Fire accelerant insolvency law — the problem of insolvency avoidance
Contestation in insolvency poses a considerable risk for creditors, as payments already received — even in the case of honest conduct — can be reclaimed retrospectively, which severely impairs the predictability and security of incoming payments, with the result that creditors subsequently lose liquidity and their entire realization of claims is shaken.
To protect against the risk of insolvency avoidance, it is advisable to agree insolvency-proof collateral at an early stage — for example through contractually established pledges of rights or reservations of title — and to consistently secure suspicious payment difficulties of the debtor through strategic liquidation measures before insolvency occurs. At the end of the article, a strategic guideline is developed on how you can protect yourself.
The preservation of Germany’s capital stock — and thus the entirety of companies based in Germany — is massively threatened by the wave of insolvencies. The toolbox offered by current insolvency law is proving to be unsuitable for effectively limiting the negative consequences. The looming, far-reaching economic crisis is ruthlessly exposing the system’s design flaws. But no stable building can be erected on a foundation with inadequate statics. Politicians now have a responsibility to develop measures to at least contain the impending damage. The causes of the crisis and short-term solutions that urgently need to be implemented in the near future are described below.
Our blog post is not politically motivated. Regardless of which political constellation is currently in government, we believe it is crucial that the three factors of production — labor, land and capital — are in a balanced relationship with one another. We are not concerned with opinions that reflect subjective views without reflection, but with facts based on clear evidence that reflect reality. Facts often reveal uncomfortable truths, but they have to be faced.
We are driven by serious concern for the business location. Anyone who takes up a topic in economics and business administration quickly realizes that, in the end, everything is connected. In this article, we focus on the area in which we have expertise: Receivables, liabilities and insolvencies. As publicly appointed and sworn auctioneers, we are regularly involved in the realization of claims, especially in the case of non-performing contracts. This means that we are always close to the latest developments in these areas.
The Austrian economist Josef Schumpeter considered bankruptcies to be a necessary and natural consequence of the capitalist system. Inefficient or low-innovation companies fail, while new, innovative companies take over the resources and markets. This creates room for economic progress. In a functioning free social market economy, the insolvency of individual companies is a process of market consolidation. Unproductive companies are eliminated, which means that capital and resources are used more efficiently and made available for more innovative, competitive companies. Insolvencies thus promote progress by exerting pressure on companies to continuously develop and adapt. Companies that do not make this change in time risk being displaced by more innovative competitors through the process of “creative destruction”. This intense competition — both nationally and internationally — contributes to optimization and innovation in companies in the long term.
The economic models of the Austrian School, developed by economists such as von Mises, Hayek and Schumpeter, were integrated into economic policy by Ludwig Erhard, the first Economics Minister of the Federal Republic of Germany, despite considerable initial resistance. These models were based on the BGB and HGB. Particularly recommended in this context are Friedrich A. Hayek’s standard work The Road to Serfdom, Carlos A. Gebauer’s Warning against Serfdom and Ludwig Erhard’s Prosperity for All, which we have linked in the description below. Ludwig Erhard played a decisive role in the rapid reconstruction after the Second World War and the success of the economic miracle. Unfortunately, we have now left this economic model, which was so successful for our country, behind us.
Germany is facing the worst economic crisis in its history. The German economy is shrinking and sinking deeper and deeper into recession. In many sectors, incoming orders are falling to almost zero and the number of company insolvencies is rising steadily. This is mostly triggered by exogenous factors over which companies have little or no influence. Forecasts do not point to any improvement in the foreseeable future. The economy is facing enormous challenges and everyone should be prepared for a loss of prosperity.
On September 11, 2024, WELT reported that almost 25 percent more companies filed for insolvency in the first half of the year than in the previous year. The courts put the creditors’ claims at around 32.4 billion euros — a significant increase compared to the 13.9 billion euros in the first half of 2023. It should be noted with these figures that insolvency applications are only included in the statistics after the insolvency courts have made their first decision, with the actual application often having been filed three months earlier.
According to Allianz Trade, the number of major insolvencies is rising in line with the increase in company bankruptcies: 40 cases were already recorded in the first half of 2024, which is not only the highest figure since 2015, but also represents an increase of over a third compared to the same period last year. Major insolvencies often have a domino effect on many companies along the entire supply chain. “It is not uncommon for them to be swept along and get caught up in the downward spiral themselves, which in the worst case also ends in insolvency,” explains Milo Bogaerts, Managing Director of the credit insurer.
The gloomy forecast in the business section of Die Welt on September 10, 2024 reads: “37 percent more major insolvencies — and the ‘storm of company bankruptcies’ is only just beginning.” The negative trend is likely to continue in the second half of the year, with both the economic damage and the number of jobs at risk increasing rapidly. The head of the Federal Employment Agency, Andrea Nahles (SPD), is forecasting unemployment of 3 million by 2025. According to Allianz Trade, the cumulative turnover of insolvent large companies in the first half of the year is already at 11.6 billion euros, which means that the total loss of the previous year has already been exceeded after the first six months. The average turnover of the large companies affected is around 290 million euros, an increase of 85 percent compared to the same period last year.
A new peak in non-performing loans is unavoidable. Rising insolvency figures inevitably lead to an increase in credit risks and defaults, which further increases the need for banks to take precautions. Despite the current fall in key interest rates, lending must be handled much more restrictively due to the increased risks. The intensive care departments of banks are faced with the challenge of whether they can continue to support the restructuring of ailing companies as before in light of the MaRisk and Basel regulations. Studies by banks show that companies that file for insolvency again within five years of restructuring are almost 1.5 times more likely to be wound up. The reduction and avoidance of non-performing loans will therefore be of central importance for banks. The granting of new loans will become more expensive due to deteriorating scoring values. These higher costs will be priced into the credit conditions, which will further weaken the competitiveness of German providers on the global markets.
Many now believe that the end of the tunnel will be reached at some point and that things will start to look up again, as they have in the past. But what these optimists are not yet taking into account in their naive belief: The actual implosion of large parts of the economy is still to come. The situation is worsening from month to month, from week to week and from day to day, and the economy has not yet fully discounted this. The current dislocations mostly just reflect the general decline.
Why is this the case? The impending wave of insolvencies is correlated with poorly designed insolvency law. Insolvency law, which might still have worked in periods of economic good weather, is sending our economy tumbling straight into a perfect storm. Legislators are well aware of the shortcomings of this flawed, interest-driven law — it can hardly be called anything else. During the 2008 financial crisis and again during the coronavirus pandemic, the law was not relied upon and the obligation to file for insolvency was suspended twice by ad hoc decisions. In combination with the European Central Bank’s low interest rate policy, this created economically damaging zombie companies.
Insolvency law may offer a temporary reprieve for an individual company in difficulties. However, all affected creditors — and ultimately the general public — pay the price for the inadequate design of this law. It weakens the equity base of companies and thus reduces the resilience of companies that are still healthy, especially those that will soon also be fighting for survival. As a result, we must prepare ourselves for a loss of prosperity and considerable economic turbulence. It remains questionable whether the generations who are in employment and accustomed to a carefree life will even be able to cope with the challenges ahead.
What is the origin of this inevitable debacle we are facing? Under the aegis of the then Federal Minister of Justice, Herta Däubler-Gmelin, who belongs to the left wing of the SPD, the red-green coalition pushed through a fundamental amendment to the German Civil Code in debt law, which was designed to benefit debtors and came into force on January 1, 2002. There was no significant opposition from the business community, as many people often only become aware of the consequences of insolvency when they themselves are affected. They primarily saw their own advantages — in line with the St. Florian principle “Spare my house, set fire to others” — and not the negative effects on the economy as a whole. The intention to save the jobs of struggling companies was particularly popular with the trade unions and sounded plausible to less economically informed sections of society. Without considering the long-term chain of effects, the bankruptcy code, which had been tried and tested for almost 100 years, was abandoned. Since then, driven by vested interests, new regulations have been regularly introduced in the Insolvency Code to the detriment of creditors.
During the legislative process, it appears that no consideration was given to whether these regulations were compatible with the overarching European legal requirements, nor what far-reaching consequences the amendments could have in a major economic crisis. The socialist-motivated aim was to ensure the continued existence of obsolete business models and their jobs instead of winding up insolvent companies and paying out the proceeds to which creditors were actually entitled. The overarching plan was to reorganize and restructure — but someone had to finance it. In line with the world view of those politically responsible at the time, this role was assigned to the ‘bad’ entrepreneurs, i.e. the previous owners and creditors.
The amendments were particularly welcomed by insolvency administrators and their advisors, who saw the new regulations as giving them greater access to the remaining assets and claims in insolvency cases and an expansion of their business. The legal basis was the considerably tightened right of insolvency administrators to contest claims. Accompanied by the case law of the Federal Court of Justice, which enabled administrators to hold creditors more accountable, the principles of the free and social market economy, personal responsibility and the “polluter pays” principle were virtually undermined — regardless of the long-term consequences for creditors. Today, insolvency challenges can extend to legal acts dating back several years. In some cases, insolvency administrators can even reclaim payments that creditors have already received from their debtors retroactively for up to ten years.
What was the real cornerstone of the German economy’s success? It’s not always the better products — because other countries also offer excellent quality. Toyota builds the more durable cars, and the Italians shine with better marketing and design. So what is the reason for their success? It was the internationally recognized reliability of the German legal system and the unquestionably inviolable existence of property rights. But for ideological reasons, this was recklessly and unnecessarily abandoned. As soon as property rights are even partially axed, a long-term loss of confidence in the rule of law is set in motion. This is a sin against the principle of good faith of the honorable businessman — a sin that will not be forgiven.
This state intervention in the market economy, particularly through insolvency law, will soon prove disastrous for our economy. In this context, British Prime Minister Margaret Thatcher should be quoted: “Socialism only works until it runs out of other people’s money”.
A prime example of misallocations is the Karstadt Quelle insolvency case, the consequences of which still concern us today. The company was sold to Nicolas Berggruen’s hedge fund for a symbolic euro by the insolvency administrator Görg after calculating their fee of 50 million euros — as reported in an article in WELT on October 29, 2012 — with the promise of preserving the department stores. According to the Süddeutsche Zeitung, Koblenz university lecturer and former insolvency judge Professor Hans Haarmeyer criticized the procedure: “Instead of satisfying the creditors in the best possible way, the handling of insolvency proceedings apparently largely only benefits the insolvency administrators and the structures associated with them.”
Ursula von der Leyen, then Federal Minister of Labor and now President of the European Commission, announced this solution as a success in a media-effective television appearance. Nicolas Berggruen, as he himself later admitted in an interview with WELT on 27.09.2024, was overwhelmed by the task and sold the company on to Austrian real estate speculator René Benko, having probably also taken advantage of it. With the new owner Benko, the company went bankrupt again, whereupon the public sector had to step in with taxpayers’ hard-earned money to ensure the company’s continued existence.
More serious in its long-term impact, however, is the ruling of the European Court of Justice (ECJ) of April 22, 2021 (case number C‑73/20 — Oeltrans Befrachtungsgesellschaft), which represents a major setback for the legislator. In a nutshell: In the context of insolvency avoidance, the ECJ ruled that foreign creditors domiciled in an EU member state can invoke the insolvency avoidance law of their home country for reasons of legitimate expectations if the contested payment cannot be contested there. This defense against avoidance claims is particularly effective for Austrian creditors, for example, as in Austria avoidance actions must be filed within one year of the opening of insolvency proceedings. In many cases, the insolvency administrator has not even determined the relevant facts during this period.
This ECJ ruling opens up the possibility for companies with foreign group companies to conduct business transactions via companies in countries where insolvency avoidance law is more advantageous for creditors, particularly if the business partner has an uncertain payment history. This unequal treatment gives large groups additional competitive advantages and is an affront to domestic creditors who cannot benefit from such structuring options.
This anomaly in German law, which allows extended access to services already rendered, is perceived by many as expropriation. As an example, one entrepreneur told us that his company had existed for three generations and employed over 50 people. Compared to his competitors in other European countries, his company was heavily burdened by the highest taxes, levies and energy prices. His competitiveness is on the brink. He was already working at the limit, and the toxic combination of bad debt losses and the additional bloodletting caused by the insolvency proceedings was no longer sustainable for him.
If we extrapolate this situation to the medium term, it means that the economy and our companies will be forced to bear the largest package of losses that has been accumulated in the history of the free and social market economy.
From an overall perspective, this system can only function as long as new creditors can continue to be expropriated by disputing their claims from services already rendered. As soon as the number of solvent creditors stagnates or there are not enough new ones, the entire system threatens to collapse. This would trigger a cascade of subsequent insolvencies, destroy livelihoods, prevent new start-ups and mean the loss of thousands of jobs.
In the medium term, this legal situation will prove to be counterproductive for the business location. After assessing this unpredictable legal situation, which foreign investor will still be prepared to make a major commitment in Germany? Further details and analysis on this topic can be found in our detailed video on insolvency avoidance, which we have linked below.
The Corporate Stabilization and Restructuring Act (StaRUG), which came into force on 1 January 2021, extended the compulsory participation of creditors to out-of-court restructurings. Many distressed companies attempt to restructure themselves with the help of StaRUG or ESUG, or alternatively apply for insolvency under self-administration or in so-called protective shield proceedings. This is financed at the expense of creditors through debt waivers, debt losses and insolvency challenges.
Germany has one of the most expensive insolvency law systems in the world, with one of the longest liquidation periods. When legislators create opportunities to enrich themselves, they are exploited — and that is exactly what has happened. The number of lawyers looking to secure a slice of this lucrative business is growing steadily. Established players can look on with satisfaction while newcomers compete fiercely for the most lucrative insolvency cases at the competent courts.
The amendments to insolvency law introduced by the legislator further exacerbate the already precarious situation of the economy. The existing insolvency law has led the economy as a whole down a bumpy road. The continuation of the law in its current form therefore no longer makes sense.
Although those working in the insolvency sector should actually recognize the possible consequences of their actions, these are ignored. As long as the system works, the existing approach is maintained. People adapt to the circumstances and stick to tried and tested ways of thinking. The economist and chief economist Folker Hellmeyer from Netfonds AG states: “Those responsible for Germany’s decline naturally do not want to experience the consequences of their actions. Perhaps that is why we are currently seeing so much framing to protect their vested interests. But this is neither in the interest of the public nor in the interest of the state, let alone in the interest of democracy”. There is nothing to add to this.
This problem should have been addressed to the responsible federal ministries years ago. The decisions that led to this inevitable catastrophe were made a long time ago by those responsible. The fact is that even if the rudder were to be turned quickly now, Germany as a business location as a whole would be in existential distress. And if the German economy crashes, the consequences will be dramatic — not just for Germany, but for the whole of Europe.
The erosion of capital resources triggered by insolvency avoidance, which is increasingly spreading to more and more subsequent creditors, is causing a financial smouldering fire for many market participants — and initially invisible to the public — that is gradually eating its way through the German economy. The chain of insolvencies continues from company to company, while the fire of the crisis ignites itself again and again. It is foreseeable that this process will ultimately lead to a devastating conflagration that will plunge numerous companies into ruin. It is difficult to determine exactly when the tipping point will come. But one thing is certain: it will come — we just don’t know exactly when yet.
The Federation of German Industries has issued an urgent warning against deindustrialization. Compared to previous crises, there is an imbalance today: companies that are predominantly internationally active can switch to more attractive locations — or have already done so, as the examples of BASF, Miele or Stihl show. This is clearly reflected in the highs of the DAX, as the companies listed there are almost without exception globally positioned. There is a growing divergence from the nationally active companies that still make up the majority of the economy. These companies cannot escape the bloodletting. If fundamental changes are not made soon, this process will be virtually unstoppable.
The nationally active companies are at a completely different level of abstraction. They are examining the few remaining options, as many are now faced with the question of survival. An entrepreneur operating in Germany has to run through various scenarios: Can production still be adapted? Is there unused optimization potential? However, monocausal patterns of action, which were often successful in the past, are only partially effective today. Market cycles behave differently than they used to, and the classic rebound after a market downturn often fails to materialize.
What we are seeing this time is that the current crises are much deeper and more comprehensive than in the past. That is why other, new measures must be taken to meet these challenges.
When the breaking point has been reached and all hope seems lost, companies often have no choice but to close down or relocate. Companies are voting with their feet, because when all the circumstances are weighed up, Germany is neither attractive nor competitive as a business location in the current situation. The exodus and company closures that we are already seeing in many sectors are in full swing. From an overall economic perspective, it is probably already too late to stop this trend.
Mismanagement and payment problems almost always have commercial causes. It therefore stands to reason that these problems should best be solved by merchants themselves — not so much legally, but rather market-oriented. A look back at the example of the Hanseatic merchants could be helpful, for whom it was a matter of honor to settle their affairs among themselves. This is a worthwhile approach that should be considered without any prohibitions. However, this would require completely new structures.
Politicians now have a responsibility to quickly develop sustainable solutions in order to curb the deficits that have arisen in the rule of law. Instead of continuing to repair the completely failed, socialist-influenced amendment to insolvency law, a complete reset would be easier and quicker to implement. The key issue is how to reform the existing structures and better regulate the insolvency administrator sector and the associated advisors. One solution would be to swear insolvency administrators to their independence and conscientious conduct in the proceedings.
The time for economic experiments is over. The fulfillment of legally binding contracts must once again be fully valid until the time of the opening of insolvency proceedings. The discrimination of German creditors within the European Union must finally come to an end. The right to financially undermine companies through insolvency challenges, carried out by insolvency administrators, should be abolished without replacement. A protective mechanism, a cordon sanitaire, should be put in place around insolvent companies to prevent healthy market participants from being further weakened by insolvent companies.
Existing companies must no longer be eroded by a counterproductive insolvency law. Their preservation and capital resources must be protected. A company’s equity is not an end in itself, but is necessary to ensure its continued existence. Companies are the foundation of our economic existence, as they generate the entire tax revenue. Many believe that the state will step in if things go badly. However, the state can only distribute what it has previously collected in taxes.
In the interests of the common good, it must be recognized that the limits of insolvency law have been exceeded. It is time to overcome the class war and to strengthen and protect the continued existence of the remaining companies. This can only be achieved through an immediate realignment of insolvency law.
Protection against insolvency avoidance — act strategically, avoid losses
Insolvency avoidance pursuant to sections 129 et seq.InsO is a sharp sword for insolvency administrators — and an incalculable risk for creditors. Even claims that have long since been settled can be reclaimed retrospectively — with direct consequences for your liquidity and planning security.
Our recommendation:
Protect yourself before it’s too late.
Agree insolvency-proof collateral: Retention of title, assignments or contractually agreed pledges of rights protect your claims.
Initiate realization measures at an early stage: Make consistent use of your rights — e.g. by publicly auctioning off pledged goods.
Take warning signals seriously: Payment delays, installment agreements or out-of-court restructuring attempts indicate impending insolvency — react strategically.
Keep complete documentation: Clear payment agreements, neutral correspondence and evidence-proof bookkeeping make it more difficult to challenge the transaction at a later date.
Conclusion:
If you act in good time, you minimize the risk — and secure your claims before they are lost in the insolvency estate.
Are you affected by an insolvency challenge?
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Please also contact us if you have a specific case for a public auction: To the contact form
Video: Time bomb insolvency avoidance
Book recommendations: Friedrich A. Hayek “The Road to Serfdom”: https://amzn.eu/d/hZzCbR4
Carlos A. Gebauer “Warning against servitude”: https://amzn.eu/d/d3tuhuV
Ludwig Erhard “Prosperity for all”: https://amzn.eu/d/jm3szUK
