Germany's corporate insolvency filings increased 16.8% in 2024 compared to the previous year, with December 2024 showing a 13.8% rise according to Federal Statistical Office data. This growth in German insolvency proceedings has expanded litigation financing usage, as resource-constrained insolvency administrators increasingly utilise third-party funding to pursue valuable claims that would otherwise be abandoned.
In our comprehensive research recently published in a leading legal journal, my colleague Dr. Johanna Büstgens and I examined how this trend has altered litigation financing in Germany. Our analysis demonstrates that traditional funding methods are not always sufficient for the scale of legal disputes emerging from corporate failures, creating new legal and practical considerations for administrators. This article summarises the key findings from our research "Litigation in Insolvency and its Financing," which provides a detailed foundation for understanding both litigation in insolvency contexts and the various financing mechanisms available to practitioners.
Our study addresses a critical gap in current legal practice. With the post-Corona increase in insolvency proceedings, there is high probability of a corresponding increase in court and arbitration proceedings affected by the opening of insolvency proceedings. This raises fundamental questions about the effects of insolvency on litigation and the financing options available to administrators who must navigate these complex scenarios.
Procedural Impact on Court Systems
Our research reveals that when insolvency proceedings commence, existing court cases face immediate disruption. Under Section 240 sentence 1 ZPO, all litigation involving the bankrupt company automatically suspends until the newly appointed insolvency administrator decides whether to continue. The bankrupt company loses all procedural authority under Section 80(1) InsO, whilst existing legal representation becomes invalid under Section 117(1) InsO.
The complexity extends beyond simple suspension. When proceedings resume through written submissions under Section 250 ZPO, administrators inherit the debtor's previous legal actions and omissions, including acknowledgments, confessions, waivers, and missed deadlines. An exception exists only for the debtor’s previous procedural actions voidable under Sections 129 et seq. InsO.
The legal framework makes distinctions between proceeding types. Active proceedings, where rights are claimed for distribution estates, can be resumed under Section 85(1) sentence 1 ZPO in their existing condition. Passive proceedings face more complex rules, with separation and segregation claims following different procedures under Section 86(1) InsO compared to standard insolvency claims, which require filing, verification, and contestation under Sections 87 and 174 et seq. InsO.
Arbitration proceedings present a different situation. Unlike court cases, arbitration does not automatically suspend under Section 240 ZPO, providing administrators greater flexibility in managing international disputes. This procedural difference has led to increased interest in international arbitration for its streamlined procedures, limited appeals, and enhanced enforcement under the 1958 New York Convention.
Arbitration Dynamics and Binding Agreements
Our analysis of the intersection between insolvency and arbitration reveals complex scenarios that administrators must navigate. Whilst administrators generally remain bound by arbitration agreements concluded by the debtor when asserting contractual rights, exceptions exist for what courts term "insolvency-specific rights".
Claims from insolvency avoidance under Sections 129 et seq. InsO present particular challenges. Restitution claims under Section 143 InsO arise from independent administrator rights rather than original contracts, removed from the debtor's control. This creates practical difficulties: administrators can assert such claims in arbitration only if opponents agree or if arbitration agreements explicitly reference Section 143 InsO, which rarely occurs in practice.
The complexity extends to domestic arbitration proceedings concerning insolvency claims, which must suspend based on Sections 87 and 174 et seq. InsO until proper claim filing and verification procedures are completed. This requirement, assigned to internal ordre public, can delay proceedings and complicate international commercial disputes.
Traditional Funding Methods Prove Insufficient
Our research reveals that administrators face strict legal obligations under German insolvency law. Section 148(1) InsO establishes that administrators have the duty to take possession and administration of entire assets belonging to insolvency estates. This administrative mandate extends to enforcing all property rights claims against third parties.
Our research demonstrates in this regard that the scale of Germany's insolvency crisis has revealed limitations in traditional insolvency litigation financing approaches. Under German law, the estate’s creditors, already financially affected by corporate failures, face a three-step reasonableness test that often proves challenging in practice. This test requires determining necessary costs, calculating benefits arising from legal action, and comparing expected burdens against benefits.
German courts have established demanding requirements. Reasonableness typically requires achievable yields to significantly exceed twice the advance provided. Even meeting this mathematical threshold doesn't guarantee success, as creditor willingness remains limited after suffering losses from corporate failures.
Legal aid, as an alternative means of funding, presents additional obstacles. Beyond reasonableness requirements, the Code of Civil Procedure demands sufficient success prospects under Sections 114(1) sentence 1 and 116 sentence 1 No. 1 ZPO. Case law requirements regarding success prospects and cost advance unreasonableness have proven high, creating additional hurdles for resource-constrained administrators.
Timing poses another challenge. Summary examination in legal aid procedures often requires one to two years, which is problematic given the acceleration principle applying to all insolvency phases. The situation becomes more challenging for arbitral disputes, as legal aid remains unavailable for arbitration proceedings regardless of merit or financial circumstances.
Commercial Litigation Financing Development
Our study identifies how commercial litigation financing firms have developed to address these gaps, offering comprehensive coverage extending beyond simple legal fees. These specialised companies provide coverage for court costs, arbitration tribunal costs, and reasonable opponent legal costs in case of unfavourable decisions.
Arrangements operate on strict non-recourse terms, meaning administrators owe nothing if cases fail regardless of litigation costs incurred. This structure has proven suitable given the inherent risks of insolvency litigation. Success fees typically start at approximately 20% of recovered amounts, but estate recovery rates often increase considerably compared to abandoning claims entirely.
One aspect involves risk diversification opportunities unique to insolvency contexts. Litigation financiers can simultaneously finance multiple claims within the same estate, potentially enabling more favourable terms through portfolio risk management. This approach allows financiers to balance higher-risk claims against more stable recovery actions.
As the Federal Court of Justice observed in a key ruling:
"In a process with high risk that cannot be financed by the estate, everything suggests that the insolvency administrator would have refrained from conducting proceedings if they had to be financed from the estate."
Administrator Liability Framework
The liability framework is demanding. Administrators who fail to pursue legal claims face liability under Section 60 InsO when prospects of success are favourable and proceedings appear economically reasonable. The Federal Court of Justice requires administrators to carefully assess proceedings prospects regarding their internal liability toward debtors and insolvency creditors.
Administrators have indirect duties to exhaust all possibilities for financing legal enforcement. Our analysis indicates that legal literature assumes administrator liability for failing to utilise commercial litigation financing when available options exist. This creates a "liability trap" where administrators must pursue valuable claims or potentially face personal consequences.
International Arbitration Disclosure Requirements
Our study reveals that the growth of litigation financing has created new complexities in international arbitration proceedings. Multiple international arbitration rules now mandate disclosure of third-party funding arrangements, including the ICC Rules 2021, HKIAC 2024 Rules, VIAC 2021 Rules, and DIA 2021 Rules.
These requirements generally serve to avoid conflicts of interest in tribunal constitution, working with IBA Guidelines on Conflict of Interest in International Arbitration. Under General Standard 7(a)(i), parties must inform participants about relationships between arbitrators and persons with direct economic interests in awards, specifically including litigation financiers.
German arbitration law and the Arbitration Rules of the German Institution for Arbitration (DIS) do not currently require disclosure of litigation financier participation. However, when arbitration seats are outside Germany or non-DIS rules apply, administrators must conduct thorough disclosure assessments before engaging funding arrangements.
Security for costs presents additional considerations. Whilst third-party financing alone is generally not considered sufficient reason for such orders in state court proceedings, arbitration proceedings may be assessed differently. The underlying concern is that successful defendants may not receive cost reimbursement from impecunious plaintiffs, since litigation financiers aren't directly involved in proceedings.
Financial Calculations and Remuneration
Our research examines how the Federal Court of Justice has addressed practical questions about administrator remuneration. Litigation financier success fees do not increase the calculation basis for insolvency administrator compensation under Section 63(1) sentence 2 InsO and Section 1(1) sentence 1 InsVV. Only money actually flowing to estates after deducting amounts due to financiers affects compensation calculations.
This ruling initially might seem unfavourable to administrators, but the court's reasoning proves sound. Without litigation financing, claims would simply be abandoned, generating no recovery for creditors and no remuneration for administrators. The approach recognises that litigation financing enables recoveries that would otherwise be impossible.
Administrators face strict examination duties requiring careful assessment of proceedings prospects regarding internal liability toward debtors and creditors. The Federal Court of Justice requires thorough cost-benefit analyses rather than arbitrary monetary thresholds when determining substantial dispute amounts under Section 160(2) No. 3 InsO.
Current Practice Evolution
Our analysis indicates that industry experts predict continued growth in German litigation financing whilst insolvency rates remain elevated. Rising bankruptcies, procedural complexities, and innovative financing solutions have created lasting changes in German litigation practice extending beyond the current situation.
Administrators now incorporate litigation financing strategies into initial case assessments as standard practice. This involves early identification of valuable claims, comprehensive cost-benefit analysis, and strategic use of arbitration for international disputes where procedural advantages can be maximised.
Administrators develop multi-option financing approaches blending traditional methods with commercial funding to optimise recovery rates. This includes risk diversification strategies where multiple estate claims are bundled into single financing arrangements, potentially improving terms through portfolio risk management.
The transformation reflects a shift toward commercially-driven approaches to German insolvency litigation that prioritises creditor recovery over traditional procedural conservatism. Law firms are developing specialised litigation finance teams, financial institutions are creating new funding products specifically for insolvency contexts, and courts are adapting procedures to accommodate third-party funded litigation realities.
Future Outlook and Conclusions
The 2024 increase in German insolvency proceedings has altered the litigation financing landscape in ways that will outlast the current crisis. For administrators, embracing third-party litigation funding has evolved from innovative practice to legal necessity, essential for both compliance and maximising creditor recoveries.
This transformation signals the emergence of a new standard of care for insolvency administrators, where proper financing strategies can determine successful estate recovery versus personal liability for missed opportunities. Our research demonstrates that administrators who fail to adapt risk not only personal liability but also suboptimal outcomes for creditors who expect sophisticated financing strategies.
For Germany's business community, this represents a change in how corporate failures are resolved. Rather than accepting minimal recoveries that were once the norm, creditors are more likely to see meaningful distributions thanks to professionally funded litigation campaigns. The combination of rising insolvency rates, sophisticated financing tools, and legal requirements for comprehensive financing consideration has created conditions reshaping German litigation practice.
Our research concludes that
"the relevant literature therefore unanimously assumes a liability of the insolvency administrator if they fail to make use of commercial litigation financing, although this option would have been available to them."
This legal reality has transformed litigation financing from optional service to essential tool for German insolvency practice.
In summary, our study reveals three key points regarding litigation in insolvency and its financing: the opening of insolvency proceedings has a disruptive effect on court or arbitration proceedings; the insolvency administrator has the duty to enforce valuable claims and must exhaust all financing options available; and the participation in proceeds to be paid to litigation financiers does not increase the calculation basis for administrator remuneration.
For practitioners seeking detailed analysis of these complex issues, our full research paper "Litigation in Insolvency and its Financing" provides comprehensive examination of the relevant legal provisions, practical considerations, and emerging trends in this rapidly evolving area of German insolvency law.
Written by:
Dr. Stephan Klebes
Senior Legal Counsel
