Avoidance of advisors’ fees – goodbye QCells?

After the Higher Regional Court (OLG) Frankfurt had already ruled in 2016 on the facts of the challenge of advisors’ fees in the case of a failed restructuring attempt (specifically “QCells“,see here for further details), the German Federal Supreme Court (“Bundesgerichtshof”, “BGH”) took more than five (5!) years to decide on the appeal. This fact alone is astonishing. Moreover, the decision, with its 49 pages, seems to be part of a growing series of decisions that are difficult to implement in practice (see earlier here). The following is an attempt at an initial assessment.

First of all, it must be conceded that the judgement renders the previously used standard of the intended restructuring’s probability of success more practical and thus indirectly corrects the judgements of the lower courts, which were completely excessive in this respect. In their respective decisions, first, the Regional Court (LG) and then the OLG Frankfurt had emphasised that “the debtor (must) have the certain expectation that the restructuring would be completed in the near future“. The lower courts thus increased the degree of probability of success considerably compared to the previous BGH line (from: “serious and well-founded prospect” to “certain expectation“). Now it may indeed be deduced from the BGH’s formulations, for example, that even an “optimistic assessment” of the ability to make up for an existing liquidity shortfall in the foreseeable future may well eliminate the intent to prejudice other creditors in the sense of § 133 InsO (para. 23 of the judgement). Furthermore, the insolvency administrator must now demonstrate and prove that the debtor’s (management) attempt to restructure the business was unsuitable and that the debtor recognised or accepted it (para 74). In order to conclude that there was an intent to prejudice, it is also decisive that the debtor had no reasonable prospect of being able to fully satisfy his other creditors in the future (para 75). These parameters considerably strengthen the management’s discretion in crisis situations. Also, the fact that, among other things, in the case of payments to a restructuring advisor the restructuring attempt under certain circumstances does not have to be at least “implemented in its early stages” (paras 72, 79) in order to avoid avoidance in case of a later insolvency is also very welcome from the point of view of the restructuring practice.

Like the previous instances (LG Frankfurt, judgment of 15.11.2011 – 3-5 O 45/11, here, in German), however, the BGH also assumes that case law contradictory to the legal considerations underlying the restructuring concept leads to the ultimate failure of the restructuring attempt even if that particular decision is not of the last instance (para. 34). This approach must be viewed very critically, as the BGH itself had ruled in favour of the advising law firm’s legal considerations underlying the restructuring concept in this very matter in the last instance, i.e. the legal premises of the restructuring attempt at the time were ultimately correct (BGH, ruling of 1 July 2014 – II ZR 381/13, here, in German). However, it is a different matter whether the respective advisor should in practice not rather advise against the continuation of the restructuring attempt for reasons of prudence in view of such a judgement. It is precisely this consideration to which the BGH refers – rightly in principle – when it states (para. 36) that it is not only the prospects of success of a possible legal remedy that are important, “but also whether the debtor still has the time necessary to carry out a legal remedy“. And further: “The window of opportunity [for a reorganisation attempt] ends when the insolvency petition is inevitable from an ex ante perspective.” (para. 88). From an advisor’s point of view, this approach is to be agreed with, but it is interesting to note that this very case law itself provides an example of how reorganisations can fail due to the “slow grinding of the judiciary’s efforts”, i.e. the judiciary itself contributes significantly to the failure of reorganisations with its lengthy decision process.

Quite rightly, though, the BGH points out that a “suitable restructuring concept” [must] not be limited to the financial side, but must also include the causes that led to the insolvency“. (para. 83 ff.). Hence, the mere conversion of bondholders’ claims into equity, which was probably the only envisaged measure in the restructuring concept underlying this case, did – according to the BGH – not sufficiently take into account the “considerable changes in the industry“. What is required – unless there are clearly definable purely legal causes for the crisis – is a comprehensive business restructuring approach.

On the other hand, it is at least dogmatically questionable that the BGH does not allow for the application of the legal institute of a so-called “cash transaction like situation” (“bargeschäftsähnliche Lage“), which it created itsel to fill an alleged legal loophole, to “services of a restructuring advisor” within the framework of § 133 InsO (para. 45), only to state from para. 49 onwards that a “protection against avoidance according to the principles of the situation similar to a cash transaction is not necessary for a payment of services of a restructuring advisor“. For, according to the BGH, “if the debtor strives for a promising restructuring and pays for the services of the restructuring advisor in this context, such fact alone speaks against the debtor’s intent to prejudice other creditors.” Of course, this case law is dogmatically much more stringent with regard to the legal situation of § 142 InsO, which until the reform of 2017 (again here) explicitly excluded the application of the so-called “cash transaction privilege” (“Bargeschäftsprivileg“) for preferences challenged under § 133 InsO. By recognising a so-called “cash transaction like situation” within the framework of § 133 insO, the BGH itself had created a cash transaction privilege – which was not provided for by law until 2017. It may be understandable from a dogmatic point of view that the court is now pushing back this legal concept which is useless after the 2017 reform. However, such volte-faceted case law is difficult to comprehend in practice.

Subsequently (from para. 52 onwards), the BGH refers to the judgment of 6 May 2021, which has already been discussed elsewhere (here), in order to overturn the decision of the lower courts and states that the OLG Frankfurt, as the court of appeal, did not observe this new case law, according to which “in the case of congruent cover, it cannot be concluded from the debtor’s imminent insolvency alone that the debtor acted with intent to prejudice the interests of other creditors“. In referring the case back to the first instance (the underlying facts of the case could not sufficiently be clarified for a final decision), the BGH issues numerous “sailing instructions”, in particular with regard to dealing with claims of restructuring advisors.

Particularly questionable in this context are the comments on the question of when an (external) restructuring advisor shall be regarded as a “related person” within the meaning of § 138 para 2 no. 2 InsO. The BGH assumes that this is the case if “the restructuring advisor receives the relevant information without restriction”, “which, according to its legal and factual character, conveys the typical advantage of knowledge about the economic situation of the company which otherwise only executives of the company or its board members dispose of.” (para. 69). However, precisely this level of information is and should be the rule for the work of a restructuring advisor when preparing a restructuring concept. Thus, unless information is deliberately withheld from the restructuring consultant, he is now to be considered a “related person”. Moreover, in view of the sophisticated litigation strategies of insolvency administrators, it should now only be a matter of time before, for example, the conclusion of a contract for restructuring advice is challenged as a directly disadvantageous legal transaction under § 133 para 4 InsO. Accordingly, it is also already foreseeable that in about five years the BGH will once again try to catch such excesses in avoidance litigation. To be clear: such a volte-face is simply tiring for practice.

This criticism should not ignore the fact that in this case the last payment of fees to the law firm was made less than 24 hours before the application for insolvency was filed (para. 6/7), i.e. at a time when the law firm must also have been aware that the restructuring had failed. However, it should be possible to make such payments voidable without recourse to the classification as a “related person”, which again opens up the scope of application of presumption rules. After all, the proof of the constituent elements of the so-called “congruent coverage” (“kongruente Deckung“) according to § 130 InsO is already facilitated by its paragraph 3.

In contrast, the BGH’s decision – also published as a guiding principle – that “the lawyer [can] agree with his client that s/he may claim and enforce his/her fees without having to inform the client of a calculation with more detailed information” (see from para. 63 onwards) is to be considered rather misguided, not only because of the contested fees amounting to approx. Euro 4.5 million for an advisory activity covering a period of less than six months. Furthermore, this decision devalues the decision of the BGH’s very same (!) senate (judgement of 13 February 2020 – IX ZR 140/19 and 141/19, here, in German), according to which “the agreement in the form of a time-based fee, which entitles the lawyer to charge a quarter of the hourly rate for every 15 minutes or part thereof” is void. The consequence of both decisions probably will be that from now on legal advisors will no longer submit any evidence regarding work actually carried out. This, however, basically prevents the management from controlling the often not inconsiderable costs of restructuring advice.

Conclusion: A ruling with light and shade. With regard to the restructuring practice, it is to be welcomed that the BGH now grants the management a broader scope of discretion and has substantially cut back the excesses of the previous Frankfurt case law on QCells. The further curbing of the chain presumption rules also seems sensible, although the opening of new presumption rules by classifying restructuring advisors as “related persons” immediately counteracts this effect. The denial of the “cash transaction like situation” of the fee payments also seems arguably contrived, even if it is dogmatically understandable and, due to the new version of § 142 InsO, only relevant for old cases anyway. However, the classification of restructuring advisors as related parties (which can probably be applied to almost every advisory constellation in the vicinity of a crisis), together with the associated presumption rules, partly relativises the very presumption rules overruled in the same decision. Dogmatically perhaps cleaner, but not really helpful in the matter.

The waiver of a “more detailed calculation” of how the lawyer’s bill of costs came about, on the other hand, opens the door to abuse. The BGH should rather consider leaving the timing of the billing periods to the discretion of the parties instead of completely dispensing with any evidence.

On the merits, however, this decision could turn out to be a Pyrrus victory for the law firm concerned, because all in all, the prospects of being able to keep the fees paid after the aforementioned LG Frankfurt’s decision (
judgment of 15.11.2011 – 3-5 O 45/11) became known are probably not very high in view of the BGH’s sailing instructions. Regarding fees paid up to that point, the question will arise as to the extent to which the submitted reorganisation concept actually got to the root of the “causes of insolvency”. According to the BGH’s statements, this is at least doubtful. Therefore, while the future consulting practice can confidently say “goodbye” to QCells, the law firm concerned here will most probably still have to nibble on this case for a while.

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