Dawn of a new era at the BGH?

The change in jurisprudence of the German Federal Supreme Court (“Bundesgerichtshof“, “BGH“), may – after previous decisions regarding avoidance in insolvency that were initially difficult to interpret (here) – now actually turn into a true “dawn of a new era”: Germany’s highest civil court realignes areas such as avoidance law, the appointment of administrators and administrator remuneration previously considered sacrosanct by the proverbial “stroke of the pen”. In order to allow for an easier understanding of the magnitude of the court’s turnaround, the following article presents a summary of the various comments I published previously (cf. for the resprective links in the article).

1. Avoidance in insolvency

With two recent decisions, the BGH has continued its correction with regard to the so-called “chain presumption rule” (“Kettenvermutungsregel“), which had led to an immense expansion of the German provisons on avoidance of preferences (see again here) and thus probably finally follows the legislative guideline of the reforms from 2017 (see here).

a) With its decision of 22 February 2022 (“Preferences – the end of the “chain presumption rule”), the BGH (once again) breaks with its previous, unfortunate doctrine known as the “chain presumption rule” (see for criticism already Beissenhirtz, ZInsO 2016, 1778, 1785, available here, in German) and returns to the basic rules of the distribution of the burden of proof in civil law. In particular, according to the BGH, a sluggish payment behaviour of the debtor cannot be used (any more) to infer a later cessation of payments (as strongest proof of illiquidity) if the entire previous business relationship was characterised by such sluggish payment behaviour.

b) The BGH took five years to reach its decision on the challenge of advisors’ fees in the QCells case and the 49-page decision is very comprehensive and multi-faceted (cf. here for a detailled commentary). The result is a ruling with both light and shade: with regard to restructuring practice, it is to be welcomed that the BGH now grants a broader scope of discretion to the management of a distressed company and that it has substantially cut back the excesses of the (challenged) decision of the Higher Regional Court Frankfurt on QCells (cf. here for a comment on that previous decision). The further curbing of the “chain presumption rule” also seems sensible, although the opening of new presumption rules by classifying restructuring advisors as “related persons” according to § 138 InsO counteracts this effect to a certain degree. Furthermore, the denial to charaterise the payment of the fees as a “valuable consideration” (“bargeschäftsähnlichen Charakter“) also seems arguably contrived, even if it is dogmatically understandable and, due to the new regulation 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 corporate crisis), with the ensuing presumption rules regarding certain facts of the case, partly relativises the above mentioned abolishment of the so-called “chain presumption rule” in the same decision. Dogmatically perhaps cleaner, but not really helpful in the matter.

2. Pre-selecting administrators – does quality prevail?

Since the famous German Prof. Dr. Ernst Jäger, the appointment of the insolvency administrator has been regarded as the “fateful question” of insolvency proceedings. Pursuant to § 56 of the German Insolvency Code (InsO), the insolvency administrator must be “a natural person who is suitable for the individual case, in particular one who is competent in business and independent of the creditors and the debtor”. In practice, insolvency courts have developed so-called “pre-selection lists”, which are compiled from applicants for the office and used for the appointment in the specific proceedings. The Berlin Insolvency Court had drawn up a particular ranking of candidates which allocated points calculated on the basis of the type of proceedings already administered (more or less than 20 corporate insolvencies / only consumer insolvencies) and on “general” and “proceedings-related” individual characteristics.

The BGH declared this points system to be unlawful because the very basis of the points allocation cannot form a basis for comparison (cf. here for a detailled commentary on the decision, in German). Currently, the question of whether this means that the system of pre-selection lists per se has “died” or only the specific form developed in Berlin is discussed in practice. It is likely to gain momentum in view of the project of a nationwide pre-selection list (e.g. here, in German). Based on the argumentation of the court, at least a system that insists on the aforementioned “general” and “procedural” characteristics should not be inadmissible per se. Such systems have been in use for years in the form of key performance indicator (KPI) systems (see, for example, Deloitte’s report on the activities of Rombach Rechtsanwälte Insolvenzverwalter, here, in German).

Although this topic has in general been discussed for years, the topic of quality measurement among insolvency administrators is developing only slowly, but now perhaps in a direction that is also common practice in other sectors of the economy: creating comparability of services through key performance indicator systems in order to increase the quality of service. For insolvency administrators, this development – if it goes in the direction suggested here – would naturally mean more competition. For the creditors as “customers,” on the other hand, it might mean an increase in the previously “meager” quotas.

3. Administrators’ remuneration – there used to be more tinsel

Two relatively recent decisions of the BGH on remuneration settlements of the (preliminary) insolvency administrator led to not insignificant reductions of the respective claims (cf. here for a more detailled commentary on the decisions, in German).

a) First, the BGH ruled that “the provisions on increasing the minimum remuneration in accordance with the number of creditors who have filed their claims are not applicable to the remuneration of the insolvency administrator in insolvency proceedings concerning the assets of a legal entity“. Behind the unwieldy wording lies the (now formulated) principle that the simple number of creditors in (preliminary) proceedings may not per se be taken into account in a manner that increases the administrator’s remuneration. This decision specifically affected the provisional insolvency administrator of Air Berlin who had argued that the number of 1.3 million creditors should have increased his remuneration.

b) In another case, the BGH ruled: “If the insolvency administrator has assigned part of the disputed claim to a litigation financier or has undertaken to pay a certain part of the proceeds to the litigation financier, only the part of the proceeds which accrues to the insolvency estate after deduction of the amounts due to the litigation financier increases the calculation basis.” In other words, the share of the successfully litigated claim to be paid to the litigation financier – which often exceeds 25% – is not to be included in the calculation for the administrator’s remuneration.

Both decisions naturally lead to a – initially formal – narrowing of the calculation basis for administrator remuneration. The decision regarding the consideration of a large number of creditors is likely to affect only a few cases, while the second decision regarding litigation financiers will probably affect a not insignificant part of insolvency proceedings. Apart from these concrete decision, it is not too far-fetched to conclude that the BGH will take a generally more critical view at the administrators’s remuneration claims in general. This is not good news for insolvency administrators in what are already difficult economic times.

Conclusion: Taking into account that, in addition to the above-mentioned decisions, the legislator has considerably limited the temporal extension of the grounds for insolvency through the SanInsFOG (see here), it becomes clear how strongly the law on insolvency administration is currently changing: The obligation to file for insolvency generally occurs later in time and attempts at reorganization can now be planned with a more “optimistic” approach. Within the insolvency proceedings, the possibilities for avoidance have been seriously reduced. Potential candidates for the office of insolvency administrator may have to face a more transparent selection process in the future, while their remuneration base will become narrower – not least due to the restriction of avoidance rights. Hence, 23 years after the German Insolvenzordnung came into force, that really seems like the dawn of a new era.

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