Attorney at Law and Insolvency Administrator Dr. Franc Zimmermann

1. Supervisionof the Work of Insolvency Administrators in GermanyGIZ Legal Reform Project SerbiaBankruptcy Supervision Agency Republic of SerbiaBelgrade, 23 April 2012 Attorney at Law and Insolvency Administrator Dr. Franc Zimmermann Gifhorn · Braunschweig · Wolfsburg · Magdeburg · Potsdam · Berlin Mönning and Georg, Attorneys at Law, Berlin

2. Supervisionof the Work of Insolvency Administrators in Germany Structure: Part I: Supervision and supervisory bodies Part II: Typical organisation of an insolvency administrators’ office in Germany Part III: Relationships between judges, administrators and creditors

3. Supervisionof the Work of Insolvency Administrators in Germany Part I Supervision and Supervisory Bodies

4. Typical course of insolvency proceedings under German law Filing for insolvency proceedings (where applicable: pre-preliminary creditors’ committee); Where applicable: preliminary insolvency administrator (decision either by pre-preliminary creditors’ committee (if appointed, but this is not compulsory) or bankruptcy judge. Appointment always by judge); Opening of insolvency proceedings; Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies

5. Typical course of insolvency proceedings under German law 3 months after opening of insolvency proceedings: First meeting of creditors (creditors’ assembly) - Decision whether the debtors’ enterprise is closed down (liquidation) or (temporarily) continued. The assembly of creditors may commission the administrator to draw up an insolvency plan (reorganisation) - Decision on the designation of the appointed insolvency administrator Process of insolvency proceedings  liquidation ↔ reorganisation; Final distribution among the (unsecured) creditors; Termination of insolvency proceedings. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies

6. Process of insolvency proceedings Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies Typical course of insolvency proceedings under German law Filing for insolvency proceedings (where applicable: pre-preliminary creditors’ committee) 3 months after opening of insolvency proceedings: first meeting of creditors (creditors’ assembly) Final distribution amongst the (unsecured) creditors Termination of insolvency proceedings Opening of insolvency proceedings Liquidation or reorganisation Where applicable: preliminary insolvency proceedings Where applicable: pre-preliminary creditors’ committee Where applicable: preliminary creditors’ committee Where applicable: creditors’ committee, otherwise: creditors’ assembly

7. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies Involved/interested parties in insolvency proceedings Creditors Insolvency administrator Insolvency court until opening insolvency proceedings: bankruptcy judge during insolvency proceedings: judicial officer Debtor (managing director, shareholder) Difference to Serbian law system: No additional regulatory body like the ALSU

8. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies • Why no separate, independent supervisory or regulatory body like the Serbian ALSU in Germany? Insolvency proceedings under German bankruptcy law are a process which is self-regulated by the creditors → Creditors have strong and substantial influence on the insolvency proceedings because the proceedings concern their financial interests → (Risks arising from abuse/misuse of the powers of the insolvency administrator and the lack of an independent regulatory body have been overlooked by the German legislator)

9. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies • Core issue in the question of regulatory bodies and supervision: Safeguarding the highest quality of insolvency proceedings • The highest quality of insolvency practice and administration in Serbia is the same as in Germany, including paticularly: Maximum settlement of debts

10. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies ‘…ensure the most favourable collective settlement of bankruptcy creditors by achieving the highest possible value for the bankruptcy debtor or its assets…’ (Section 2 of the Serbian Law on Bankruptcy) ‘…(best) collective satisfaction of a debtor’s creditors…’ (Section 1 German Insolvency Law (InsO))

11. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies • The definition of the ‘best quality’ of insolvency proceedings is at the most possible based on single clauses of the bankruptcy law. • The absolute definition of ‘best quality’ in terms of insolvency proceedings is impossible to define, because insolvency proceedings are dynamic and incomparable (e.g. insolvency proceedings involving a small company with modest or few assets are substantially different from insolvency proceedings on a real estate investment trust).

12. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies • Even in the same industrial or technical sector, insolvency proceedings involving companies of equal size can have completely different results and bankruptcy dividends (e.g. liquidation of one company, reorganisation of the other). • Each bankruptcy case is an individual case. The success of the insolvency administration can, therefore, only be measured retrospectively if at all.

13. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies Supervision of insolvency administrators and insolvency proceedings Creditors Insolvency administrator Insolvency court until opening insolvency proceedings: bankruptcy judge after opening insolvency proceedings: judicial officer Debtor (managing director, shareholder) No regulatory body similar to the Serbian ALSU exists, rather associations/organisations of insolvency administrators (i.e. Verband der Insolvenzverwalter Deutschland; Verband Junger Insolvenzverwalter etc.). These possess no regulatory powers or legal status, unlike the ALSU.

14. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies • Purposes of insolvency proceedings: • Market regulation (closing down insolvent, non-restructurable, non future-proof companies/enterprises in order to protect the financial interests of the public); • Controlled and ordered handling of business transactions and residual assets after termination; • Establishing an order of labour relations (dismissal and preparation of insolvency payments where applicable); • Learning and documenting the (financial) history of the debtors’ enterprise; • Safeguarding the completion of tax accounting, financial accounting and payroll and investment accounting; • Controlled settlement of the debtors’ leasing agreements.

15. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies • Other purposes of insolvency proceedings: • Contesting transactions made prior to the opening of insolvency proceedings which disadvantage the creditors in the insolvency proceedings (active transactions and omissions, up to ten years prior to the request to open insolvency proceedings); • Reorganising/restructuring the company if it can be restructured with no negative impacts or disadvantages for the creditors; • Protecting the debtors (especially from unregulated debt enforcements by individual creditors); • …

16. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies Main areas of responsibility for insolvency administrators: • Ensuring the best possible settlement of debts; • Assuming possession of, and managing the whole estate forming part of the assets involved in the insolvency proceedings; • Holding in trust the debtors’ whole estate forming part of the assets involved in the insolvency proceedings; • Continuing the debtor’s enterprise (where applicable); • Liquidating the debtors’ assets (in a liquidation scenario) or initating a restructuring process with due dilligence (where applicable); • Collecting the debtors’ outstanding debts.

17. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies Main areas of responsibility for insolvency administrators: • Establishing an order of labour relations; • Ensuring the completion of tax accounting, financial accounting, payroll and investment accounting; • Regularly reporting on the insolvency proceedings (to the insolvency court, creditors etc.); • Claiming and filing liabilities (director, shareholder, third parties); • Contesting transactions made prior to the opening of insolvency proceedings which disadvantage the creditors; • …

18. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies Representation and defence of the creditors’ financial interests „ … Die Auswahl des Verwalters ist die Schicksalsfrage des Konkurses …“ ‘…The choice and appointment of the insolvency administrator is the fateful question of insolvency proceedings…’ Ernst Jaeger 1869 -1944

19. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies – Supervision by Court Supervision by insolvency court Abstract: • In itself and under the law it is but a ‘preserver of the legality of the proceeding’ because otherwise liability risks would be too greatly integrated into a court’s case processing; • Generally there is no suitability assessment because it is at the administrator’s own liability risk. Suitability is only assessed in cases of evident breaches of obligations; • Nullity, i.e. the absolute legal ineffectiveness of acts by the administrator that conflict with his/her intended purpose; • Selection of an insolvency administrator (Section 56 para. 1 clause 1 InsO [German Insolvency Law]).

20. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies – Supervision by Court Supervision by insolvency court Abstract: • The insolvency administrator is generally under the supervision of the insolvency court (Section 58 para. 1 clause 1 InsO); • The insolvency administrator is obliged to report or render account to the court either regularly or upon request (Section 58 para. 1 clause 2 InsO); • In cases of non-fulfilment of the insolvency administrator‘s duties, the court can impose a fine of up to 25,000 euro for each breach of duty.

21. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies – Supervision by Court Supervision by insolvency court Specifics: • Transparency of financial transactions (no assembly accounts; confirmation of monetary holdings by balance sheets and statements of account; no (ab)use of the debtors’ assets in any way for the administrator’s private business, no misappropriation of funds); • Examination of accounts on regular basis (due to size up to every 6 months); • Reporting on a regular basis (up to as often as each quarter); • Can appoint additional/special insolvency administrators to oversee and investigate the administrator’s actions in the insolvency proceedings.

22. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies – Supervision by Court Supervision by insolvency court • Appointment of certified public accountants to verify final accounts • Minimum requirements for reports: • Must provide proof of current monetary holdings • Must disclose any external service providers contacted and provide a declaration regarding whether the administrator is in any way financially connected to the service providers • Must report on the state of pending proceedings and provide a conclusive statement concerning the grounds on which the proceedings are based • Must disclose acts of exploitation and, in particular, to whom assets were sold • Must disclose, and provide proof of, any satisfaction of privileged creditors (creditors of the estate) • Must provide a statement on the situation of the claim verification (any other registered claims are always checked by the court)

23. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies – Supervision by Court Supervision by insolvency court • Distribution and conclusion only after verification of the final report by the court; • The administrator is obliged to provide evidence of distribution to the court (distribution list) (how many, to whom?); • Dismissal of the insolvency administrator for good reason (Section 59 para. 1 InsO) Examples: • Lacking availability: office not regularly occupied, phone number not generally accessible (Local Court of Göttingen NZI 2003, 267; Regional Court of Göttingen NZI 2003, 441) • If the administrator deceives the insolvency court as to his/her qualifications (BGH ZInsO 2006, 669)

24. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies – Supervision by Court Supervision by insolvency court Further examples: • Continually delaying in providing requested reports, doing business without fulfilling the new obligations incumbent on the estate (Local Court of Bonn ZInsO 2002, 641; Local Court of Göttingen ZInsO 2003, 289); • Having insufficient qualifications caused by the incorrect assessment of a legal issue – an untenable legal stance (Regional Court of Braunschweig NZI 2008, 620); • Severely faulty billing of, and failure to satisfy a collateral receiver (Local Court of Braunschweig ZInsO 2009, 97); • Failing to obtain the consent of the creditors’ meeting in cases in which this is expressly required by law, in particular under Section 160 InsO; • Frequently causing damages; • Insufficient liability insurance; • Conflict of interests (administrator has received a prior mandate from debtors or principal creditor); • Mixing insolvent assets or awarding loans from the assets (as was the case with Reinhard Mühl: he was also convicted and sentenced to 8.5 years imprisonment for embezzling 45 million euro in 106 particularly serious instances).

25. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies – Supervision by Administrator Supervision by insolvency administrator • Self-regulation in the administrator’s own interests, as the administrator is personally liable: Section 60 para. 1 InsO: ‘The insolvency administrator shall be held liable for damages to all parties to the proceedings if he/she wrongfully violates the duties incumbent on him/her under this statute. He/She, as an insolvency administrator, shall act carefully, properly and diligently.’ Section 61 clause 1 InsO: ‘If a debt incumbent on the assets involved in the insolvency proceedings created by a legal transaction of the insolvency administrator cannot be fully satisfied from the assets involved in the insolvency proceedings the administrator shall be held liable for damages for the creditor with a claim to the assets involved in the insolvency proceedings.’

26. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies – Supervision by Administrator Supervision by insolvency administrators • In general, an insolvency administrator must prove at least the following: • Sufficient knowledge of insolvency law, commercial law, corporate law, labour law and fiscal law; • Sufficient personnel; • Sufficient technological equipment; • Guaranteed local attendance (always reachable and available (2 hours)); • Sufficient free capacity; • The highest level of direct personal involvement in the administrative office; • Organised personal and financial situation; • Independence, freedom from instructions; • Professional liability insurance taken out, specific to insolvency administrators; • No criminal convictions.

27. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies – Supervision by Administrator Supervision by insolvency administrator • The standards used for self-regulation: • Certification under EN ISO 9001:2008; • Certification under InsO 9001; • The best possible certification of insolvency administrators in Germany: ‘InsO-Excellence’; • Specialist solicitor in Insolvency law; • Mandatory continuing education; • Adherence to professional regulations (established in part by associations of insolvency administrators, in part by associations of judges and judicial officers, and in part through cooperation between judges, judicial officers and insolvency administrators).

28. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies – Supervision by Administrator Supervision byinsolvencyadministrator • Important professional regulations: • The principlesof VID e.V. (theAssociationofInsolvency Administrators in Germany); • Recommendationsbythe Uhlenbruck Commission • The German law on theimprovementandsimplificationofsupervision in insolvencyproceedings (GAVI), • The German Principlesof Proper Insolvency Administration (GOI), • Codes ofconductforinsolvencyadministrators • IDW [German Institute of Public Auditors Inc.] Accounting Guidelines RH HFA 1.010 and RH HFA 1.011 • Professional measures

29. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies – Supervision by Debtors Supervision by debtors • Debtors are not entitled to deselect an insolvency administrator, but may present irregularities to the insolvency court and encourage the implementation of supervisory measures; • Debtors are entitled (with restrictions) to information on the state of the proceedings.

30. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies – Supervision by Creditors Supervision by creditors • Creditors are entitled to deselect insolvency administrators (1st creditors’ meeting, Section 57 clause 1 InsO) Problem: they are often too late. Example: Bach A. GmbH machine works. 150 employees, preservable. The administrator had already moved for liquidation, not preservation, during the previous insolvency administration. 3 month-long previous insolvency administration + 3 months until the report deadline = 6 months.  All recapitalisation options were no longer available.  Claims for damages against the administrator? Problem: Proving long-term ability to continue and recapitalise.

31. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies – Supervision by Creditors Supervision by creditors • Comprehensive rights to information (reporting), i.e. Sections 79 and 156 InsO; • Decision on the direction of proceedings (liquidation ↔ reorganisation), Section 157 InsO; • Liability claims against the insolvency administrator under Section 60 InsO (‘… The insolvency administrator shall be held liable to damages for all parties to the proceedings if he/she wrongfully violates the duties incumbent on him/her under this statute…’); • Right to request to convene an extraordinary creditors’ meeting (through the committee of creditors or through creditors entitled to separate satisfaction), Section 75 InsO;

32. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies – Supervision by Creditors Supervision bycreditors • Right to request that decisions taken by the creditors’ meeting be repealed if the decision is contrary to the common interests of the creditors, Section 78 InsO; • Integration into legal transactions of particular importance in the decision-making (Section 160 InsO); • Section 160 InsO (Legal Transactions of Particular Importance): ‘(1) The insolvency administrator shall obtain the consent of the creditors' committee if he/she intends to engage in transactions which are of particular importance to the insolvency proceedings. If no creditors' committee has been appointed, he/she shall obtain the consent of the creditors' meeting.’

33. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies – Supervision by Creditors Supervision by creditors Section 160 InsO: ‘(2) Consent under subsection 1 shall be required in particular 1. if such transaction purports to sell the enterprise, plant, the entire stock, a part of real property to be disposed of by private sale, the debtor's shares in another enterprise if such shares are intended to bring about a permanent affiliation to such other enterprise or the entitlement to receive recurring earnings; 2. if such transaction purports to enter into a loan contract with considerable burdens on the assets involved in the insolvency proceedings; 3. if such transaction purports to bring or join a court action amounting to a considerable value in dispute, to refuse the bringing of such action, or to negotiate a settlement or compromise to settle or avoid any such action.’

34. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies – Administrators’ Organisation Part II Typical Organisation of an Insolvency Administrators’ Office in Germany

35. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies – Administrators’ Organisation Insolvency administrator Where applicable ‘shadow’ insolvency administrator Where applicable ‘shadow’ insolvency administrator bankruptcy specialist – responsible for keeping deadlines, reporting bankruptcy specialist – responsible for keeping deadlines, reporting bankruptcy specialist – responsible for list of creditors’ claims bankruptcy specialist – responsible for list of creditors’ claims bankruptcy specialist - general bankruptcy specialist - general secretary secretary … …

36. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies – Administrators’ Organisation Normally due to representation regulations and the constant reachability of the administrator, as well as due to specialisation: Company ofInsolvency Administrator e.g. Mönning & Georg Insolvency Administrators andattorneysatlaw Insolvency administrator Insolvency administrator Insolvency administrator law firm lawyer ‘shadow’ insolvency administrator ‘shadow’ insolvency administrator ‘shadow’ insolvency administrator lawyer bankruptcy specialist bankruptcy specialist bankruptcy specialist lawyer lawyer bankruptcy specialist bankruptcy specialist bankruptcy specialist secretary bankruptcy specialist bankruptcy specialist bankruptcy specialist secretary secretary secretary secretary secretary

37. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies – Relationships Part III Relationships between Judges, Administrators and Creditors

38. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies – Relationships Relationship between insolvency administrators and the insolvency court Basically: • Court = employer, because insolvency proceedings are allocated by the court. • Insolvency administrator = service provider. However, as administrators are fundamentally free from instruction and occasionally even have to work against the instructions of the court, it can sometimes be problematic.

39. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies – Relationships The overall relationship between insolvency administrators and the insolvency court: Complex and sometimes complicated

40. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies – Relationships Relationship between insolvency administrators and creditors Basically: • Creditors = clients, since insolvency proceedings are mainly in the interests of the creditors. • Insolvency administrators = service providers. However, because administrators are committed to all creditors, it can often be problematic when creditors assert their own interests or attempt to entice/force the administrator to make certain decisions or take certain approaches. It is also not uncommon for creditors (‘clients’) to simultaneously be opponents in the insolvency proceedings, such as in insolvency-specific challenges (banks, social insurance carriers, tax offices).

41. Supervisionof the Work of Insolvency Administrators in Germany Supervision and Supervisory Bodies – Relationships The overall relationship between insolvency administrators and creditors: Complex and sometimes complicated

42. Attorneyatlawandinsolvencyadministrator Dr. Franc Zimmermann Gifhorn · Braunschweig · Wolfsburg · Magdeburg · Potsdam · Berlin Partner Mönning & Georg attorneysatlawpartnershipcompany Berlin franc.zimmermann@moenning-georg.de Emser Str. 9 · 10719 Berlin · Tel: +49 30 - 890 449 0 · Fax: +49 30 – 890 449 50 Steinweg 44 · 38518 Gifhorn · Tel: +49 5371 - 945 40 0 · Fax: +49 5371 - 945 40 20