GERMANY Law and Practice Contributed by: Michael Josenhans, Lucas Lengersdorf and Karl Kuhn, Freshfields
In addition, when accelerating secured obli - gations, lenders need to enter into stand-still agreements with borrower’s management to avoid triggering any personal liability for man - agement due to non-compliance with mandatory insolvency filing requirements. 6.7 Claims Against Secured Lenders Post-Enforcement The enforcement of collateral by a secured lender does not typically result in the lender assuming the obligations of the borrower, such as employee or environmental remediation obli - gations. However, certain circumstances could indirectly expose the lender to liabilities or claims. If the collateral includes an operation - al business and the lender sells or takes over the business, employee contracts may transfer to the buyer, including all related liabilities (eg, unpaid wages or severance). Even tax authori - ties and social security agencies hold preferen - tial claims in insolvency proceedings but these obligations generally do not transfer to the secured lender unless the lender takes over the borrower’s operations. Further, a secured lender acquiring real prop - erty as part of the enforcement process could face clean-up obligations if contamination were to exist under the Federal Soil Protection Act ( Bundesbodenschutzgesetz ). 7. Bankruptcy and Insolvency 7.1 Impact of Insolvency Processes The German Insolvency Code ( Insolvenzord- nung - InsO) contains the statutory framework for the initiation, process and termination of insol - vency proceedings.
The court order opening insolvency proceed - ings customarily imposes an automatic stay on any enforcement actions by unsecured creditors against the company. Unsecured creditors can only enforce their rights within the legal frame - work of insolvency proceedings – ie, substan - tially filing their claims to the insolvency table with the insolvency officeholder to receive the insolvency dividend (pro rata payment). In prac - tice, the court often imposes such a stay even prior to the formal commencement of insolvency proceedings in so-called preliminary insolvency proceedings. The InsO does not impose an automatic stay on the enforcement by third parties/certain (secured) creditors. Generally speaking, the fol - lowing rules apply. • Third parties who can demonstrate that they have ownership (title) in an asset or similar rights in rem or other absolute rights which, therefore, are not part of the insolvency estate (segregation right, Aussonderungsrecht ) have a claim for restitution of the relevant asset – eg, suppliers with (simple) reservation of title rights ( einfacher Eigentumsvorbehalt ). • Creditors with security interests in assets forming part of the insolvency estate have a right to separate satisfaction ( Absonder- ungsrecht ) – ie, they may seek preferential satisfaction of their claims from the proceeds of the liquidation of the relevant asset. The InsO provides for specific rules regarding the responsibility for and processing of the enforcement of such security interests. 7.2 Waterfall of Payments The proceeds realised by the insolvency office - holder (note the exceptions under 7.1 Impact of Insolvency Processes ) will generally be distrib -
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