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19 September 2012
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Schultze & Braun News

Recent publications

Dr Annerose Tashiro
From Bondholder to Equityholder : Still a Difficult Route in Germany?
ABI Journal, June 2012, 44-45, 84-85

Frank Tschentscher
Germany welcomes new Insolvency rules
The Lawyer, www.lawyer-monthly.com, April 2012, 1-2

Frank Tschentscher
Germany : Good Tidings
The European Lawyer 02 2012, 31-32

Frank Tschentscher
The Germans are not coming
Accountancy Age, 12.03.2012

Dr Annerose Tashiro / Patrick Ehret / Frank Tschentscher
Trust, Parallel Debt Mechanism under N.Y. Law Are Now Recognized in French Insolvency Law
ABI Journal February 2012, 30 et seq.
Less strict concept of over-indebtedness extended for five years
When it introduced the Financial Market Stabilisation Act (FMStG) of 18 October 2008, the German Federal Government, motivated by the financial crisis and with the object of preventing feared bank failures, at the same time softened, at least provisionally, the over-indebtedness provision of Section 19 (2) of the Insolvency Code (InsO).

Dr Annerose Tashiro
Attorney at law in Germany
Registered European Lawyer (London)

Dr. Annerose Tashiro
Dr Annerose Tashiro
According to the version of Section 19 (2) InsO as amended by the FMStG, over-indebtedness occurs if the debtor’s assets no longer cover his existing obligations to pay, unless it is highly likely that the company will continue to exist. Hence, the same weight is given to the forecast of the company’s continuation as to mathematical over-indebtedness; if the company’s continuation is highly likely, mathematical over-indebtedness does not lead automatically to over-indebtedness in a legal sense.
This amended provision, which is favourable to the continuation of companies without having to file insolvency proceedings, was initially in place until 31 December 2010, but was then later extended until 31 December 2013. However, the date of 1 January 2014 was already beginning to loom large, at least in the minds of auditors. This is because when preparing their annual financial statements, companies must also give a continuation forecast that takes into account at least the current and the following financial year. Under the current version of the over-indebtedness provision, a positive continuation forecast (determined by a positive liquidity forecast) for this period is sufficient in principle to avert over-indebtedness as defined in Section 19 (2) InsO. Conversely, if the so-called single-stage concept of over-indebtedness applicable prior to the amendment were to be restored, mathematical over-indebtedness would be decisive. If the latter occurs, a positive continuation forecast is no longer sufficient on its own to override the insolvency ground of over-indebtedness. This means that a positive continuation forecast could not be issued for companies that would qualify as over-indebted under the single-stage concept of over-indebtedness; they would have to value their assets and liabilities at liquidation value. This is likely to mean that a number of companies would be required to file for insolvency as early as the end of this year.
A study by the University of Mannheim commissioned by the Federal Ministry of Justice (BMJ) already recommended this summer, in light of these concerns, introducing this year a further, at least temporary, extension of the current concept of over-indebtedness. Only such an extension could prevent directors from having to file for insolvency as soon as 1 January 2013 because of the new/old version of Section 19 InsO becoming applicable one year later. In the survey on which the study was based, 20% were in favour of at least temporarily retaining the current two-stage concept of over-indebtedness and 37% for permanent retention. It is also interesting that only 17% wanted the insolvency ground of over-indebtedness to be completely abolished. Only a quarter wished to return permanently to the old single-stage concept of over-indebtedness.
According to our latest information from Bundestag sources, confirmed by the BMJ, the German Federal Government is now planning to extend the transitional provision for a further five years, i.e. until 31 December 2018. Parliamentary consultations are already underway. It is likely therefore that the situation for companies that are mathematically over-indebted will ease off once again, since it will be possible to make a positive liquidity forecast for a further five years, i.e. until the end of 2017.

Dr Annerose Tashiro, Attorney at law in Germany, Registered European Lawyer (London)

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