Debt Collection in Germany

• Domestic firms payment behavior is good and the courts are efficient in delivering timely decisions but professional pre-legal negotiation efforts remain the most effective means of debt collection.

• The aim of the insolvency proceedings in Germany was for a long time to realize the debtor's assets in order to repay the creditor's debt.

• Consequently, liquidation has remained the default procedure in practice and the system does not provide genuine support to unsecured creditors when it comes to debt collection from insolvent debtors.

‍

1. Summary

1.1. General financial information

1.1.1. Access to financial reports on German companies has increased since the implementation of corporate reporting requirements in 2007. Both limited liability firms may file at the company's corporate offices with the state court's Commercial File but this is not compulsory for a small business run by a private individual or through a civil law agreement.

1.2. Key legal structures

1.2.1. Company debt responsibility is defined by legal structures that are listed as follows:

• Businesses that need a business structure can be formed by different corporate frameworks. Sole proprietorships (Einzelunternehmen) are tailored to sole owners who are fully liable for the company's obligations and may be applied to Civil Law Partnerships (Gesellschaft des bürgerlichen Rechts, GbR), in which the partners are unlimitedly liable.

• Larger companies may also be organized by General Partnerships (Offene Handelsgesellschaft, OHG) which require partners to cooperate without restricting their liability, while Limited Partnerships (KG) allow non-managing partners (only liable for their contribution) to discriminate between directors (fully liable).

• Limited liability firms (Gesellschaft mit beschrankter Haftung, GmbH) are also commonly used (minimum capital obligation of EUR 25,000, partner responsibility limited to their contribution) although it is easier to set up Entrepreneurial Firms with Limited Liability (Unternehmergesellschaft, UG) (minimum capital is EUR 1).

• Joint-Stock Companies (Aktiengesellschaft) form the ideal legal structure for large enterprises (minimum capital of EUR 50,000, restricted liability).

1.2.2. In reality, foreign investors that tend to rely on limited liability arrangements are increasingly used by corporations, trusts, mutual firms and business associations. It should also be remembered that foreign entities that maintain recognized branch offices or offices of representatives.

1.3. Regulatory framework

1.3.1. As a general rule, business disputes fall within the jurisdiction of District Courts in Germany. A particular District Court's liability depends on the amount reported. Payment based legal proceedings over undisputed debts was conducted by the Mahngericht (Court of Payment Order). In practice the amount of the claim defines the court in question.

2. Receiving payments

2.1. DSO - Days Sales Outstanding

German businesses' payment behaviour is strong-with the average DSO at 53 days in 2016-and, generally speaking, quick periods may be clarified by a propensity to focus on manufacturer credit rather than bank loans. German partners as a general rule seek to preserve their credit history and thus prevent late payments.

2.2. Late interests

2.2.1. According to German law the core principle is that the debtor must compensate and/or reimburse the damages caused by the late payment to the creditor, however late with payments.

2.2.2. Consequently, the Recast Directive 2011/7/EU which stipulates that payments must be made in the EU within 60 days was transposed into domestic law. However the domestic laws are more strict than the standards of the EU.

2.2.3. As a general rule it is necessary to pay for business-to-business transactions as specified in the contract. Therefore, the receivable would be due forthwith. Early interest on the loan may be asserted as long as the debt is overdue. Late payment interest rates may be negotiated contractually or decided by the regulation, plus 9 percentage points, measured from the base rate established by the ECB.

‍

‍

‍

‍

‍

‍
‍

‍

2.3. Costs of debt collection

2.3.1. In fact, the Civil Code (Bürgerliches Gesetzbuch, chapters 280 to 286) requires payment of a restitution sum (Verzugsschadensersatz) for the damage caused to the claimant and covering the cost of processing. Throughout Germany, there is a long-lasting legal tradition here. The law is actually more favorable when it comes to late payment than the recently introduced EU allowances. Whether or not outstanding debts are charged is a question of dispute in action, which depends on recovery experts.

2.4. Protecting ownership

2.4.1. German law requires the parties to a deal to decide on how possession should be passed: in principle, assets would first be sold and properties of the products would only be transferred to the seller once the total cost is charged. Hence very detailed regulations on conservation of title (RoT) are common.

2.4.2. Unlike many other countries, ownership retention clauses in Germany do not merely retain property over goods as long as they remain clearly identifiable: ownership may be retained as long as all debts are not paid for, even though the debtor may have transformed the goods(' Lengthened RoT,' verlängerter Eigentumsvorbehalt) and sold the final product to a third party(' all monies' or'' It is crucial that the parties have agreed on these terms clearly before the goods are delivered.

2.5. Payments

2.5.1. The most common methods of payment are as follows:

• Sepa bank transfers (Überweisung) and direct debit in Germany are very common means of payment. Traditionally, there have been two types of direct debit: the' Einzugsermächtigung' (replaced in February 2014 by the Sepa Direct Debit Core Scheme) or the' Abbuchungsverfahren' (replaced in February 2014 by Sepa Direct Debit B2B).

• The down payments and early payment incentives are fairly common. Exchange bills are becoming uncommon and often viewed as a lack of confidence, although checks are revocable if not sent to the bank within eight days, but both are called debt identification titles and would give access to streamlined procedures. Asking for bank guarantees usually implies a lack of trust but corporate guarantees are typically provided by holding companies.

3. Collecting payments

3.1. Amicable action

3.1.1. It is best to first explore comfortable mediation options as an option to formal litigation, while German courts are competent and relatively effective.

3.1.2. Until launching legal proceedings against a debtor, asset appraisal is critical as it requires assurance of whether the business is still successful and whether chances of recovery are at best. Therefore, it is important to be mindful of the solvency condition of the debtor: once insolvency proceedings have been started, payment of a loan will indeed become unlikely.

3.1.3. Since the 2002 Civil Procedure Reforms, it has become a prerequisite for formal judicial proceedings to enter into conciliation or mediation in order to reach a compromise and the courts tend to request proof that a mediation phase was undertaken before considering the claim any further. As a consequence, most German debtors agreements conclude with a typically valued agreeable arrangement (which may include a payment instalment or debt write-off).

3.2. Legal proceedings

3.2.1. Ordinary proceedings. German investors will depend on fast-track payment order procedures (Mahnbescheid) before the Payment Order Court (Mahngericht) where the obligation is certain and undisputed –if the debtor's properties are traceable.

3.2.2. This is a quick, efficient and cost-effective way to get an enforcement order (Vollstreckungsbescheid) within a matter of weeks, as the procedure is becoming increasingly automated. The debtor will respond within two weeks in each situation (i.e., settle his debts or challenge the Order). Nonetheless, any response posed by the claimant leads to a routine legal action to resolve the dispute.

3.2.3. A belated resistance to the implementation order would be viewed as an opposition. Therefore, in reality, any review process will escalate uncertainties and expenses so a borrower should always move as quickly as possible and allow a compliance order to be made.

3.2.4. If the amicable process fails or if the debtor challenges the allegation, then there remains the right to take ordinary legal action (klageverfahren). Proceedings will usually begin once the debtor's summons has been issued.

3.2.5. The courts also arrange oral hearings (Früher Erster Termin) and formal trials (Schriftliches Vorverfahren) for review of the arguments put forward by the parties. When mentioned earlier, when part of those hearings, the court would also attempt to set up a conciliation process (Güteverhandlung). The primary trial would then be conducted in order to allow the court to make a decision.

3.2.6. In addition, a European Payment Order mechanism which enables the recovery of undisputed debts (under Regulation EC No 1896/2006) may be activated when the debtor entity has assets in other EU Member States.

3.2.7. Required documents:

• Payable invoices and payment notices
• Power of attorney
• Correspondence between the two parties
• The debtor's bank account, where specified (for further recovery of bank accounts)
• Other documentation such as transaction confirmations, all relevant facts about the debtor's capital/state, arrangements and general terms and conditions as signed by the debtor.

3.2.8. Time limits. The general legislative limitation period (Verjährungsfristen) in Germany is three years, starting at the end of the year in which the lawsuit occurred or in which the claimant is aware of the circumstances giving rise to the claim (subjective constraint). Numerous exceptions can apply, such as claims for transport which take place within one year from the delivery of the products. Different measures could help preserve the rights of the requesting party awaiting a final and enforceable judgment; furthermore, they would not be used in selection proceedings.

3.2.9. Appeal lodging. If the argument reaches EUR 600 the losing party is allowed to lodge an appeal against the ruling of the first instance before the next higher District Court. Then a second decision will be made. Second-instance rulings may also be challenged, but consideration by the Federal Supreme Court (Bundesgerichtshof) would be restricted to issues of legal interpretation or practice and would be limited to cases that legal uniformity is concerned.

3.2.10. Enforcing court decisions. Once a judgment is final, compliance can begin. If the debtor fails to satisfy the verdict, court rulings require bank accounts to be closed or properties to be confiscated and sold (Zwangsversteigerung). When released, a local bailiff attached to the District Court will be ordered to execute the writ and proceed accordingly after payment of a charge (auction of the debtor's estate or garnishment for third party payment, etc.). It may also be necessary to grant fine fees.

3.2.11. The duration of a judicial action. The period for a court order varies depending on the process, the jurisdiction and the nature of the dispute, but ordinary trials may take from three months to a year, whereas cases brought before the Federal Supreme Court (Bundesgerichtshof) may take up to six years. Enforcement (which relies on bailiffs ' availability) will vary from 10 weeks to 10 months.

3.2.12. The costs of the procedure. When mentioned previously, the successful party may require that the losing party pay part of its court fees and legal costs. Therefore, expenses resulting from civil actions may be regarded as a default liability and paid to the debtor. It is important to clarify in the Letter of Request and in writing of summons that the debtor must cover the pending expenses.

3.2.13. Conditional contracts where lawyers are not paid up front but earn a fixed amount after performance (i.e.' no-win-no-fee') are not approved, so defined legal fees would be regulated by law. In addition, the legislation applied to payments for lawyers (RVG, Rechtsanwaltsvergütungsgesetz) also extends to collection agencies (RDG, Rechtsdienstleistungsgesetz), which ensures that the borrower can be given domestic collection services at a significantly lower cost than in other nations.

4. Managing insolvent debtors

4.1. Insolvency in Germany

4.1.1. A debtor is required by law to file a petition for insolvency proceedings within three weeks of the day the corporation becomes un-liquid or over-indebted.

4.1.2. The main purpose in insolvency proceedings (Insolvenzverfahren) in Germany was for a long time to understand the debt by liquidating the debtor's estate. Instead of establishing a rescue community and helping sustainable businesses with acute challenges, recovery methods are gradually depending on.

4.2. Insolvency proceedings

4.2.1. Out-of-Court proceedings. The debtors can begin secret early out-of-Court proceedings instead of going to court. The debtors may indeed seek to renegotiate their debts with their creditors without having first secured a standstill arrangement from their financial partners. It helps protect debtors against demands for early payment but the process is also in the benefit of borrowers as it can be quicker and appears to be less costly than structured insolvency.

4.2.2. Debt restructuring. Recent changes (based on US Chapter 11) have provided major incentives for consolidation and recapitalization of distressed companies. Nevertheless, successful consolidation emerged as a target in 2008 and indicates that' the aim of the[ German Law] reform is to contribute to a stable business that will not fall back into insolvency in the face of minor financial problems.

4.2.3. Insolvency Act (Insolvenzordnung "InsO"), revised in 2012, regulates reorganization proceedings. After a petition lodged before the Insolvency Court (Insolvenzgericht) on the grounds of illiquidity, impending illiquidity or over-indebtedness, the court may open preliminary insolvency proceedings (appointment of a preliminary administrator, preliminary creditors ' committee) aimed at examining the chances of the company being restructured.

4.2.4. If the court authorizes the process of recovery, it initiates legal hearings and nominates a trustee responsible for maintaining the debtor's enterprise and retaining its properties. The chance is granted to a creditors' conference (Gläubigerversammlung) to create a distribution list and to prepare an insolvency timetable (Insolvenztabelle).

4.2.5. So long as the company has not run out of cash, the law allows the debtor to apply for a suspension (Schutzschirmverfahren) that protects the corporation from any creditor acts or shareholder orders. Thus the claimant stays in charge and may even request that a guardian monitor their acts. The permission of the Gläubigerausschuss (Creditors ' Committee) must however be received by the judge to confirm the process. It should be remembered that through an insolvency scheme, the amended Act provides an opportunity to compel a debt-equity-exchange against existing shareholders.

4.2.6. Alternatively, self-administration (Eigenverwaltung) requires the directors to stay in management's hands when working out insolvency under the oversight of a monitor (Sachwalter), insolvency judge, creditors ' committee and creditors ' conference. Self-administration seems to be increasingly being used, notably with a view to simplifying processes affecting large groups of organizations and preventing having to face several administrators (one for each entity), but management specialists generally manage instead of managers. The administrator/supervisor or management can decide to follow the liquidation process (Regelverfahren) or develop and implement an insolvency plan (Insolvenzplan) with the creditors in both procedures.

4.2.7. Winding up proceedings. Liquidation proceedings have long been known as the primary insolvency action and can be launched on the petition of either the claimant or the borrower, so that the debtor is unable to pay their obligations when they fall due. Once the debtor's insolvency condition has been recognised by the court through a liquidation order, investors are required to file their claims with the liquidation administrator within three months of the issuance. Then the administrator is responsible for verifying the admissibility of the different claims, before supervising the sale of the debtor's assets and distributing the proceeds to the different creditors. The company in insolvency would be deleted from the register once the liquidation proceedings are finished.

4.2.8. Priority rules. The priority rules apply when the proceeds from the sale of the debtor's estate are allocated. Both protected statements rate similarly, but would gain preference over subordinate and inferior claims. Creditors retain preference status if a Retention of Title provision contains covered receivables. Claims relating to employees do not enjoy priority status.

4.2.9. Cancelation of suspicious transactions. Under Sections 129 to 146 of the Insolvency Act, reorganization and insolvency managers are allowed to revoke any actions taken by the insolvent corporation to the detriment of shareholders, given that those actions were taken within a' suspicious duration' spanning from three months to ten years prior to the insolvency petition.

4.2.10. Duration of insolvency process. Insolvency litigation will take four to seven years.

4.2.11. Necessary records:

• Both invoices and shipping notices
• Complete list of products
• General Terms and Conditions if the products were shipped under property reservation (RoP).
• Power of Attorney.