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Insolvency law serves to ensure the orderly administration and, where applicable, distribution of the assets of a debtor who is no longer able to pay their debts when due. In order to prevent the claims of individual creditors who take more aggressive action from being satisfied while other creditors are left empty-handed, insolvency proceedings begin as collective proceedings in which all creditors are treated equally. If the assets are insufficient to satisfy all claims, the creditors' claims are settled on a pro rata basis, i.e., each creditor receives the same proportion of their claims.

A construction company has debts of €2 million to several creditors, including banks, suppliers, and subcontractors. However, there is only €1 million in available funds in the accounts. One of the creditors—a bank—tries to act particularly quickly and demands €1 million for itself in order to recover its loan. This leaves no money for the other creditors, even though they also have legitimate claims. Insolvency proceedings are initiated precisely to avoid such unequal treatment. They ensure that all creditors are treated equally and that the available funds are distributed according to a quota that is the same for all creditors (in this case: 50%).

Opening of insolvency proceedings

The opening of insolvency proceedings requires that the debtor is insolvent or, in the case of legal entities, overindebted. Insolvency exists when the debtor is no longer able to meet its due liabilities in substance. Temporary liquidity bottlenecks are not sufficient; there must be a permanent inability to service the debts. Over-indebtedness exists when the company's assets no longer cover its debts and there is no positive prognosis for its continued existence.

The proceedings are opened by a decision of the insolvency court. The application for this can be made by a creditor or by the debtor itself. From this point on, the debtor can no longer freely dispose of its assets. The assets become part of the insolvency estate, which can be disposed of by an insolvency administrator appointed by the court.

As part of the insolvency proceedings, a decision is made on how to proceed with the company. If it is not economically viable to continue the company, liquidation takes place, in which the debtor's assets are realized and the proceeds are distributed to the creditors according to a specified order of priority. This usually results in the company being dissolved and removed from business transactions.

However, the insolvency administrator may also continue the business, depending on the economic situation and the prospects of success. The aim of continuing the business is to restructure it, i.e., to restore its solvency and secure as many creditor claims as possible.

Claims against the insolvency estate

Insolvency claims are all claims that arose before the opening of insolvency proceedings. These are merely mandatory claims (e.g., purchase price claims, claims for damages, loan repayment claims). These creditors must file their claims. After the proceedings have been concluded, they receive a quota, i.e., a certain percentage of their claim, depending on how much is recovered from the liquidation of the estate.

A furniture manufacturer delivered goods to a furniture store before the opening of insolvency proceedings, which has not yet paid the purchase price of EUR 50,000. Shortly thereafter, insolvency proceedings are opened against the furniture store's assets. The furniture manufacturer thus has an insolvency claim, as its claim arose before the opening of proceedings. It must file the claim with the insolvency administrator and, after the proceedings have been concluded, will only receive a quota, e.g., 30% of the outstanding amount, depending on how much was obtained from the liquidation of the estate.

In the course of continuing the business, it may be necessary for the insolvency administrator to conclude new contracts. If claims from contractual partners were also only satisfied on a pro rata basis, no contractual partner would be willing to conclude transactions with the insolvency estate. Therefore, claims that arise after the opening of proceedings and are related to the administration of the estate (estate claims), such as the remuneration of the estate administrator or employees, purchase price claims, are given preferential treatment, i.e., they are paid in full from the estate with priority.

After the opening of insolvency proceedings, the insolvency administrator continues to run the debtor's business in order to complete ongoing orders. He orders new raw materials worth EUR 10,000 from a supplier in order to complete production. This claim arises after the opening of insolvency proceedings and is related to the continuation and administration of the insolvency estate. The supplier therefore has a claim against the estate that is paid in full and with priority from the insolvency estate – unlike insolvency claims that arose before the opening of insolvency proceedings.

Rights in rem, in particular ownership, are not affected by the opening of insolvency proceedings. The insolvency estate consists only of the debtor's assets. Items that are in the possession of the estate but are owned by a third party do not belong to the insolvency estate. The owner can reclaim their property in the insolvency proceedings by means of a claim for separation. The prerequisites for this are that the item is identifiable in the estate and that the owner can prove their ownership. The owner therefore has a privileged position in the insolvency proceedings: their right remains intact and they can reclaim the item independently of the proceedings. While creditors with mandatory claims (insolvency claims) are only satisfied on a pro rata basis, the owner can reclaim the item in full.

A computer dealer has provided a company with ten leased laptops for use. The devices are located at the debtor's premises but belong to the leasing company. If insolvency proceedings are now opened against the company's assets, the laptops do not form part of the insolvency estate as they are the property of a third party. The leasing company can reclaim the devices with a claim for separation, provided that they are identifiable and ownership can be proven. The owner therefore gets his property back in full.

Similar advantages also apply to pledgees whose claims are secured by liens. In the event of insolvency, they have a so-called right of separation. This means that they have the right to sell the pledged item separately from the insolvency estate in order to satisfy their claim. The proceeds from the sale are initially available exclusively to cover their secured claims. If there is a surplus after the sale, this is added to the insolvency estate and is thus available to all creditors on a pro rata basis. If, on the other hand, the proceeds are not sufficient to cover the pledgee's entire claim, the pledgee participates in the pro rata distribution of the insolvency estate with the outstanding balance.

A bank has granted a construction company a loan of EUR 200,000 and registered a lien on a hall as security. When the construction company becomes insolvent, the hall is sold by the insolvency administrator for EUR 180,000. Due to its right to separate satisfaction, the bank receives the proceeds of the sale on a priority basis to cover its claim. It can only register the remaining €20,000 of the debt as an insolvency claim and will later receive a share of the estate in return. If, on the other hand, the proceeds were €300,000, the surplus of €100,000 would flow into the insolvency estate and thus benefit the other creditors.