Sat morning Preferential Creditors by pengxiuhui


									The Role of Preferential Creditors
    in Insolvency Situations
          German View
          Dr. Burkard Göpfert, LL.M.
                 Gleiss Lutz

Amsterdam 2005

Exemplary Case
“Preferential Creditor”
Recent changes to the law
Transition of changes
Interaction: security rights and preferential creditors

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Exemplary Case

    purchaser of a building in London is a German closed real
     estate fund in the legal form of GmbH & Co. KG (limited
     liability partnership), registered in Germany
    main asset of the GmbH & Co. KG was the building in
    the GmbH & Co. KG (Borrower) was externaly financed by a
     German bank (Lender)
    financing was based on a facility agreement

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 securities: debenture which contains mortgages over the
  freehold interest, assignments of rent accounts of the
  building, the benefit of insurance relevant to the building
  and of other contracts
 debenture and facility agreement were governed by English
 assets secured by the debenture are located in England

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Questions arising out of the situation
    Would insolvency proceedings in Germany in relation to the
     Borrower adversely affect the ability of the lenders under
     the Facility Agreement to enforce the securities?
    Jurisdiction?

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Legal Position

Affect on assets outside of Germany
    under German insolvency rules, the ability of a secured
     creditor to realise its security once insolvency proceedings
     have started varies according to the type of asset
    the question is whether these rules are overridden by the
     COMI Regulation
    since 31.5.2002 the European Insolvency Directive (COMI)
     has been implemented

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 Article 4 of the COMI Regulation states:
    – „1. Save as otherwise provided in this Regulation, the law
      applicable to insolvency proceedings and their effects shall be
      that of the Member State within the territory of which such
      proceedings are opened, hereafter referred to as the "State of
      the opening of proceedings“.“
    – The law applicable is therefore the lex fori, the German
      Insolvency Code

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 Article 5:
    – „1. The opening of insolvency proceedings [in one Member
      State] shall not affect the rights in rem of creditors or third
      parties in respect of tangible or intangible, moveable or
      immovable assets - both specific assets and collections of
      indefinite assets as a whole which change from time to time -
      belonging to the debtor which are situated within the territory
      of another Member State ate the time of the opening of
      proceedings. (...)

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    – 4. Paragraph 1 shall not preclude actions for voidness,
      voidability or unenforcability as referred to in Article 4 (2) (m).“
 Article 4 (2) (m) states:
    – „2. The law of the State of the opening of proceedings shall
      determine the conditions for the opening of the proceedings,
      their conduct and their closure. It shall determine in particular:
    – (m) The rules relating to the voidness, voidability or
      unenforcability of legal acts detrimental to all the creditors.“

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    basically German law as the lex fori concursus governs the
     insolvency proceeding
    exception: not over immovable assets in other states
    unless: acts that might be void, voidable or unenforcable
     because they detriment all the creditors are to be ruled on

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In case:
    the main proceedings would be in Germany; but they have
     no effect on assets situated in England
    lender can enforce his securities under the Facility

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    can be determined by German autonomous and by
     European law; latter has precedency
    rules are very similar: Art. 3 COMI and Art. 102, §§ 1-11
       – center of main interests constitute jurisdiction
       – = general place of jurisdiction of the debtor, usually place of
       – in case: Germany

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Preferential creditor under German law

Legal consequence
    Preferential treatment =
       – creditor has a right to dissociate his claims (Absonderung)
       – the asset the creditor has an security interest in will be
         realised in full
       – proceeds of the realisation will primarily be distributed to the
         creditor as the security holder
    only the excess amount can be distributed to the liquidation
     fund and is thus accessible to other creditors

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 the security holder is still creditor of the insolvency debtor
  and therefore subject to the Insolnency Code (§ 49 et seq.,
  § 165 et seq. InsO)
 means: he can only enjoy preferential treatment in relation
  to claims entitled to dissociation (absonderungsberechtigte

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Claims with a right to dissociation are governed by §§
49-51 InsO
Can be classified into rights on movable (§ 49) and
immovable (§§ 50, 51) assets and on receivables (§
If the creditor has one of the following securities, his
claim will be treated preferentially:

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  Securities   Legal basis Constitution           General consequences            Consequenses
                                                                                  in Insolvency
  Mortgage     §§ 1113-    1. agreement that       - grants the security holder a preferential
  (Hypothek)   1190 BGB    such a right shall be right to payment of a particu- settlement be-
                           created                 lar amount against the land    cause of rights
                           2. registration of      - the owner of the land is in  in immovable
                           charge in the land re- duty to tolerate the compulso- assets, § 49 In-
                           gister                  ry enforcement or the sum of sO
                                                   money against his property
                                                   and the security holder has
                                                   the right to sell the property
                                                   by public auction and then re-
                                                   ceive settlement out of the
                                                   revenue in the amount of his
  Land charge §§ 1191-     follows mostly similar rules as the mortgage
  (Grund-     1198 BGB     but the land charge is abstract and therefore materially more flexible
  schuld)                  than the mortgage and commonly more used in practice

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     Pledge over   § 1205      1. the owner deposits     - pledge is accessory to the      Preferential sa-
     goods         BGB         the goods with the        claim and therefore depen-        tisfaction, § 50
                               security holder           dant to the existence and the     InsO over mo-
                               or: transfers the         amount of the underlying debt     vable assets,
                               constructive posses-      - is enforced by public aucti-    receivables or
                               sion to the pledgor       on, another form of realisation   other property
                               both parties agree        is not possible                   rights
                               that the security hol-
                               der should be entitled
                               to the pledge
                               2. through distraint
                               3. by law
     Transfer of   not regula- 1. Agreement bet-         security holder can only exer-    - Preferential
     Title for Se- ted in the  ween owner of             cise the rights in accordance     satisfaction, 51
     curity Purpo- BGB but     good/security provi-      with the purpose of the secu-     Nr. 1 InsO over
     ses (Siche- created by der and security hol-        rity                              movable assets
     rungsübe-     mercantile der to pass the title to   the security provider usually
     reignung)     practice    the property              retains possession of the
                               2. Handing voer of        good
                               goods to security hol-
                               der or substitution

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       Reservation     BGB knows    1. agreement of par-        - security holder can claim       1. Purchase
       of Title (Ei-   existence,   ties to pass the title in   property when the security        agreement is a
       gentumsvor-     compare §    the goods, pursuant         provider has not performed        pending
       behalt)         445 BGB      to §§ 929 et seq.           according to the agreement        contract and
                                    BGB                         - the reservation ceases to e-    the administ-
                                    2. Agreemente that          xist when the purchase price      rator can de-
                                    passing of title is         has been paid or when a third     mand perfor-
                                    subject to the conditi-     party has obtained title to the   mance; then
                                    on precedent that the       good                              the seller’s
                                    purchase price for the                                        outstanding
                                    goods is paid in full                                         claim has prio-
                                                                                                  rity over insol-
                                                                                                  vency claims, §
                                                                                                  55 par. 1 No. 2
                                                                                                  2. If perfoman-
                                                                                                  ce is not de-
                                                                                                  manded, seller
                                                                                                  can demand
                                                                                                  repossession of
                                                                                                  the goods, he
                                                                                                  has a right to
                                                                                                  segregation, §
                                                                                                  47 InsO

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Security As- §§ 398, 931   - agreement to asign    - security holder can collect   Preferential sa-
signment     BGB           trade receivables o-    the receivables payable to the tisfaction, 51
(Sicherungs-               wed to the security     security provider               Nr. 1 InsO
abtretung)                 provider to the secu-   - he is bound to exercise the
                           rity holder             rights within the scope of the
                           - receivables must be   security purpose
                           assignable and as-      - the debtor can still make
                           certainabel             payments to the security pro-
                                                   vider as long as he is ignorant
                                                   of the assignment

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Recent changes to the law

1. General
    a) The „Insolvenzordnung“
      – implemented since 1.1.1999
      – bundle of instruments against mass-poverty (Massearmut):
          >   early motion for insolvency
          >   inclusion of assets acquired after the opening of the proceeding
          >   tightening of the challenge of the insolvency
          >   right to realisation of the administrator
          >   cost sharing of preferential creditors

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    – fortification of the possibilities to sanify
    – simplified proceedings for small insolvencies
    – still: discussion about amendment of the InsO
 b) recent changes
    – consumer insolvency
    – relief of the remainder of a debt (Restschuldbefreiung)
    – new modell for delay (Stundungsmodell)
    – new institutes: insolvency plan, self-governement of creditors

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 c) changes with adverse effect for preferential creditors
    – §§ 170, 171
    – §§ 166 ff.
    – Insolvency plan
 d) International Insolvency Law
    – EUInsVO (COMI) governs over international jurisdiction in
      cross boarder cases the law applicable and the recognition of
      other insolvency procedures (31.5.2002)
    – Art. 102 EGInsO: jurisdiction in cases not governed by COMI

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    – § 335-358 InsO applicable law in cases not governed by COMI
 e) Transition of the Directive on financial collateral
  arrangements (Finanzsicherheitenrichtlinie (2002/47/EG))
    – preference of financial securities

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2. Practice of the courts
    work up of a new field of law which can be seen by the high
     business activity and the multitude of principle decisions
    „Inspire Art“

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3. Position of the state
    § 51 Nr. 4 InsO
    state is only preferred creditor as far as it has securities on
     taxable and declarable assets for public contributions

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4. Tax liabilities
     liabilities owed to tax authorities and social security
      contributions are nor longer preferred debts
     the only preferred debts recognised by the InsO are costs
      for the insolvency procedure = court costs, remuneration
      payable to the administrator, liabilities arising out of
      contracts, where the administrator elected performance, §§
      53-55 InsO and § 51 Nr. 4 InsO (see above)
     security holders are not under duty to make available their
      security for the preferred rights to be settled
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 UK tax liabilities
    – all creditors can register for the insolvency procedure, even
      revenue authorities, Art, 32, 39 par. 1 COMI
    – but their rights are governed by the law of the state of the
      opening of proceedings
    – under German law foreign tax authorities are no preferential
      creditors, §§ 51 No 4 or 55 InsO are not applicable

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5. Employees
    a) Termination/Continuity of employment
       – § 108 InsO: Continuity of employments of the Debtor with
         effect on the bankrupt‘s estate - principle
       – § 113 InsO: Termination by the administrator possible with 3
         months period of notice

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 b) Assertion of claims of the employee
    – renumeration claims are no longer privileged
    – they stay simple insolvency claims if no interim administrator
      with authority to administrate and to to dispose (strong
      administrator) is initiated
    – Exception: claims arisen after commencement of insolvency
      proceedings, e.g. through actions of the administrator
      engaging the mass
    – these are claims entitled to dissociation, employees then are
      preferential creditors in accordance with § 53 InsO

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 c) Employee liabilities in the UK
    – Applicable law?
        > Art. 10 COMI: law governing the employment contract for
          questions of continuity and termination of the employment during
          insolvency of the employer
        > Art. 4 COMI: law of the State of the opening of proceedings for
          questions in relation to the insovlency procedure
    – if Germany is State of the opening of proceedings the foreign
      employee basically is no preferential creditor

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IV. Transition of changes

InsO has a good reception
    greater transparency
    more possibilites to sanify
    change of reception in public
    unification of several insolvency procedures in one statute

More procedures
    especially due to the new consumer insolvency procedure

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Spectacular proceedings
    Kirch Media, Philipp Holzmann, Herlitz, Babcock Borsig

Yet many suggestions for amendments
    Consultant draft for amendment of the InsO
    In relevance to the role of a preferential creditor: the
     realisation of receivables that are charged with a right to
     dissociation is not governed by the InsO as it ia for movable
     and immovable assets in §§ 165 et seq. InsO (compare §
     21 para. 1 No. 5 of Consultant draft
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V. Interaction between security rights and
preferential creditors

Security rights under German law
    see above

Possibilities of the creditor, once insolvency
proceedings have commenced

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   – Movable assets:
       > If the creditor is in possession of the asset: he can execute his
       > if he does not possess the asset he has a right to preferred
         satisfaction but no right to foreclose
       > the administrator disposes of the asset freely, but has to
         announce his actions to the creditor, §§ 166 et seq. InsO
   – immovable assets
       > creditor can foreclose, §§ 49, 80 InsO
       > but the administrator can interimly prohibit enforcement if it
         would endanger the realisation of the mass, § 165 InsO

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    – Receivables
          > creditor can dispose over receivables that have been charged to
            him or that he has charged
          > all others will be disposed of by administrator

 costs
    – also creditors who have a right to dissociate
      (absonderungsberechtigt) have to share the costs
    – costs for determination and for realisation, § 170

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                   Immovable assets         Movable assets             Receivables
Right to dispose   Prefential creditors     Basically: administrator   Assigned: administrator
                   Administrator            If he does not exercise:   Charged: preferential
                                            preferential creditor      creditor
Cost sharing       For determination        For determination and      For determination and
                   Sometimes for realisati- realisation                realisation

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Affects of an insolvency proceeding on assets not
situated in the state of procedure
    the opening and the consequences of an insolvency
     procedure are part of a states sovereign powers
    therefore jurisdiction and applicable law have to be regulated
    COMI regulates jurisdiction (Art. 3) and applicable law (Art.
     4) for a greater part of cross border cases

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 When does German law apply?
   – Relation of German autonomous law to COMI: primacy of
   – COMI
       >   Art. 4
       >   Art. 5
       >   Art. 11
       >   Art. 13, 14
   – German autonomous law
       > §§ 335 seq. InsO

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   – according to the European Directive German law does not
     apply to assets situated in another country
   – but according to autonomous German law the application of
     German Insolvency Rules is possible, if COMI does not apply

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