from the
courtappointed independent insolvency practitioners to the creditors and the debtor’s
management. To this end, the rights of creditors have been strengthened and hurdles for the
Insolvency Court to reject an application by the debtor for self administration proceedings
have been increased. Lawmakers have justified both changes by arguing that these
innovations will encourage earlier filings for insolvency, favor restructuring versus
liquidation and increase the attractiveness of Germany as jurisdiction of choice for
restructuring distressed businesses.

It is evident that the objective of German insolvency proceedings (Insolvency Proceedings) is

to satisfy creditors either by (i) liquidation of the insolvent entity’s assets and distribution of
the proceeds (Liquidation Proceedings), or (ii) by reaching an arrangement by means of an
insolvency plan procedure in order to restructure the insolvent entity (Insolvency Plan
Proceedings). These two types of insolvency proceedings are not similar to proceedings
under US Insolvency Law although the concept of the Liquidation Proceedings can be
compared to Chapter 7 of the US Bankruptcy Code whereas the Insolvency Plan Proceedings
are more akin to proceedings under Chapter 11. However, in contradistinction to its US
counterpart, the German Insolvency Plan Proceedings are not frequently employed.

In addition to (and partially deviating from) the general principles described above and
below, credit institutions must comply with specific insolvency rules in order to avoid a
domino effect on the overall functioning of the financial sector. The German Banking Act
provides for certain notification requirements at an early stage of financial difficulties and
confers powers on the Federal Financial Supervisory Authority (BaFin) to initiate and control
insolvency proceedings. Such powers comprise, inter alia,

 the right to restrict or prohibit any withdrawal of cash by or any granting of loans to the
shareholders of the troubled bank,
 prohibiting transactions or payments of or the acceptance of cash by the troubled bank,
 dismissing bank managers or even close the troubled bank's business, and/or
 revoking the troubled bank's banking licence.
 Comparitive Analysis Of Objectives Of Indian Bankruptcy And Insovency Code, 2016

1.The Insolvency and Bankruptcy Code, 2016 is intended to strike the right balance of
interests of all stakeholders of the business enterprise so that the corporates and other
business entities enjoy availability of credit and at the same time the creditor do not have to
bear the losses on account of default. 2. As per the Preamble to the Code, the purpose of this
Act is as under:- (a) To consolidate and amend the laws relating to reorganisation and
insolvency resolution of corporate persons, partnership firms and individuals. (b) To fix time
periods for execution of the law in a time bound manner. (c) To maximize the value of assets
of interested persons. (d) To promote entrepreneurship (e) To increase availability of credit.
(f) To balance the interests of all the stakeholders including alteration in the order of priority
of payment of Government dues. (g) To establish an Insolvency and Bankruptcy Board of
India as a regulatory body for insolvency and bankruptcy law.

What are the grounds for filing for insolvency?

Final insolvency proceedings will be opened if the Court finds that (i) the debtor is illiquid,
i.e. unable to pay its debts when they fall due (Zahlungsunfähigkeit), or (ii) the debtor is over-
indebted, in the event that the debtor is a legal person or a legal entity which does not have at
least one natural person who is personally liable without limitation, i.e. if the debtor’s assets
do not cover its liabilities (Überschuldung).
Pursuant to case law, illiquidity does not exist in the event of certain limited temporary
liquidity gaps. Rather, the debtor is deemed to be illiquid if it has stopped making payments
as they fall due. The debtor itself can also, voluntarily, file a petition on the grounds of
pending illiquidity, i.e. if it is predominantly probable that the debtor will become unable to
meet its payment obligations when they fall due in the future (drohende
Zahlungsunfähigkeit).
Regarding the question of whether a debtor is over-indebted, pursuant to current law which
will be in effect until December 31, 2013 the crucial question is whether a positive business
continuation forecast (positive Fortführungsprognose) can be made. As of January 1, 2014 a
company will be deemed over-indebted if its assets are exceeded by its liabilities (balance
sheet test), no matter whether a positive outlook exists or not. A positive outlook may,
however, influence the value at which the debtor’s assets will be valued (continuation or
liquidation values).

Insolvency Proceedings can be initiated against an entity for:

 Illiquidity (incapacity to pay);

 Over-indebtedness (balance-sheet insolvency - in response to the current financial crisis, the
German Government has recently amended the definition of over-indebtedness in order to
alleviate otherwise solvent corporations from having to file for insolvency merely on the
 basis of balance-sheet insolvency; here, a positive business forecast may also be taken into
consideration to circumvent over-indebtedness);
 Imminent illiquidity.

Comparitive Analysis Of Grounds For Filing For Insolvency Under Indian Bankrutcy
And Insolvency Code, 2016

An individual can file an insolvency petition if he/she is unable to pay his/her debts and needs
protection from creditors

An individual can file an insolvency petition if he/she is unable to pay his/her debts on fulfillment of
any of the following three conditions:

 Debts amount to more than Rs.500

 Individual is under arrest or imprisonment in execution of a money decree
 There is an subsisting order of attachment against his/her property in execution of
such decree