“You should all hang them” The quote from a well-known repetitor boldly reports the opinion of the general public and many lawyers towards the professional group of insolvency administrators. Why is that when insolvency administrators perform important tasks for a functioning economic order according to the legal model?
Insolvency proceedings in the US
Section 1 of the Bankruptcy Code names the objectives of bankruptcy proceedings to be the collective satisfaction of the creditors of a debtor by realizing his assets and, if possible, maintaining the company. Finally, the honest debtor should be given the opportunity to free himself from his remaining liabilities in order to be able to participate in economic life again. To begin with, some statistical information: In 2017, a total of 115,632 bankruptcy proceedings were opened in the US; 20,093 were corporate insolvencies, the remaining proceedings were – by far the majority – so-called consumer bankruptcy proceedings.
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How does an insolvency administrator work? – An example
The following fictional case is intended to illustrate the activity of an insolvency administrator. X AG, a medium-sized company in the structurally weak region, has been a global company for many years. In recent years there has been more and more specialization and concentration on the manufacture of photovoltaic systems. The company employs around 500 people.
The photovoltaic industry as a supplier of green energy has been strongly promoted by politics since early 2000s, so that the demand at X AG virtually exploded. Due to initial success, the decision was made to expand. Larger production halls were built and additional staff was employed.
The funding programs turned out to be too successful; LNAT tutors help in coping with it, click here for more detail . The planned budget was quickly exhausted; funding had to be reduced and was ultimately largely discontinued. In addition, increasingly cheaper competition from the Far East pushed onto the market.
X AG, completely surprised by the development, increasingly slipped into crisis. After several months of tough struggle, the board decided to file for bankruptcy after the banks terminated the loan and made it due. The board of directors was obliged to do this.
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EXPLANATION, PART 1 – Reason for bankruptcy and filing for bankruptcy
Organs of a legal person must regularly file for insolvency if there is a reason for insolvency. This duty is punishable by law. Reasons for insolvency are over-indebtedness or insolvency. Over-indebtedness exists when the company’s liabilities exceed its assets. bankruptcy is when the company is unable to service 90% of its due liabilities within a period of three weeks.
CONTINUED – Initiation of the insolvency proceedings
When the judge responsible for insolvency proceedings District Court receives the X AG’s application, she first has to swallow. X AG is the largest employer in the district. The collapse of the company and the loss of jobs would have far-reaching consequences for the region. She therefore calls the office of the most experienced insolvency administrator G and asks whether he could take over the matter. G immediately accepts.
EXPLANATION, PART 2 – Requirements for working as a liquidator
You become an insolvency administrator by being appointed by an insolvency court. There is no state examination or even a special course of study. When choosing the administrator, the judge responsible is free to decide.
According to the law, he should appoint a natural person who is suitable for the respective individual case, in particular someone who is knowledgeable about business and who is independent of the creditors and the debtor, who is to be selected from among all persons willing to take on insolvency administrations. The specific requirements that are required vary from court to court. As a rule, courts require proof of several years of extensive administrator-specific activity in an bankruptcy administrator’s office.
CONTINUED – decisions of the court
After the approval of the G, the judge immediately issues two decisions. With the first decision, it appoints the G as an expert in the insolvency application procedure of X AG and instructs the G to prepare an expert opinion within four weeks in order to determine whether X AG is bankrupt. With the second decision, the court orders preliminary security measures and appoints G as the preliminary insolvency administrator.
EXPLANATION, PART 3 – Arranging security measures
Arranging preliminary safeguards is just one option. It is regularly chosen if there is ongoing business operations or if, without the measures, it would be feared that substantial assets could be lost in the short term. The court can, for example, order that enforcement against the debtor be prohibited for the time being. This is to prevent a race of creditors.
The company is to remain functional for the time being in order to give the provisional bankruptcy administrator the opportunity to clarify the matter and to look for possible solutions. The provisional bankruptcy stretches a temporary protective shield over the company to calm and stabilize it.
THE CONTINUED – Bankruptcy Money and Retention of Title
After the G arrives at X AG, the mood is desolate. In a hastily called works meeting, G first calms the workforce. He assures that wages will be paid on time. His employees were already taking care of the so-called bankruptcy money.
In addition, operations continue to run as before. Meanwhile, G poses a multitude of purely practical problems. The fleet leasing companies have announced that they will secure the entire vehicle fleet within 24 hours. Meanwhile, suppliers send employees to pick up the goods that are in stock and delivered under retention of title; In addition, the municipal electricity supplier has sent an employee to shut off the power supply.
Although the provisional security measures give the administrator the opportunity to prevent all of this, the practical implementation regularly takes a lot of time and everyone involved needs a lot of discussion. At the same time, G is looking for investors.
EXPLANATION, PART 4 - Bankruptcy Ordinance: preliminary procedure
In the vast majority of corporate insolvencies, the future of a company is already decided in the preliminary proceedings, since the protection afforded by the insolvency code can only prevent collapse if it is possible to raise fresh capital quickly. The search for investors or buyers in the event of bankruptcy is comparable to a normal M&A process. The insolvency administrator has options for this that a normal company does not have. For example, the insolvency regulation enables the buyer to continue the company without the risk of assuming old liabilities. Strict protective regulations in favor of commercial transactions, such as Section 25 of the German Commercial Code (HGB), are nullified by the insolvency code.
CONTINUED – Creditors’ Meeting and Investors
G succeeds in finding two serious interested parties for X AG. X AG’s largest competitor on the German market offers the higher price. She would like to use synergy effects quickly after the acquisition in order to set up the company efficiently, so she would like to cut jobs.
The second offer comes from a group in the Far East. The price offered is well below that of the German competitor, but the investor offers a guarantee that all jobs will be retained; they want to build up a Western European sales and production site in the long term. G opts for the investor from the Far East. Keeping as many jobs as possible is one of the primary goals of an bankruptcy administrator.
The fully negotiated asset deal is signed immediately after bankruptcy has opened and approved three months later by the creditors’ meeting, the highest body in insolvency proceedings. The previous business operations of X AG have been saved by the so-called transferring restructuring, G with the opening of the procedure and conclusion of the purchase contract suddenly only the administrator of an empty company shell.
THE FURTHER PROCEDURE – Claims for damages and insolvency challenges
For G now comes the coming to terms with the past. The creditors can register their claims against X AG with G after the opening of bankruptcy proceedings. He records each creditor in a table and checks whether he accepts the claims. In addition, G must process the entire collection of claims by X AG up to the point in time of the transfer of business operations. Since X AG has recently struggled with quality problems, G customers also require supplementary performance. However, their position is weak. G does not have to perform subsequent fulfillment. He may refer the customer to register the defects as claims for damages in the table. If necessary, you can offset against any outstanding claims from X AG.
With the opening of the procedure, all tax declaration obligations of X AG were also transferred to G. G uses a tax advisor for this. G also checks whether it is possible to contest insolvency. If X AG was already insolvent and creditors still received payments after this point in time, although other creditors with outstanding claims went empty-handed, G can claim back these payments – in extreme cases even those that were ten years ago.
EXPLANATION, PART 5 – Claims, fines and imprisonment
The aim of the legislature with this is the equal satisfaction of all creditors. Since it is usually a matter of payments that the creditor rightly received at the time, the instrument of avoiding insolvency is difficult to convey to general business transactions and often triggers violent reactions. Practically every claim can be challenged. In terms of numbers, the most frequent contestant is likely to be the tax office, which has to reimburse taxes paid. Even fines that have been paid can in principle be challenged – with the possible consequence of being converted into a prison sentence.
EXPLANATION, PART 6 – Liability claims
After all, it is the administrator’s responsibility to examine possible liability claims against the company’s executive bodies and advisors. If, for example, the organs have failed to file for bankruptcy in good time, often for very understandable reasons, then they are liable to the company for the payments made after the bankruptcy was reached. In the case of a medium-sized company with 500 employees and corresponding sales, this very quickly results in amounts of receivables that endanger the existence of the parent company. After all these efforts by the insolvency administrator to increase the bankruptcy estate, the creditors often do not receive more than 3% of their registered claims.
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Conclusion: Bankruptcy administrators cannot please anyone
The bottom line is that bankruptcy administrators cannot please anyone. The reason for their activity, the economic end of companies or private individuals, and the goal of an orderly settlement of the situation, however, determine this. As far as career choice is concerned, bankruptcy law in general and bankruptcy administration in particular is still worth a closer look.
The bankruptcy law does not displace the other legal issues that played a role in the insolvent company. It merely restates them from the specific point of view of bankruptcy. Insolvency law also makes it possible to get to know a large number of industries and their economic, legal or factual principles through the bankruptcy of individual market participants. The insolvency administration is suitable for everyone who works legally and at least occasionally also wants to make and enforce business decisions.