Situation in the event of a bankruptcy of the provider. Various companies issue profit participation rights, bonds, subordinated loans or similar forms of investment in order to raise capital. Consumers can invest their money by purchasing these financial products. Occasionally these companies get into financial difficulties and have to file for bankruptcy. In the following, we explain what the general situation is for investors in the event of bankruptcy.
Basics of bankruptcy proceedings
In insolvency proceedings – to put it simply – the company’s existing assets (warehouses, machines, own claims, goods, etc.) are used to pay the claims of the creditors (employees, investors, banks). Usually, this is done under the direction of an insolvency administrator.
Often the assets are not sufficient to meet all demands. Therefore, creditors must expect losses.
The course of an insolvency procedure
Business media often first report economic problems and possible bankruptcy. If bankruptcy can no longer be averted, an application is made to the court to open insolvency proceedings. Reasons for this step can be insolvency, impending insolvency or over-indebtedness. This begins the so-called “preliminary insolvency proceedings”. During this stage, the proceedings, the bankruptcy court is obliged to take precautions to secure the debtor’s assets. This is done, for example, by appointing a preliminary insolvency administrator.
This is followed by the actual insolvency proceedings, which begin with the so-called “opening resolution”. There are now various options in the process. On the one hand, it can end in the company’s liquidation. In this case – to put it simply – the company’s existing assets are used to pay the claims of the creditors.
On the other hand, an attempt can be made to continue the company as a whole or at least parts of it. This can be done, for example, through an insolvency plan. Put; this is a contract between all creditors in which they agree on the terms under which the company can continue to operate. In particular, it will decide on the (partial) waiver of claims.
To ensure a fair distribution of the remaining money for everyone, the outstanding claims of all creditors against the company are collected and recorded in the insolvency procedure. This collecting and recording of the claims is legally called the “registration for the insolvency table”.
If that happens, investors have to take action and register their claims. The insolvency administrator usually sends the required documents and information on the next steps by post. During the preliminary insolvency proceedings, the registration of claims is not yet necessary and would have no meaning.
The creditors’ meetings
In the course of the proceedings, the insolvency administrator sets a date for a first creditors’ meeting. On the, he usually provides information about the company’s economic situation. In addition, decisions on the progress of the procedure are made there. These include, for example, the commissioning to draw up an insolvency plan and the election of the members of the creditors’ committee. Investors have voting rights and can thus help determine the future development of the company.
In further creditors’ meetings, for example, the insolvency plan (drawn up by the insolvency administrator) can be voted on. Participation in the meetings is not mandatory. Investors who do not want to participate do not have to be represented by another person. However, important decisions about the future of the company can be made at the creditors’ meeting. Absent investors can also be bound by it.
Investors who are unable to attend the meetings for technical or time reasons can be represented. It should be noted, however, that the authorized person is authorized to appear and vote on behalf of the investor. The declarations made by the representative are binding for the investor.
Only grant power of attorney if you trust the authorized person. Powers of attorney already granted can be revoked. The authorized representative may then no longer act as your representative in the future.
It is difficult to predict what losses investors will expect in the event of bankruptcy. The insolvency administrator often comments on this after having obtained an initial overview of assets and debts. But this is also only an estimate. Possible subordination: Roughly speaking, the total assets of the debtor are collected in an insolvency procedure and distributed among all creditors. However, not all creditors are always treated equally. In some investment conditions, there is a so-called subordination. This means that only when other creditors, who are to be treated with priority, have received their money in full, the creditors in the lower ranking receive their money. Suppose there is still something left. How high this remainder is or whether the subordinate investors get nothing at all cannot be said with certainty.
Duration of bankruptcy proceedings
Insolvency proceedings can take several years. As a rule, investors are informed about new findings by the insolvency administrator and, for example, invited to creditors’ meetings.
Sale of the investment
Often profit participation rights, bonds, subordinated loans or similar forms of investment can be sold to third parties. Some of them are even traded on the stock exchange; however, stock exchange trading can be suspended in the event of bankruptcy.
Whether a sale or a transfer to third parties is permitted at all is regulated by the investment conditions that the consumer generally received when purchasing.
If the sale is possible, investors face a major problem: They have to find someone who – despite the (impending) bankruptcy – actually buys the investment from them at an acceptable price.
Foreclosure against the company concerned
In general, if creditors want to enforce a claim (e.g. for damages) in court, they can first sue. With a judgment based on a lawsuit, the creditor can then pursue foreclosure. This means that he can force the debtor with the help of the bailiff to pay the sued monies. It is also conceivable to apply for a dunning notice. For the time being, a court will not issue any judgments required for enforcement. Even if investors already have a judgment in their hands, individual foreclosure measures by judgment (or payment order) are no longer permitted after the opening of insolvency proceedings.
Even in the preliminary proceedings, the insolvency court can prohibit or stop individual enforcement measures.
Legal action against third parties
Since creditors often only receive minimal amounts in insolvency proceedings, alternative counterparties are often sought. This can be, for example, the company’s managing director who filed for bankruptcy too late and thus made himself liable for damages.
If the investment was made based on incorrect advice – for example, from a bank or financial service provider – this can also result in claims for damages.
Investors should always keep in mind: A lawsuit is still fraught with certain risks! If you lose the process, you have to pay the court and legal fees yourself. Also, all other investors have the option of filing a lawsuit. For some defendants (for example the managing director mentioned) a large number of cases could bring them to their knees very quickly, which in turn makes it less likely that all plaintiffs will be successful. Acting quickly can be beneficial, but there is no guarantee that you will get your money.
NOTE THAT! Investors should, therefore seek advice from a lawyer before filing a lawsuit.
Beware of exuberant promises
Investors should exercise particular caution when lawyers promise them sure success in court or in pending insolvency proceedings, for example on the Internet or in any other way. Investors can obtain information from the local bar association about lawyers who are particularly qualified in the field of investment.
Further consumer rights in case of company bankruptcies
Consumers cannot be affected by bankruptcy just as investors. Likewise, for example, the seller or manufacturer of a purchased product can file for bankruptcy. In this case, numerous questions arise over and over again – for example about prepayments, defective products, hire purchase, data protection and vouchers that have not yet been redeemed. Our information on consumer rights in the event of corporate bankruptcies provides the answers.
Are sustainable investments always unsafe?
The bankruptcies of companies whose business fields include the energy transition or renewable energies have recently received special attention in the media. Participations in such companies are a form of climate-friendly or sustainable investments. Certain ethical, social and ecological criteria are taken into account for sustainable investments. For example, the manager of an equity fund is instructed not to buy shares in companies in the nuclear industry. With the exclusively climate-friendly investments, the focus is accordingly on protecting the climate. From climate savings certificates to sustainable investment funds to closed investments in wind farms, there is everything in the area of this investment that also exists in the area of classic financial investments.
With sustainable and climate-friendly investments, the palette ranges from “very safe” to “high risk”. Such investments are therefore not always unsafe or risky.