With a judgment published in May 2016, the German Federal Court of Justice (“Bundesgerichtshof”, “BGH”) further tightened the requirements creditors have to meet in order to defend a claw-back of monies received prior to insolvency according to sec. 133 German Insolvency Act (“Insolvenzordnung”, “InsO”).
According to this provision, the insolvency administrator is entitled to challenge the debtors’ transactions up to ten years before the application for insolvency if he proves that the debtor has undertaken the transaction with the intent to defraud his creditors and the creditor knew the intention of the debtor. This knowledge is presumed when the creditor knew that the debtor’s insolvency was imminent and that the action discriminated against the creditors (as a whole).
Especially in recent years, the BGH has considerably reduced the requirements regarding the proof of the aforementioned conditions to such an extent that already the non-payment of an invoice can justify the conclusion on the above-mentioned conditions (therefore, some authors speak of a “chain indicative assumption rule” (“Kettenvermutungsregel”). The BGH, however, allows to repeal this indication, if the transaction in questions was part of a serious turnaround-attempt.
In order to repeal the indication, there must be a coherent restructuring concept, based on an analysis of the business operation, which has a well-founded prospect to succeed and it’s implementation must have started already at the time of the transaction. In its decision, the BGH explicitly states that the reorganization concept does not have to follow specific formal requirements, such as issued by the German Institute for Auditors (“IDW S6”, comparable to international IBR-standards). Adherence to the requirements postulated there is sufficient, but not mandatory, and may not even be useful in the case of smaller companies. However, an analysis of the operational situation, including the causes of crises, an assessment of the prospects for success of the restructuring measures and the future profitability of the company by means of an integrated financial planning, is always required. Furthermore, the nature and amount of the liabilities and their regulation must be presented.
On the other hand, the creditor claiming the relief has to prove that the payment received was based on a conclusive turnaround concept of the debtor. The mere conclusion of a composition agreement containing a certain quota payment is not sufficient. Rather, the creditor may only assume a conclusive turnaround concept if he has been informed in detail about the fundamental principles of the concept. However, the creditor is not obliged to get the turnaround concept examined professionally; he may rely on the information given by the debtor – as long as he has no evidence to the contrary.
Hence, in future avoidance cases, creditors will have to deal more with the background of a proposed composition agreement if they wish to avoid a later challenge. On the whole, the judgment tightens the requirements on which a transaction in the vicinity of an insolvency might escape avoidance.