Special features of airline insolvencies in Germany
In recent years, many airlines around the world, but also in Germany have gone bankrupt. Current examples are found in both smaller and larger companies. When Air Berlin filed for insolvency in August 2017, it was the second largest airline in Germany and the seventh largest in the European Union. Further, in September 2018 the smaller German air carriers Azur Air GmbH and Small Planet Airlines GmbH became insolvent and in December 2018 the German airline PrivatAir GmbH together with its Swiss affiliate PrivatAir SA also filed for bankruptcy. Followed by the midsize airlines Germania Fluggesellschaft mbH in February 2019 and Condor Flugdienst GmbH (in connection with the Thomas Cook bankruptcy) at the end of September 2019. The last German airline filing for insolvency was Sundair (on 30 October 2020). At present, almost all airlines worldwide are having to deal with severe financial problems due to the consequences of fighting COVID-19 and the grounding of fleets for several months. Even Lufthansa considered filing for insolvency during negotiations with the German government about state aid.
This article addresses German insolvency law in general and some special features regarding airline insolvencies.
German insolvency law in general
The statutory base for German insolvency law is the EU Recast Insolvency Regulation (2015/848) and the German Insolvency Code (InsO).
EU Recast Insolvency Regulation
As EU regulations directly apply in Germany, the EU Recast Insolvency Regulation must be considered. Pursuant to Article 3(1) of the regulation, the courts of the EU member state in which a debtor has its main centre of interest will have jurisdiction to open insolvency proceedings (main insolvency proceedings). A centre of main interest is the place where a debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties. In the case of a company or a legal person, the place of its registered office will be presumed to be the centre of its main interest in the absence of evidence to the contrary. However, this presumption will apply only if the registered office has not been moved to another EU member state in the three months preceding the filing for insolvency. Save as otherwise provided in the EU Recast Insolvency Regulation, the law applicable to insolvency proceedings and their effects will be that of the EU member state in which such proceedings are opened (Article 7 of the EU Recast Insolvency Regulation).
Under certain conditions, secondary insolvency proceedings may be opened in another EU member state (Articles 3(2) and 34 to 52 of the EU Recast Insolvency Regulation). During the insolvency proceedings regarding the Austrian airline NIKI, there was controversy as to whether insolvency proceedings in Berlin, Germany (where the insolvency court of NIKI’s affiliate Air Berlin was situated) or at NIKI’s registered seat in Austria should be opened, respectively, or whether the proceedings in Austria should be regarded as primary or secondary insolvency proceedings under the regulation. The proceedings regarding NIKI in Austria are now considered the primary proceedings and those in Berlin the secondary insolvency proceedings.
German Insolvency Code
Section 1 of the InsO determines the two objectives of German insolvency proceedings as follows:
- the liquidation of a debtor’s assets; or
- maintaining an insolvent enterprise by restructuring in accordance with an insolvency plan.
Preliminary insolvency phase
Insolvency proceedings in Germany are judicial proceedings opened only on a written request that has been filed by either the debtor or a creditor. If the court considers an insolvency application to be admissible, an examination is made as to whether there is a reason for opening the insolvency proceedings (eg, illiquidity, imminent illiquidity or over-indebtedness) and whether the debtor’s assets are likely to be sufficient to cover the costs of the insolvency proceedings. If the assets are insufficient, the application will be rejected for lack of assets unless an advance on costs is paid. The phase during which the court must decide whether to open insolvency proceedings or reject the request due to lack of assets to cover the costs of the insolvency proceedings is considered the preliminary insolvency phase and usually has a duration of two to three months.
During the preliminary phase, the insolvency court will take all measures necessary to avoid any detriment to the debtor’s financial status for its creditors (Section 21(1) of the InsO), in particular the court may order any of the following:
- The designation of a provisional insolvency administrator, who will be usually a lawyer from a law firm specialised in insolvency matters and will:
- secure the debtor’s assets;
- analyse the debtor’s economic situation and continuing viability; and
- recommend to the court as to whether the insolvency proceedings will be opened.
- The appointment of a provisional creditors’ committee (if the debtor is above a certain threshold – Section 22a of the InsO).
- The imposition of a general prohibition on the debtor on making dispositions or an order that the debtor’s dispositions will require (at least) the consent of the provisional insolvency administrator to become effective.
- An order of a prohibition or provisional restriction on enforcement measures against the debtor unless immovables are involved.
- An order that objects which are owned by or mortgaged to a third party may not be collected by creditors if such objects will be used by the debtor to continue its enterprise, provided that they are of considerable significance for the debtor’s business.
Since 2012 a proceeding similar to Chapter 11 in the United States has been implemented under German law, by which the debtor continues to fully self-administer its day-to-day business (Sections 270a and 270b, that is the so called ‘debtor-in-possession management’, which could be in the form of a ‘protective shield proceeding’). Such proceedings may be requested by the debtor already when filing for insolvency and will be granted by the court (also for the preliminary phase) if no circumstances are known, which lead to the expectation that the order will place the creditors at a disadvantage. If the debtor’s request for debtor-in-possession management does not manifestly lack the prospect of success, the court will refrain from ordering any measures mentioned in the first or third bullets above. Thus, in such case, a (provisional) trustee or monitor will be appointed by the court rather than a (provisional) insolvency administrator. By contrast to an insolvency administrator, the monitor has only supervising functions. However, obligations exceeding the range of the debtor’s ordinary business may not be entered into by the debtor without the insolvency monitor’s consent. Moreover, the debtor cannot enter into obligations falling under the range of its ordinary business if the insolvency monitor objects to such obligations. In addition, the insolvency monitor may require the debtor to allow collection of all payments to be received and payment of the debtor to be made only by the insolvency monitor (Section 275 of the InsO).
Air Berlin and Condor requested a debtor-in-possession management proceeding in order to continue flying. However, in the Air Berlin matter, that route was abandoned after the opening of insolvency proceedings, whereas it was continued in the Condor insolvency proceedings, which were opened on 1 December 2019. At present, Condor is still in an insolvency proceeding as the investor which committed itself to take over Condor in January 2020 – the parent company of Polish airline LOT – withdrew from the purchase agreement in March 2020. However, the creditors recently approved a new restructuring plan and Condor will exit the insolvency proceedings at the end of November 2020.
Insolvency proceedings after opening
If an insolvency court decides to open the insolvency proceedings it will issue an order which specifies, among other things, the name and address of the insolvency administrator or monitor as applicable (which is usually the same person as the provisional administrator or monitor) and the date and hour that the insolvency proceedings are actually opened. At the opening of proceedings at the latest, the debtor’s right to manage and transfer the insolvency estate is vested in the insolvency administrator unless a debtor-in-possession management proceeding has been requested by the debtor and ordered by the court.
The court order that opens insolvency proceedings will also state the period in which the creditors must file their claims. Such period will be fixed to extend over not less than two weeks and not more than three months after the opening of the insolvency proceedings. Such filing must be done in writing and all respective documents, which prove the existence of the claims must be provided. If neither the insolvency administrator or debtor or monitor nor another creditor objects to such claims, the insolvency court registers such claims in a table and such registration in the table has the same effect as a non-appealable judgment. However, it depends on the value of the assets of the debtor and the whole amount of the outstanding debts whether a creditor will finally obtain a satisfying amount for its claims as an insolvency creditor (if any).
Special features of airline insolvency
Due to the peculiarities of the aviation industry, there are some special features of airline insolvency, which are set out below.
As aircraft are often not owned by the insolvent debtor airline, the aircraft owner may request the debtor or the (provisional) insolvency administrator (as applicable) to return the aircraft to the owner pursuant to Section 47 of the InsO provided that the leasing has been terminated. The debtor, respectively the provisional insolvency administrator, must comply with such a request, unless the airline continues flying and the insolvency court granted (on request of the debtor airline) an order according to Section 21(5) of the InsO (mentioned above) which states that during the preliminary phase of the insolvency proceedings the owner of certain assets (eg, an aircraft) may not demand their return if those assets are needed to continue the business.
In relation to the termination of the leasing, the lessor must further consider Section 112 of the InsO (such statutory provision cannot be circumvented by any contractual provision according to Section 119 of the InsO). Section 112 prohibits the termination of a lease agreement after the filing for insolvency for the following reasons:
- a default in the payment of rentals that arose before filing for insolvency; or
- degradation of the debtor’s financial situation.
Thus, it may be advisable for a lessor to terminate the leasing prior to the (lessee) filing the request to open insolvency proceedings. However, if such termination has not occurred prior to that date and the debtor airline uses the aircraft after filing for insolvency but does not pay rent, which became due after the filing for insolvency, the lessor may terminate the leasing for such rent, that became payable (after filing for insolvency) in accordance with the terms set out in the lease agreement.
As aircraft are considered to be immovables for enforcement purposes, a mortgage registered on an aircraft may be enforced only by public auction of the aircraft pursuant to the Act Governing Auctions and Sequestrations of Immovables. If an aircraft is owned by the insolvent airline, the insolvency administrator may as well initiate such auction process, even if such aircraft is subject to a right to separate satisfaction by a mortgagee. However, in such case the mortgagee’s interest in the aircraft will be considered when the proceeds obtained after the sale by auction will be distributed.
In order to secure the insolvent company’s assets during the preliminary insolvency proceedings, the insolvency court usually implements a temporary stay of debt enforcement measures with respect to the insolvent company’s movables. The temporary stay also covers the enforcement of security interests. However, regarding the insolvent debtor’s immovable assets (which includes aircraft in that context), a temporary stay cannot be ordered by the insolvency court. On the other side, the court in charge of the enforcement proceedings in connection with the public auction of the aircraft may order a temporary stay if the insolvency administrator expressly requests so in order to prevent any detrimental changes to the debtor’s assets (Section 30d of the Act Governing Auctions and Sequestrations of Immovables).
As aircraft engines have a high economic value and are swapped for maintenance on a regular basis, they are regarded in Germany as simple components or accessories of an aircraft. Therefore, aircraft engines may be subject to separate rights than the rights in rem regarding the airframe to which they are attached.
Thus, the ownership of an aircraft need not extend to the engines, so that another person may claim a right of separation from the insolvency estate, respectively repossession in relation to the engines than the person claiming such a right in relation to the airframe.
If the engines are owned by the owner of the airframe and such airframe is encumbered with a registered mortgage, the mortgage extends to the engines (Section 865 of the Civil Procedure Law in conjunction with Section 99 I 1 of the Act on Rights in Aircraft (LuftFzRG)). However, a release of any engine from liability under the mortgage is possible pursuant to Sections 31(3) and 31(4) of the LuftFzRG, provided that the engine is separated from the airframe (not only on a temporary basis) and sold before a bailiff has taken the mortgaged aircraft into custody for enforcement purposes. In the case of detaching an engine from the airframe solely on a temporary basis (eg, for maintenance purposes only), the release from liability for an aircraft mortgage is usually denied.
Operating licence and AOC
In order to provide air transport services to the public, a commercial airline is dependent on the continuing existence of a valid operating licence and air operator certificate (AOC). Although neither the filing of a request to open insolvency proceedings, nor the actual opening of, the insolvency proceedings leads to an automatic expiry of the operating licence and AOC, such licence or certificate may be suspended or revoked by the national civil aviation authority (LBA) considering the financial situation of the airline debtor.
Pursuant to Articles 4(b) and 4(g) of EU Regulation 1008/2008, requirements for a German air carrier operating licence are, among other things, a valid AOC as well as meeting the financial conditions specified in Article 5 of EU Regulation 1008/2008. Moreover, according to Articles 9(1)(1) and 9(1)(2) of EU Regulation 1008/2008, the LBA may at any time assess the financial situation of a German air carrier and based on its assessment, the LBA will suspend or revoke the operating licence (it has issued) if the LBA is no longer satisfied that the German air carrier is or will be able to meet its actual and potential obligations for a 12-month period. Nevertheless, the LBA may grant a temporary licence not exceeding 12 months pending financial reorganisation of the German air carrier, provided that:
- safety is not at risk;
- such temporary licence reflects, when appropriate, any changes to the AOC; and
- there is a realistic prospect of a satisfactory financial restructuring within that period (Article 9(1)(3) of EU Regulation 1008/2008).
Thus, only if the operating licence and AOC are still valid is it generally possible for an airline that is subject to insolvency proceedings to use the aircraft in its fleet and continue the business as an airline (ie, providing air transport services on a commercial basis).