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Security Interests in Insolvency Proceedings

It is important to note at the outset that all rights of enforcement and repossession, as set out above, may be suspended or precluded under German insolvency laws.

In the context of secured financings, creditors holding a security interest in a moveable asset forming part of the debtor’s insolvency estate will in most cases not be able to obtain possession of the asset. Instead, they will have to rely on the insolvency administrator’s sale of the asset and the preferential disbursement of the proceeds therefrom (Absonderungsrecht).10 This also applies in case of a security transfer of ownership although - as outlined above - this is a full transfer in rem. Against this background it is evident that, at present, German insolvency law deviates from the remedies on insolvency pursuant to the Aircraft, Rail and Space Assets Protocols which rest upon the idea that secured creditors ultimately are given possession of the collateral.

As a general rule, the insolvency administrator will take possession of the debtor’s assets and proceed to liquidate them for the benefit of all of the debtor’s creditors. Although a secured creditor enjoys a priority claim over unsecured creditors in relation to the proceeds from those assets in which it was granted a security interest, this claim will be subordinated to the insolvency administrator’s costs for ascertainment and utilization of the assets.11 The costs for ascertainment of an asset are set by statute at 4 % of the utilization proceeds therefrom while the costs for the utilization of an asset will usually amount to 5 % of the utilization proceeds.12 If the utilization entails the insolvency estate incurring VAT (currently at 19 %), this amount will also be added and in total 28 % of the utilization proceeds will be deducted prior to the remainder of the proceeds being disbursed to the secured creditor. Creditors holding mortgages in aircraft (which in many respects are treated as real estate for legal purposes in Germany) will be entitled to preferential disbursement (Absonderungsrecht) under the above-mentioned Act Governing Auctions and Sequestrations (Gesetz ttber die Zwangsversteigerung und die Zwangsverwaltung).

As far as leasing agreements are concerned, the insolvency administrator in most cases can choose whether or not to continue a lease.13 The lessor may demand from the insolvency administrator to make a decision without undue delay as regards the continuation of the lease. In the past, courts have granted a consideration period of up to 3 months to the insolvency administrator. If the insolvency administrator decides to continue the lease, all of the insolvent lessee’s obligations under the lease stay in full force and effect and - going forward - have to be borne by the insolvency estate with priority. In contrast, if the insolvency administrator decides not to continue the lease, the lessor is entitled to claim the separation (Aussonderung) and [1] [2] [3] [4]

return of the lease object from the lessee’s insolvency estate.[5] What is more, if the insolvency administrator does not live up to this obligation, the lessor could initiate proceedings against the insolvency administrator for the delivery of the possession of the lease object.

Finally, lease agreements concerning aircraft (which - as mentioned above - German law in many respects regards as real estate) remain in place in case of the lessee’s insolvency but can be terminated by the insolvency administrator.[6] In case of such termination, the lessor will be entitled to request the return of the aircraft from the lessee’s insolvency estate.

Benjamin von Bodungen (LLM Auckland 2002, PhD Manheim 2008) is Professor of Law at the German Graduate School of Management and Law in Heilbronn where he teaches German and international commercial and corporate law, finance and tax law. He also is an Of Counsel in the Banking & Finance practice group of Bird & Bird LLP, based in Frankfurt. Prior to joining the German Graduate School of Management and Law, he worked in the Frankfurt office of Freshfields Bruckhaus Deringer LLP, where he specialised in asset and structured finance.

  • [1] Cf. Sections 50, 51 of the Insolvency Code (Insolvenzordnung).
  • [2] Cf. Section 170 (1) of the Insolvency Code (Insolvenzordnung).
  • [3] Cf. Section 171 of the Insolvency Code (Insolvenzordnung).
  • [4] Cf. Section 103 of the Insolvency Code (Insolvenzordnung).
  • [5] Cf. Section 47 of the Insolvency Code (Insolvenzordnung).
  • [6] Cf. Sections 108, 109 of the Insolvency Code (Insolvenzordnung).
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