Interruption of proceedings upon insolvency – “What now?”

According to Section 240 German Code of Civil Procedure, the ongoing civil proceedings are interrupted – to the extent that they concern the debtor’s estate – until they are resumed in accordance with the provisions applying to the insolvency proceedings, or until the insolvency proceedings are terminated.

The aforesaid provision applies to “classic civil proceedings”, not, however, to execution proceedings, legal aid proceedings, independent procedures for the taking of evidence or proceedings to determine the place of jurisdiction.

The purpose of Section 240 German Code of Civil Procedure is to take account of the statutory transfer of the right to be a party to legal proceedings. The right to be a party to legal proceedings provides information on who the correct party is, that is, on whether the claimant is authorised to assert the claim and whether the claim may be asserted against the particular defendant. Within an insolvency law context, Section 80 (1) German Insolvency Code provides that one party is substituted by law for another. According to this provision, upon insolvency proceedings being opened, the right to manage and dispose of the assets belonging to the debtor’s estate (Section 35 German Insolvency Code), including the right to be a party to legal proceedings in this respect, passes from the insolvent debtor to the insolvency administrator. The debtor’s estate is affected in this sense if, at the time the proceedings are opened, the matter in dispute belongs in whole or in part to the debtor, that is, there is an economic relationship. Determining the correct party is decisive for the purposes of insolvency law, as an interruption according to Section 240 German Code of Civil Procedure requires the insolvency of the “party” according to Section 27 German Insolvency Code (Federal Court of Justice NJW 1998, 157).

The interruption of proceedings also serves the purpose of securing the insolvency proceedings procedurally, ensuring they are not disrupted by ongoing lawsuits. This interruption takes place by operation of law, that is, regardless of whether the parties and the court are aware that insolvency proceedings have been opened. This “function” of causing other proceedings to be interrupted is favourable for the insolvency administrator, but leads to uncertainty on the part of the insolvency creditors. This is particularly the case if the insolvency creditor could not foresee the opposing party’s insolvency and is not familiar with the further procedure.

In principle, the claimant must resume the lawsuit in due and valid form as provided in Section 250 German Code of Civil Procedure by serving a written pleading to be submitted to the court. However, as an indispensable prerequisite for the valid resumption of the lawsuit, the claim must first be validly filed for registration in the insolvency administrator’s schedule of claims (cf. Federal Court of Justice, judgement of 25 June 2020 - IX ZR 47/19). A claimant can only resume proceedings to continue to pursue an insolvency claim once the claim already asserted in court has been filed in insolvency proceedings, has been finally disputed by the insolvency administrator or has been disputed by the debtor (Sections 179 (1), 184 (1), second sentence, 180 (2) German Insolvency Code; Federal Court of Justice, judgement of 23 July 2024 - II ZR 222/22).

In order for a claim to be validly filed for registration in the schedule of claims, the requirements of Section 174 German Insolvency Code must be observed. According to said provision, the insolvency creditor must file its claim with the insolvency administrator and enclose documents evidencing the claim. In addition, the insolvency creditor must state the reason for and amount of the claim, as well as any facts which, in the creditor’s opinion, show that the claim is based on an intentional tort, an intentional breach of a statutory obligation to pay maintenance or a tax offence committed by the debtor according to Sections 370, 373 or Section 374 German Fiscal Code.

After the claim has been filed with the insolvency administrator, the claim will be examined in the insolvency proceedings and the insolvency administrator will decide whether to dispute the claim. In this case, the creditor will receive confirmation from the insolvency court that the claim has been disputed. At that point, consideration should then be given to whether to resume the lawsuit as claimant by declaration to the court and change the motion to a motion for a declaratory judgment establishing the claim to be entered into the insolvency administrator’s schedule of claims. This is because, as a result of the opposing party’s insolvency, an action for performance can no longer be brought, but only an action for a declaratory judgment establishing the claim for the purposes of registration in the schedule of claims. By contrast, if the insolvency administrator recognises the claim, there is no scope for further litigation, as there is no interest in a declaratory judgement establishing the claim: once the insolvency administrator has recognised the claim, the claim is deemed established with legally binding effect and will, therefore, be taken into account in the final distribution.

A claim filed validly with the insolvency administrator is an indispensable prerequisite for the resumption of proceedings that were interrupted according to Section 240 German Code of Civil Procedure. Consequently, insolvency creditors would be well advised to file their claims validly for registration in the insolvency administrator’s schedule of claims, as specified in Section 174 German Insolvency Code, so that the commenced proceedings can be resumed in case of doubt. In addition, however, it should also be noted that, as a result of the opposing party’s insolvency, the claimant’s motion for performance must be changed in the lawsuit to a motion for a declaratory judgment establishing the claim to be entered into the schedule of claims and that, from an economic perspective, this will often only be worthwhile with very large disputed claims.