ROUNDTABLE. Investigating the Affairs of an Insolvent Debtor Balancing Duties, Powers and Responsibilities of Insolvency Administrators German View

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1 FRANKFURT AM MAIN LEIPZIG BERLIN KARLSRUHE BAD CAMBERG DRESDEN HANNOVER LIMBURG BONN MÜNCHEN STUTTGART MANNHEIM HAMBURG MAILAND ZÜRICH LONDON AMSTERDAM ROUNDTABLE Investigating the Affairs of an Insolvent Debtor Balancing Duties, Powers and Responsibilities of Insolvency Administrators German View Daniel F. Fritz Attorney at Law, Insolvency Administrator Partner HERMANN RAe WP StB Frankfurt am Main Moscow, February

2 Overview: 1. Duties of the Debtor (Director) in providing full picture of the state of affairs of the debtor 2. Obtaining information from third parties and official bodies Remark: Articles quoted herein are part of the German Insolvency Code Insolvenzordnung of Hereinafter referred to as InsO. 2

3 1. Duties of the Debtor (Director) in providing full picture of the state of affairs of the debtor What is the Duty of the Debtor (Director)? The debtor shall assist the administrator in the performance of all his duties. (Sec. 97 II InsO) The debtor shall disclose all information regarding matters relevant to the insolvency proceedings. (Sec. 97 I InsO) Privilege against criminal prosecution: He shall also disclose any facts that may result in a criminal prosecution for the commission of a criminal offence. However, any information disclosed by the debtor under his obligation may not be used against him or any of his relatives. (Sec. 97 I InsO) Current and past officers: These duties apply to members of the debtor's board with representation or supervisory authority. The duties also apply respectively to persons who resigned from such position no earlier than two years before insolvency petition was filed. (Sec. 101 InsO) 3

4 1. Duties of the Debtor (Director) in providing full picture of the state of affairs of the debtor What can will the administrator do when information is not provided or incomplete? If the director is not cooperative the administrator can ask the court for the following orders: Cooperation: - Debtor shall make himself available any time in order to perform his obligations of disclosure and co-operation or shall refrain from actions which may inhibit the performance of such duties Mail redirection - Upon request of the administrator the court shall order the redirection of specific parts or the entire mail (including and telecopies) of the debtor to the administrator. 4

5 1. Duties of the Debtor (Director) in providing full picture of the state of affairs of the debtor What is the role of the courts? Hearing before mail redirection Mail redirection is affecting the constitutional right of postal freedom. Therefore only possible after a hearing, unless such a hearing might endanger the purpose sought by the order due to special circumstances. (Sec. 99 InsO) Request of Affidavit Court can order debtor to provide an affidavit that he has provided the information required to his best knowledge, correct and with complete details. Imprisonment The insolvency court may subpoena the debtor and even order him to be detained after granting him a hearing - if the debtor refuses to disclose information, to provide an affidavit or to cooperate; - if the debtor attempts to evade the fulfilment of his duties to disclose and cooperate, in particular by preparing to abscond, or; - if such subpoena and detainment are necessary, in particular to secure the insolvency estate. (Sec. 98 InsO) 5

6 1. Duties of the Debtor (Director) in providing full picture of the state of affairs of the debtor What is the role of the creditors? Individual Creditor - Individual creditors have no special rights under German insolvency law to receive information from the debtor. They are only entitled to inspect the files of the courts. The administrator can however ask the court to handle certain information as restricted, if an inspection by individual creditors would harm the objectives of the insolvency proceedings. Creditors Assembly - The court may order the debtor to provide the same information owed to the administrator to creditors assembly. Creditors Committee If a creditors committee has been elected it has the same information rights towards the debtor like the administrator. 6

7 2. Obtaining information from third parties and official bodies What are the powers of an administrator towards third parties? Sec. 80 InsO Upon the institution of insolvency proceedings, the debtor's right to administer and dispose the property belonging to the insolvency estate shall be vested in the insolvency administrator. Consequence The administrator has the same rights towards parties that have been doing business with the debtor prior to the institution of proceedings like the debtor himself. Therefore, the administrator can - request banks to provide information, e.g. regarding bank accounts - request auditors to provide information, e.g. documents received while performing an audit - request from any other party that has entered into a contractual relationship with the debtor to provide information regarding the contract or certain transactions. 7

8 2. Obtaining information from third parties and official bodies Cooperation with state authorities and obtaining financial information - There are no special rules available regarding the relationship between an administrator and official bodies. - From the perspective of German tax law the administrator is regarded as a fiduciary trustee of the estate (Sec. 34 AO General Federal Tax Code) - Therefore, the administrator as the successor of the debtor regarding the insolvency estate can request all information from official bodies related to the insolvency estate like the debtor himself. - There are numerous cases where official bodies and administrators have cooperated to the benefit of all creditors and the official bodies as individual creditors. 8

9 2. Obtaining information from third parties and official bodies Role of the courts in obtaining information from third parties and official bodies - Within the framework of insolvency proceedings the insolvency court has no special power regarding third parties. - If third parties do not fulfil their information obligations the administrator has to initiate court proceedings before the regular civil or administrative courts. 9

10 2. Obtaining information from third parties and official bodies Difference in ways of obtaining information by an administrator in the liquidation and observation procedures German law only distinguishes between preliminary proceedings regular proceedings preliminary administrator insolvency administrator Once an insolvency petition has been filed the court appoints an expert to evaluate if the debtor is insolvent and whether there are sufficient funds available to cover the costs of the proceedings. If the expert finds it necessary to secure the assets he can ask the court to order preliminary proceedings. In particular the court will impose a general prohibition of disposal against the debtor and will allow the preliminary administrator to inspect the debtor's premises and books. In such preliminary proceedings the debtor has the same information duties as within the regular proceedings. However, the administrator is not yet the successor of the debtor with regard to the estate and can therefore at this stage only enforce information from the debtor and not from any third party. But of course the preliminary administrator can request such information from third parties and creditors. 10