Insolvency Ⅲ – Something new for everyone? Perspectives from a German point of view

The directive addresses six key areas:

• Minimum requirements for avoidance actions
• Possibilities to trace assets belonging to an insolvency estate
• Pre-pack proceedings
• Directors’ duty to request opening of insolvency proceedings and their civil liability
• Regulations on creditor’s committees
• Measures enhancing transparency of national insolvency laws

The objective of the directive is to contribute to the proper functioning of the internal market and the capital markets union, as there are large divergences in recovery value and in the time required to complete insolvency proceedings across the Union.

Those differences have negative repercussions on cost predictability for creditors and investors in cross-border situations in the internal market and they reduce the attractiveness of cross-border investments, thus creating barriers and impacting the cross-border movement of capital within the Union and to and from third countries.

Since directives Insolvency Ⅰ and Ⅱ have already harmonised quite a few aspects of the substantive insolvency law of the Member States, we are now moving on to the next part.

Since the EU has set itself several goals, only two of the key areas already mentioned will be addressed in this article: The new opportunities opened up by asset tracing for insolvency practitioners, and the stricter liability requirements for company directors.

German legal practitioners will find some familiar provisions, particularly in the areas of avoidance actions and directors’ liabilities; for other jurisdictions, however, there are likely to be significant changes.

Asset tracing

With the provisions of Title Ⅲ (Articles 14-20) of the Directive, the EU is pursuing several central objectives.

The primary objective is to improve the tools available to insolvency practitioners to comprehensively identify and trace assets of debtors in the EU, with the aim of maximising the value of the insolvency estate in insolvency cases for the benefit of creditors.

This includes enhanced direct or indirect access to non-public information held in registers/databases, such as cadastral registers, land registers, movable property registers, mortgage registers, and intellectual property registers, for insolvency practitioners from all EU Member States, as public registers are often not sufficient.

Another key objective is to overcome cross-border hurdles, enabling insolvency practitioners to efficiently access asset registers in all Member States.

When querying bank account registers, each insolvency practitioner can proceed in the future indirectly by making a request to the designated court or administrative authority in the respective Member State.

For courts and designated administrative authorities in each Member State, the Directive ensures immediate and direct access to bank account registers, through which insolvency practitioners, regardless of their Member State of appointment, can obtain the requested information.

These competent national authorities can also gain access to the bank account registers interconnection system (BARIS) in accordance with Directive (EU) 2024/1640.

Account information from the state designated national entity in each Member State is published on the European e-Justice Portal. The competent national authorities must then transmit this bank account information to the insolvency practitioner who requested it.

Of particular note is that, in future, access can be gained to bank account information of third parties where there are reasonable grounds to consider that they have benefited from void, voidable or unenforceable legal acts carried out by the actor. Ultimately, the provisions aim to prevent debtors from concealing their assets and therefore strengthen the enforcement of debts.

Directors’ liability

The directive stipulates that directors are among the first to realise whether a company is insolvent and that late filing can lead to lower recovery values for creditors.

Even though insolvency can be defined differently by each Member State, the directive includes the duty to submit a request for the opening of insolvency proceedings within a period of no longer than three months from the moment the directors become aware or can be expected to have become so.

Title Ⅴ (Art. 40 - 43) of the directive includes those regulations on the directors’ duty to request opening of insolvency proceedings and their civil liability.

The current legal situation in Germany is already stricter: The “notorious” German directors’ liability takes effect upon the onset of material insolvency and may even have criminal implications.

Furthermore, in Germany there is a balance sheet insolvency test, “over-indebtedness,” and the well-known cash-flow test, “illiquidity”.

In the case of either one of these reasons for insolvency, directors are required to submit a request for the opening of insolvency proceedings “without any undue delay”. This is commonly understood as a maximum of 3 days. However, in the event of illiquidity, a period of 3 weeks - or 6 weeks in the case of over-indebtedness - may be used if there is a realistic chance of restructuring. In other words, if the cause of the insolvency can be resolved within this timeframe. However, the director is already exposing themselves to a liability risk during this period if they are mistaken about the chances of a turnaround or if, in the end, they cannot prove that this was a real opportunity.

Liability therefore begins upon the onset of material insolvency, and its amount is determined by the damages incurred by the creditors as a result of the continued operation of the business and the failure to submit a request for the opening of insolvency proceedings in a timely manner. Of course, these damages are difficult to determine.

As a starting point, this liability, which must be enforced by the insolvency administrator, is therefore calculated based on the cumulative payments made during the period between the occurrence of material insolvency and the court’s receipt of the request. The managing director can then defend themselves by arguing that the actual damage incurred by the creditors is less than this amount.

From a practical standpoint, however, determining the actual damage incurred proves to be nearly impossible. Consequently, the default assumption, and thus a very strict liability, remains in place, against which the managing director must first mount an effective defence.

In smaller companies with a managing director who is also the sole shareholder, dual insolvency is very common. If the collateral provided to the financing banks does not already lead to personal bankruptcy, the director’s liability often can no longer be met.

The view from Ireland

When asked about this title of the directive, our Irish colleague Michael Kelly, a partner in Hayes Solicitors LLP, observed:

From an Irish point of view, the most controversial change being introduced by the Directive is contained in Article 40.

In Ireland there is a statutory obligation on directors to have regard to the interests of creditors when a director believes or has reasonable cause to believe that a company is or is likely to be unable to pay its debts [Section 224A of the Companies Act 2014].

There is also an older common law duty to have regard to the interest of creditors, which has been interpreted to include an obligation to wind up a company in a timely manner.

By Ivo-Meinert Willrodt, managing partner of PLUTA, together with his colleague, attorney Rasmus Linden, both in the Munich office. PLUTA specialises in insolvency and restructuring and has more than 40 branch offices in Germany, Italy and Spain.

(This article first appeared in the July edition of Global Turnaround, the leading international magazine for restructuring and insolvency specialists.)