A chance to tailor the business for the future

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Employers all around the world are facing numerous challenges just to stay in business. Many industries have suffered historic losses due to the pandemic and its associated restrictions. Despite the many governmental programs that have been put in place to save businesses and to prevent mass layoffs, such as short-time work and the corresponding subsidies, the ongoing pandemic continues to claim its victims, with insolvency numbers rising.
But an insolvency procedure also provides a company and its shareholders with the opportunity to restructure the business for future endeavours while using the significant advantages provided by the German Insolvency Act (Insolvenzordnung – InsO).
The following statutory regulations help facilitate restructuring, including the need to lay off personnel:

Simplified termination of employment
Section 113 InsO provides significant relief in insolvency procedures. It stipulates that a maximum notice period of three months shall apply to the termination of employment. This will be the case even if longer notice periods were agreed and even where collective or individual agreements exclude the ordinary right to termination. Where the employees concerned have a shorter notice period than the three months provided in Section 113 InsO, the shorter notice period will naturally apply.

Termination of Works Agreements
Section 120 InsO also makes it easier to terminate works agreements which foresee benefits that would impact on the insolvency assets. However, Section 120 (1) InsO stipulates that the insolvency administrator must first discuss with the works council the possibility of a mutual agreement on the reduction of benefits. Only if the parties are unable to reach an agreement may the notice of termination be issued with a three-month notice period, even where the works agreement establishes a longer notice period. It should be noted, however, that the consequences of Section 77 (6) Works Constitution Act (Betriebsverfassungsgesetz) remain unaffected, meaning a terminated works agreement shall remain effective until replaced by a new works agreement in this matter.

Expedited reconciliation of interests procedure
Sections 121 et seq. InsO expedite the reconciliation of the interests procedure, eliminating the need for intermediate steps and providing the employer with additional options. In detail:

  • No attempt at mediation upon application of only one party
    In contrast to the relevant rules in the Works Constitution Act, there can only be an attempt at mediation before the employment agency (conciliation committee procedure) if both the works council and the insolvency administrator jointly request the mediation.
  • Approval of the Labor Court to implement operational changes
    Section 122 InsO also provides that, under certain conditions, the employer or insolvency administrator may seek the approval of the Labor Court for the implementation of operational changes.
    The procedure is simplified and allows the employer under self-administration (or the insolvency administrator) to apply for the approval of the Labor Court for the implementation of the operational changes, where a reconciliation of interests is not reached within either three weeks of the start of negotiations or the written request to start negotiations. However, for this to apply, the works council must have been provided with detailed information in good time. Where this is the case, the procedure under Section 112 (2) Works Constitution Act does not have to be performed, so that there will not be any claims for indemnities from employees under Section 113 Works Constitution.
    Pursuant to Section 122 (2) InsO, the Court must grant its approval where, also in light of the social considerations of the employees, the economic position of the company requires that the operational changes be implemented immediately. There are two steps to this examination:

Economic position
The question the Labor Court must answer is whether the operational changes are particularly urgent and not whether they are reasonable and economically expedient. In so doing, the Court must base its decision on the interests of creditors. It is therefore really a question of whether there would be any negative impact on the insolvency assets if the operational changes could only be implemented at a significantly later date due to a conciliation procedure. This must be compared with the question of the likely savings if the operational changes are implemented earlier; the planned measures must be described in detail. The insolvency itself will not be sufficient to justify the required urgency. Details must be provided of the debts that would be incumbent on the assets if the reconciliation procedure is carried out.

Interests of employees
On the other hand, the Court must take into account the interests of employees and the question of what social considerations are in favour of first carrying out a reconciliation procedure. This can only be the case if there is a reasonable prospect of a socially acceptable solution being found if the reconciliation procedure is carried out.
Finally, it should be noted that the order of the local Labor Court cannot be appealed to the Regional Labor Court, but only to the Federal Labor Court where the order of the Labor Court at first instance so allows, Section 122 (3) InsO.

Restricted scope of the social plan
Section 123 InsO restricts the amount of the social plan during the insolvency procedure; when the social plan is established after the insolvency procedure has been opened, Section 123 InsO foresees a total amount of 2.5 months’ wages for each employee (absolute limit). In addition, pursuant to the first sentence of Section 123 (2) InsO, no more than one third of the insolvency estate may be used to settle social plan claims (relative limit).
A social plan that is established no more than three months before the request to open insolvency proceedings may be revoked by both parties, Section 124 (1) InsO.

Drawing up list of names of employees who will receive notice is facilitated
If, as part of the reconciliation of interests, the works council and the insolvency administrator draw up a list of names of employees who will receive notice of the termination of their employment, Section 125 (1) InsO facilitates the issue of these notices for the employer.
On the one hand, it is assumed that there are urgent operational requirements which necessitate the issue of the notice of termination and which would also prevent the employee from being further employed at the same site. Section 125 (1) (2) InsO simultaneously provides that the social selection still takes place but that it may only be reviewed for gross errors on the basis of duration of service, age of the employee and maintenance obligations. Moreover, Section 125 (1) (2) clarifies that there will not be a gross error if it creates or maintains a balanced personnel structure. In detail:

Gross errors
The case law views a gross error in social selection as one where “there is an obvious, eye-catching gross error and the reconciliation of interests lacks any social balance” (judgement of the Federal Labor Court of 19 December 2013 in 6 AZR 790/12). It should be noted that there is no relief for employers with respect to the burden of proof. The employer must still make a submission establishing the basis for the social selection. The Court then only determines whether this selection was based on gross errors.

Balanced personnel structure
The term “balanced personnel structure” should not be confused with the age structure or distribution of the age of the workforce. Other aspects should be taken into account when establishing the personnel structure because the creditor or acquirer should be left with a functioning team of employees.
The age structure can constitute part of the personnel structure. Accordingly, age groups may be formed and the number of employees to be given notice can be designated for each age group, so that the percentage of employees to be given notice is the same for each group.
In addition to the age structure, other aspects can be taken into account to arrive at the personal structure, such as education or qualifications, so that the relevant education or qualification groups are formed. Personnel structure planning may also take into account performance, periods of absence, and certain conduct.
The Court can examine the formation of this balanced personnel structure. It is therefore necessary to stipulate which specific personnel structures will be created and why these are necessary.

Judicial orders under Section 126 InsO
Finally, it should be noted that – where a reconciliation of interests is not reached with the works council within three weeks – the employer can ask the Labor Court to order that the termination of the employment contracts for certain designated employees is necessitated by urgent operational requirements and justified under social aspects.
Considering these options, it is safe to say that insolvency does not need to be the final chapter, even during a pandemic. Instead, it can be an opportunity for employers to tailor the business for the future. This may mean that the restructured operation can be continued as a leaner and more tailored structure, or it might be sold and continued in a different setting. Either way, the options available under insolvency law should not be discounted.


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