Insolvency Tourism. Private and corporate debt relief through insolvency proceedings in the U.K. and Germany

Essay, 2013

22 Pages, Grade: 1,3



1 Introduction: insolvency proceedings in Germany
1.1 Problem definition: debt relief for individuals
1.2 Objectives and methodology: insolvency tourism into the U.K

2 Insolvency due to mismanagement of the business
2.1 Reasons for insolvency, imminent illiquidity, and indebtedness
2.2 Missed opportunities of extrajudicial restructuring

3 Judicial insolvency proceedings in Germany
3.1 General preconditions
3.2 Types of insolvency proceedings
3.3 Transfer of liabilities
3.4 Debt relief in Germany

4 Debt relief order in the U.K
4.1 Preconditions for insolvency tourism
4.2 Advantages and disadvantages of insolvency tourism

5 Summary and conclusion

Integral Total Management Checklist

List of literature

1 Introduction: insolvency proceedings in Germany

Germany has a particular, uniform regulation for insolvency of natural and juristic persons, which is also realized similarly in other countries all over the world. Such regulations by law shall prevent an avalanche effect of single insolvent debtors affecting their creditors, who, furthermore, could again damage their creditors, causing a ripple effect throughout an economy. Thus, if governments provided no insolvency regulation at all, insolvency could lead to a deterioration of entire business networks, and thus, damages the whole economy. Hence, without any regulation, insolvency could result in mass poverty arising from usual economic dependencies and business relations.[1]

The risk of global economic impacts by insolvency chiefly developed from the differentiation of business relations: at the end of the 19th century, the German economy boomed due to rapid industrial expansion. Many new companies were founded within this period and could share different markets. However, phases of stagnation and recession followed the economic expansion, and hence, decrease in demand and supply led to unprofitability of companies, whereas many of them yielded liquidity crises and became insolvent. As a result, the legislator implemented a protection of creditors and society by insolvency regulations. From then on, the so called "Konkursordnung" and "Vergleichsordnung" in Germany and later on "Gesamtvollstreckungsordnung" of the German Democratic Republic inhibited the mentioned economic avalanche effects. Since 1999, those different regulations were merged to the current uniform, nationalwide "Insolvenzordnung" which, additionally, gives better chances to the insolvent parties as well.[1] , [2]

Although the collective settlement of the creditors’ claims is the focus of the insolvency regulation, debt relief of insolvent debtors is an attractive characteristic, especially for the insolvent debtors.[3] Following a certain obligation time, debt relief gives insolvent debtors a chance to take part in businesses again, to be productive, and to contribute to progress and the gross national product. Thus, the insolvency regulation is justified due to economic reasons. However, the debt relief has been discussed controversially, since it could also motivate the unreasonable use of debts. Whenever natural persons are directly liable and their personal assets are at risk, due diligence might be conducted more duteously and debts are only claimed in case they can be payed back. By contrast, insolvency, imminent illiquidity, or indebtedness[4] might be promoted even more due to the second chance by debt relief. Moreover, a current trend of insolvency tourism indicates the attractiveness of the debt relief implementation. Since the process of debt relief takes a relatively long time in Germany, different agencies even advertise to order debt relief in the U.K., where the relief process only lasts one year.[1] , [3] , [5]

The present assignment introduces the basics, which facilitate insolvency tourism, and deals with the issue of its applicability to juristic persons.

1.1 Problem definition: debt relief for individuals

Debt relief is reserved to natural persons alone.[6] Contrarily, juristic persons can only get liquidated and completely depleted, if their assets cannot cover all debt claims, therefore, their debt relief is not necessary. Furthermore, "Personengesellschaften", so called private companies without legal personality, are separately treated within the insolvency regulation, and first of all, their assets are regarded as detached from the personal assets of the associate shareholders as well.[7] Corporate debt relief is not regulated by law explicitly, and in respect to corporate insolvency, debt relief and insolvency tourism into the U.K. seems to be only attractive for freelancers and petty traders. However, insolvency regulation allows within the ordinary insolvency proceedings that the insolvency administrator covers liabilities of companies without legal personality also by private assets of the shareholders.[8] , [9] Additionally, the existence of a legal personality does not protect shareholders to be personally liable for the debts: in case that delays in filing for insolvency or other offenses can be proven, the privilege of liability limitations of companies with legal personality is no longer valid within the insolvency proceedings, quite apart from being criminally prosecutable.[10] , [11] In all those situations, debt relief becomes applicable again, thus, corporate debt relief could be seen as implied when liabilities are transferred to managers as natural persons.

Debt relief in Germany takes six years of controlled finances against an assigned trustee, before the debts are abated.[12] Under certain conditions it is possible to reduce the time of fulfilling obligations to one year due to filing for debt relief in the U.K.[13] The increasing insolvency tourism for the U.K. is based on its attractive regulations, on the short obligation time, but also on the increasing number of insolvency acts in Germany. The amount of corporate insolvency acts increased by approximately 22 % from 1999 to 2001, whereas the absolute number increased over the past three years in general.[14] From 2000 to 2009 around 30,000 insolvency acts were ordered per year in Germany,[15] which is 5 % of company foundations per year.[16] Similar trends are observed for private insolvencies: from 2000 to 2009 the amount increased from below 20,000 up to more than 110,000 private insolvencies.[17] The increasing numbers of taking the service of private insolvency, even insolvency tourism and the debt relief in the U.K., is mostly based on the mismanagement of the business and its escalation, resulting in insolvency, imminent illiquidity, or indebtedness.

1.2 Objectives and methodology: insolvency tourism into the U.K.

The development of insolvency tourism has attracted increasing interest which is why this trend is viewed from two sides as follows: firstly, the legal and political grounds enable debt relief abroad, and thus, permit insolvency tourism; secondly, insolvency regulations of the U.K. offer certain attractive conditions to individuals within a private insolvency. In particular, differences between insolvency regulations of Germany and the U.K. are treated, distinguishing between the simplified private insolvency, including debt relief, and the corporate ordinary insolvency without debt relief. Hence, reasons for insolvency tourism are discussed, and requirements and consequences of British debt relief are introduced, since they become increasingly advertised and applied. This discussion includes the preceding explanation, in which case the partners and shareholders of companies with or without legal personality have to expect the transfer of the corporate liabilities to their own as a natural person.[8] , [9] , [10] , [11] Secondary literature research is the basis of this present work, predominantly dealing with the German "Insolvenzordnung" [9] to describe regulations for corporate and private insolvency proceedings.

Insolvency, imminent illiquidity, or indebtedness[4] are the requirements for filing for insolvency and for applying for judicial proceedings which offers the possibility to request for debt relief.[6] Thus, filing for insolvency is the last resort which supports to restructure the business or to reach a final settlement. Beforehand, crucial failures and mismanagement of the business must have occurred to run down the business. Reasons for becoming insolvent are explained at first to gain insights about the scope of failures possible.

2 Insolvency due to mismanagement of the business

Debt relief, which can be ordered within the filing for insolvency, is reserved to natural persons to offer them new chances for a life without debts. The filing for insolvency requires that the applicant is insolvent, imminently illiquid, or indebted. This is the worst state of affairs and unlikely to be preferred by anybody. However, especially private insolvencies occur increasingly frequent with numbers exceeding corporate insolvencies by a factor of more than three times recently.[16] , [17] These differences indicate that private insolvency arises from nescience and the inability to deal with private assets and finances competently compared to managers of larger businesses. But managers can get into such unpleasant business situations as well by nescience, inexperience, and inability. Freelancers and petty traders can mismanage their business, resulting in private insolvency, whereas, furthermore, managers of bodies corporate can also be held responsible and liable for the corporate insolvency, thus, ending in private insolvency as well. Apart from this special case concerning managers of juristic persons: private households, freelancers, and petty traders have the same possibilities to end up in crises. Hence, reasons for insolvency are similar in all those cases and are introduced in the following subsections dealing with mistreated deviations, problems, and crises in order to understand, why such a regulation by law is indispensable.

2.1 Reasons for insolvency, imminent illiquidity, and indebtedness

Business deviations from planned or desired goals and expectations can turn to problems, and finally, to crises in which the existence of a business is endangered. Those negative influences can either appear suddenly with a high impact or are noticed too late or are treated with the wrong measures and thus, insolvency, imminent illiquidity, and indebtedness is inevitable. In what follows, reasons for deviations shall be described.

Various internal and external, destructive factors can cause unprofitability over a long period of time. Unprofitability leads to liquidity problems, and, finally, to the actual inability to pay current bills and liabilities. New money injections may keep the business alive, but debts grow excessively. Usually, the compensation of additional expenditures increases the debt-to-equity ratio which induces banks and other creditors to claim for more securities. Hence, the business enters a vicious circle: loss of money due to times of crises leads to bad rating, thus, bad chances to get new credits.

External influences can be the result of changes in the economy: changes of the respective markets influence prices and costs and the demand for one’s own products and services, customers’ behavior changes, or distributors disappear. Nature can also have a high impact on business: natural disasters or catastrophes can cause unexpected expenses to which the business has to be adjusted accordingly.[18] , [19]

Managers often use economic influences and their side effects to justify or cover their own failures and deficiencies. This shifting of blame serves as a psychological self-protection, not admitting one’s own failures in decision making and insufficient preparation that leads to a belated managing of the crisis, followed by the failure of the business. Besides intentionally ignoring, not recognizing destructive business developments is based on inexperience and insecurities of managers, failing in decision-making and their leadership. Risky investments, illness of executive managers, and the absence of control, but also pure mistakes in calculation, or the urge and pressure to expand the company may lead to instabilities. Missing delegation of day-to-day business, missing coordination of operation procedures, and missing optimal structures for work organization are some lacks of management promoting insolvency, imminent illiquidity, and indebtedness.[18] , [20] , [21]

An untreated, negative course of business can appear on different levels: unrecognized deviations become problems, which usually first lead to strategy crises, afterwards to profit crises, and finally, to liquidity crises. In more detail, profits decrease by failures in strategy until all resources are depleted, and thus, liquidity decreases until insolvency is reached and current bills and liabilities cannot be paid. Exceptions of this usual sequence can occur, for instance, due to economic disasters and natural catastrophes, directly ending in liquidity crises.[20] , [22] , [23]


[1] cf. Bork (2012), see InsO [9], pp. IX - XXI

[2] cf. Henckel (2004) [6], pp. 1 - 4

[3] cf. InsO (2012) [9], §§286 - 303

[4] cf. InsO (2012) [9], §§17 - 19

[5] cf. 1986 c. 45 (1986) [3], Part VII A

[6] cf. InsO (2012) [9], §286

[7] cf. InsO (2012) [9], §11 Para. 1

[8] cf. InsO (2012) [9], §93

[9] cf. HGB (2012) [7], §171 Para. 2

[10] cf. StGB (2012) [12], §283

[11] cf. BGB (2012) [1], §823

[12] cf. InsO (2012) [9], §287

[13] cf. 1986 c. 45 (1986) [3], s. 251H

[14] cf. Seefelder (2003) [11], p. 3

[15] cf. Berger (2009)

[16], Restrukturierungsstudie Deutschland

[16] cf. Destatis (2012)

[17], Pressemitteilung Statistisches Bundesamt [17] cf. Bürgel (2012) [22], Studie Schuldenbarometer

[18] cf. Vance (2010) [13], pp. 1 - 3

[19] cf. Seefelder (2003) [11], pp. 63 - 81

[20] cf. Vance (2010) [13], pp. 35 - 39

[21] cf. Seefelder (2003) [11], pp. 54 - 55

[22] cf. Blatz (2003) [2], p. 4

[23] cf. Seefelder (2003) [11], pp. 57 - 59

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Insolvency Tourism. Private and corporate debt relief through insolvency proceedings in the U.K. and Germany
The FOM University of Applied Sciences, Hamburg  (FOM Berlin)
International Investment and Controlling
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insolvency, debt relief, insolvency tourism, insolvency proceedings in the U.K. and Germany
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Benjamin Klasczyk (Author), 2013, Insolvency Tourism. Private and corporate debt relief through insolvency proceedings in the U.K. and Germany, Munich, GRIN Verlag,


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