Bankruptcy from a Creditor’s Perspective
Where a business is over-indebted, its directors have a duty to file for bankruptcy at the competent court. In addition, creditors with overdue claims can commence bankruptcy proceedings.
How the procedure works
Once the court has opened the bankruptcy proceedings, the case will be handed to the relevant bankruptcy office (Konkursamt). However, the bankruptcy office will in many cases come to the conclusion that the available assets are insufficient to cover the costs of the proceedings. In this case proceedings are closed due to lack of assets. If the creditors remain inactive, the insolvent company will then be removed from the commercial register and cease to exist.
If the bankruptcy proceedings are carried out, these are usually summary proceedings. In comparison to ordinary proceedings, this is more efficient and goes through the following phases:
Inventory of assets
Bankruptcy notification to the public and requesting creditors to submit their claims (Schuldenruf)
Checking the claims received and creation of collocation plan (Kollokationsplan)
Liquidation of assets
Distribution of liquidation proceeds
The ordinary process is only used for complex cases and if it can be assumed that the costs for this more expensive process are covered. In ordinary proceedings, meetings of creditors are convened, and creditors can have greater influence over the proceedings. Following distribution of the proceeds from the liquidated assets, the court closes the proceedings, and the company is deleted from the commercial register.
What rights do creditors have?
Creditors who are known to the bankruptcy office will be informed directly about the commencement of the bankruptcy proceedings. Other creditors are informed through public notifications.
Creditors are requested to lodge their claims together with evidence within a one-month deadline. Claims can still be lodged at a later date, however, any additional costs arising from this must be borne by the relevant creditor.
After the deadline for claim submission has expired, the bankruptcy office will check each claim and decide whether to accept or reject them. Accepted claims are then allocated into three tiers of priority. The first tier includes claims for employee wages together with all secured claims, followed by social security claims. The third tier captures all remaining claims, such as, for example, supplier or customer claims.
Creditors can challenge the classification of their claim or its rejection in court (Kollokationsklage).
It is normally the responsibility of the bankruptcy office to liquidate the assets of the insolvent company. Available assets will be publicly auctioned or sold privately.
If the bankruptcy office declines to enforce a disputed claim against a third party, any creditor can have the claim assigned and seek to enforce it at the creditor’s own risk. The creditor will then be responsible for the costs of the proceedings and will receive the proceeds if successful.
Distribution of liquidation proceeds
Following liquidation, the proceeds are distributed, with the costs of the bankruptcy proceedings taking priority. The remaining proceeds are distributed to creditors with accepted claims, in accordance with the collocation plan. This means that all claims falling into the first tier will be met first. Only if proceeds remain will the creditors from the second and then finally third tiers be satisfied.
On completion of the bankruptcy proceedings, creditors with outstanding claims will be given a loss certificate. However, on the bankruptcy of a legal person this can only be used as evidence for write-off purposes, as the insolvent company will be removed from the commercial register on conclusion of the proceedings and will no longer exist. In contrast, in the case of natural persons, outstanding claims can be resurrected as soon as the debtor holds new assets.