Drowning in Debt A Spectacular Lack of Oversight

Government agencies failed to report a Ponzi-like scheme at the now-insolvent discount electricity provider Teldafax. It was a massive failure of oversight that is now costing the German government dearly.
Teldafax is being investigated by authorities.

When insolvency administrator Biner Bähr walked through the door at discount electricity provider Teldafax on June 14, 2011, he immediately took stock of his surroundings.

Hundreds of plastic mail crates were stacked in the hallways and desks were covered with enormous piles of unread faxes. There was no cash on hand.

Mr. Bähr shut down the business three days later. His decision left behind about €500 million ($570 million) in debts and 750,000 creditors - primarily customers that had paid their electricity bills in advance.

Four years later, Teldafax's former management faces criminal charges of delayed filing for insolvency.

Teldafax is the worst such case of delayed filing in Germany's history. One former managing director has already accepted an order of summary punishment.

Another board member confessed earlier this month in exchange for a suspended sentence.

But the criminal processing of this case is only one side of the matter. Other parties, which were partly responsible for allowing this disaster to happen, must also be held to account. And this goes for Germany's finance ministry above all.

The federal government has paid more than €100 million in compensation to the Teldafax insolvency administrator, Handelsblatt has learned from tax authorities.Some €25 million was already paid two years ago, and the remainder was handed over just a few weeks ago.

It is the biggest known sum the federal government has ever been forced to pay in a case like this. The reason for the government's culpability is that German officials have never been this willful in ignoring a company's failure to file for insolvency in due time.

The details go back as far as 2009 - a full two years before Teldafax filed for insolvency.

The Central Customs Office sent the company an ultimatum on June 4, 2009. Teldafax was given three weeks to pay €18.8 million in outstanding electricity taxes for 2008. The notice marked the beginning of a dramatic correspondence.

The electricity provider's managers portrayed the company's death throes as something akin to a moderately severe case of the flu.

Teldafax was unable to pay the €18 million by the three-week deadline – or ever for that matter. When the customs office ordered a full audit on July 29, the extent of the problems at Teldafax became clear. If authorities collected on their tax claims, read the audit report dated October 1 of that year, "the subject of the audit would become illiquid and, in the auditor's opinion, would have to file a petition to initiate insolvency proceedings."

The report also noted that, as of approximately June 2008, Teldafax was already "no longer able to pay the electricity tax owed, even though it had collected these amounts from customers."

The customs office auditors had discovered something that Teldafax management would continue to deny for several years: Teldafax was operating a snowball system, or pyramid scheme. It could only continue operating because old invoices were being paid with advance payments from new customers.

Because of its rock-bottom prices and the generous salaries of its executives, the electricity provider burned through money more quickly than it could collect from customers.

By October 2009, Teldafax was broke, unable to pay its 2008 electricity tax bill of €18.8 million or the €28.3 million it owed for the first half of 2009.

The auditors demonstrated that the Teldafax problem would only get worse over time, due to the nature of pyramid schemes. Invoices, which the company could not pay, continued to pile up. And the longer nothing was done about the problem, the greater the loss Teldafax would inflict once it hit rock bottom.

The customs office audit report should have spelled the end of Teldafax. The auditors had seen through Teldafax and exposed the system.

But then something odd happened: the officials decided to wait.

Teldafax could only continue operating because old invoices were being paid with advance payments from new customers.

Teldafax filed a request for deferment with the customs office on June 11, 2009, but it received no response. Instead, the customs office began to request increasingly detailed information, obtaining new data from Teldafax month after month, figures relating to new customers, the amount of electricity used by existing customers, Teldafax's electricity procurement costs and changes in equity capital at the company.

No other outside agency knew as much about Teldafax as the Central Customs Office.

Taxpayers could now be paying dearly as a result.

Despite everything they knew, the officials simply looked on as Teldafax launched its final kamikaze campaign in the summer of 2010. It was now selling electricity for even less than before – and its losses were even higher. Customers were beating a path to Teldafax's door, and they were willing to put down advance payments.

Teldafax used the money, which should have gone to buying electricity, to pay the customs office. In September 2010, for example, the agency was paid more than €25 million within three days, to cover electricity taxes it still owed for 2008 and 2009.

Then the inevitable happened. In early 2011, grid operators began cutting off Teldafax. On April 12, 2011, the Central Customs Office revoked Teldafax's license to supply electricity.

One of the ironies of the Teldafax case is that the electricity provider's managers portrayed the company's death throes as something akin to a moderately severe case of the flu. In an interview with the German Sunday newspaper Welt am Sonntag on April 23, 2011, CEO Hans-Gerd Höptner said that Teldafax was "basically okay," and that he was in the process of "working out the necessary issues."

Mr. Höptner resigned four weeks later. His successor, Gernot Koch, was equally dishonest when he said: "We have cleared the first hurdle toward a new beginning. In the coming weeks, we will convince our critics with our actions and return to normal business operations."

Mr. Koch filed a petition for insolvency on June 14, 2011.

The Teldafax insolvency administrator invokes insolvency law in his claims against the government. It permits the reclaiming of all funds that an insolvent company continues to disburse after its insolvency has become apparent. The condition is that creditors were put at a disadvantage, and that the receiver was aware of the financial difficulties.

"These rules were created to ensure the equitable satisfaction of creditors," said Rainer Schaaf, an expert on insolvency law at the law firm of Rödl & Partners. "Lawmakers wanted to prevent funds from being withdrawn from the company ahead of an insolvency, and that subsequent creditors would suffer as a result."

The finance ministry, in response to an inquiry by Handelsblatt, said it does not keep statistics on when or if fiscal authorities have had to pay compensation for cases of missed insolvency. A ministry spokesman said most challenges "do not involve larger amounts, as they only apply to payments in the last month or possibly in the last three months before a petition is filed to initiate insolvency proceedings."

In the Teldafax case, however, the Central Customs Office spent two years collecting funds from a company that it knew was insolvent. The sum of more than €100 million that this is costing the federal government is probably a record.

It's a thin silver lining for the customers of Teldafax, many of whom paid for electricity in advance but never received it. Because the Cologne Central Customs Office clearly shares some of the blame for an insolvency that was delayed by two years, these customers will at least recover a portion of their costs.


Sönke Iwersen became editor in chief of the "Handelsblatt Live" App in 2014 after two years leading Handelsblatt's investigative reporting team. Jürgen Flauger handles Handelsblatt's coverage of energy from all angles. To contact the authors: [email protected] and [email protected]