Requirement to substantiate German debtor's illiquidity remains high

Where a creditor believes that a debtor is insolvent, any “third-party application” that it makes for the insolvency of the debtor must be well substantiated. 

Decision 

The District Court of Hamburg recently considered an application for insolvency on grounds of illiquidity due to default in social security contributions.

A landmark decision of the German Federal Court (13 June 2006 – IX ZB 238/05) held that the illiquidity of a company could be assumed where it was in default for more than six months of social security contributions. 

The District Court of Hamburg, however, rejected the application for insolvency by a social insurance agency on grounds that the debtor had not made its obligatory social security contributions for the last six months. 

The District Court reasoned that social insurance agencies were obliged to substantiate the grounds for insolvency. Evidence of outstanding payments to an “institutional creditor” was not sufficient to meet these substantiation requirements. The District Court indicated that further enforcement measures to recover the debt should have been attempted.

Key takeaways

The German Courts of appeal do not automatically follow decisions of the German Federal Court. 

The requirement to substantiate the insolvency of a debtor remains high even where there are outstanding social security contributions. Creditors should not assume insolvency but should attempt enforcement measures before considering a “third-party” insolvency application, especially if, as in this case, the debtor’s business is still trading. 

Find out more

To discuss the issues raised in this article in more detail, please contact a member of our Restructuring & insolvency team.

(District Court of Hamburg (LG Beschluss), 27.07.2023 - 326 T 19/23).

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