• In Germany, all insolvency proceedings start on the liquidation track.argent liquide image by richard villalon from Fotolia.com
  
  The German insolvency law has been in effect since 1999.
  
  All German insolvency proceedings begin as liquidation proceedings, although some may later be converted into reorganization proceedings. The amount of control accorded to the creditors in leading the proceedings is unusual, even in Europe, and is in even sharper contrast to proceedings in the U.S.
  
  

Commencement

• Directors might be imprisoned in Germany if a board fails to file for bankruptcy when the law says it should.handschellen image by Dron from Fotolia.com
  
  Under German law, a board of directors may be liable for damages if the board fails to file for insolvency within 21 days of the the day on which the corporation's liabilities first exceed the value of its assets. Specifically, the directors may be personally liable not only for the payments improperly made by the corporation after it became insolvent, but for social security payments, withholding tax, and the value added tax.
  
  Further, defendants may be subject to criminal punishment for failure to file.
  
  The filing does not create an automatic stay limiting creditor actions against the debtor's assets, although a court may enter an order having that effect.
  
  

Avoidance Powers

• Like cement, a transaction needs time to "harden" beyond possibility of avoidance.cement pumper image by Greg Pickens from Fotolia.com
  
  One of the changes introduced by the 1999 statute was the creation of avoidance or fraudulent transfer powers for the trustee of a bankrupt estate. The changes made it easier than it had been for the estate to recover assets on the ground that the debtor had illegally preferred some creditors over others in making those transfers. In this respect, the changes brought German law in line with the bankruptcy law in place in many other countries, including the United States.
  
  Under the statute, an application by an administrator to avoid or set aside a transaction must be brought within two years of the opening of the insolvency proceedings. The length of time prior to the insolvency period during which transactions are retrospectively vulnerable is known as the hardening period and it varies greatly with the type of transaction involved.
  
  

Consequences

• The debtor-unfriendly nature of Germany's laws has had consequences. In 2006, the world's biggest manufacturer of automobile mirrors, Schefenacker AG, moved its corporate headquarters out of Germany to Great Britain to escape what it saw as the draconian effect of Germany's bankruptcy laws.
  
  Schefenacker had taken on a lot of debt in 2000, when it merged with another mirror manufacturer, Britax Visioin Systems.
  
  Its results in the third quarter of 2006 were poor enough to breach its bond covenant, and under the inflexible German system with its 21-day rule the company faced forced liquidation.
  
  

EU Insolvency Regulation

• According to the European Union (EU), wherever the debtor's center of main interests is in the EU, except for Denmark, the law of the state wherein bankruptcy proceedings are opened shall determine "the conditions for and the effects of closure of insolvency proceedings" and the creditors' rights thereafter.
  
  

Consumer Bankruptcies

• In the field of consumer bankruptcies, too, Germany's laws are considered draconian for the debtors. This has created a wave of so-called "bankruptcy tourists." These are Germans who travel to the United Kingdom, live there for the necessary six-month period, and then declare bankruptcy to clear their debts.
  
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