Reform of German insolvency avoidance law

In the end, the reform went through unexpectedly fast:  After a first reading in the German parliament in January 2015  the intended reform of the German insolvency avoidance law has been put on the back burner due to discussions on possible fiscal privileges. Now, the Bundestag has adopted the reform rather suddenly on 16 February 2017 – without further discussion and without fiscal privileges.

Key points of the reform

The most controversially discussed points of the reform were, on the one hand, the attempt to mitigate of the German avoidance provisions pertaining to a “Preference” according to § 133 InsO and, on the other hand, the (re-) introduction of fiscal privileges through the back door. In addition, a number of secondary aspects have been regulated, of which the restriction for the insolvency administrator to maximize default interest rates on avoidance claims through a clever litigation strategy – at the detriment of the creditor facing the avoidance claim – has to be emphasized.

(1) Over the years, the courts had extended the scope of especially § 133 InsO to such an extent that the uncertainty in the business community and among employees on how to deal with a debtor in a crisis had fundamentally increased. Indeed, so far that an increasing wave of press reports pointing out these risks finally led the legislature to “re-adjust” the scope of the provision. Some details:

• The period to challenge an action of the debtor has in general been shortened to four years from the current ten years, at least for those transactions “customary in commercial life”. On the other hand, the ten-year challenge period will continue to apply to asset shifts and crimes associated with bankruptcy.
• In the case of so-called “congruent” cover transactions (“Deckungsanfechtungen“) – that means in the case of contractually agreed services which were due at the time of their performance – the burden of proof for the insolvency administrator has also been increased since he no longer can just rely on proving imminent insolvency; he now has to prove the actual inability of the debtor to pay his obligations when they fall due (illiquidity).
• In the case of waivers or other accommodations for payment, which in the meantime carry a high risk of avoid ability in a later insolvency procedure, a legal construction has now been introduced according to which it is not assumed any more that the creditor actually knows that the debtor is insolvent when accepting a proposed waiver, etc. In such cases, the insolvency administrator must positively prove that the creditor was indeed aware of the insolvency.
• Furthermore, the scope of the so-called “cash-transaction-exception” (“Bargeschäftsausnahme“) pursuant to § 142 InsO is extended to Preferences according to § 133 InsO, so that in the future cash-transactions may only be challenged on the grounds of “dishonesty” (“Unlauterkeit“). “Cash transactions” in accordance with § 142 InsO are such (congruent) transactions, in which equivalent services are exchanged within – in general – thirty days. The task to define the newly element of “dishonesty” will be with the courts, the legislature providing them with a few guidelines, e.g. dishonesty shall not be present if the debtor realizes that the continuation of the business is prone to incur further losses, but still agrees to transactions “which are generally necessary for the continuation of the business. “

It remains to be seen whether the competent senate of the Bundesgerichtshof will react adequately to these obvious efforts by the legislature to limit the scope of § 133 InsO – that is, to actually adapt its jurisprudence.

(2) On the other hand, the likely reason for the delayed reform has now been dispensed with altogether: the introduction of a so-called “fiscal privilege” through the back door. Before the introduction of the German Insolvency Act in 1999, its predecessor, the “Konkursordnung” actually provided for a priority claim of the treasury, the so-called “fiscal privilege”. In the context of the now concluded reform process, it was feared that the treasury would reintroduce this privilege through the “back door” of the avoidance provisions. In particular, tax authorities and social security bodies are so-called “self-executing authorities”, i.e. they do not need a court judgement in order to enforce their claims in the first place. A new clause originally to be implemented in § 131 InsO foresaw a blocking against the avoidance of money recuperated through such enforcement. It is obvious that due to the then ensuing diminished insolvent estate, the prospects to turn around companies would have worsened considerably as would have the ratio for unsecured creditors (which is not high at 2.6% anyway, cf. here). For reasons unknown, the legislature has, however, now abolished this point and passed the reform in a hurry.

(3) In addition to the aforementioned core elements of the reform, a number of other provisions were also adapted, such as the corresponding provisions of the “Avoidance law” (“Anfechtungsgesetz“),which regulates the challenge of certain legal proceedings outside insolvency proceedings by individual creditors. Also worth mentioning is the reform of § 143 InsO, according to which the defendant in an avoidance claim has to pay default interests on the avoidance claim now only after a formal assertion by the insolvency administrator. Before the reform, insolvency administrators were able to charge default interests from the beginning of the insolvency administration or even beginning at the date of the transaction in question; the interest rate being above 5% it is obvious that this was a clear incentive to file a claim rather late in the procedure in order to increase the debtor’s estate (and his/her own revenues). This door has hopefully been closed for good now.

(4) The reform comes into force one day after its promulgation for insolvency proceedings which are opened thereafter.

First Assessment

In general, the reform should be warmheartedly welcome. In particular, the restrictions on interests in connections with transactions to be avoided is to be welcomed without restriction – this legal construction being ever more unduly exploited by insolvency administrators over the years. Also, the abolition of the originally planned fiscal privilege is more than welcome. On the other hand, the reform of the Preference law remains behind what is required: As already stated in an article in the summer of last year (see here), “the foreseen presumption in § 133 para 3 sentence 2 RegE-InsO that the creditor is “actually not aware of the insolvency of the debtor” might be understandable in the follow-up to various judgments of the Bundesgerichtshof, but certainly does not correspond to the general life experience and is systematically wrong. Moreover, this presumption does not solve the problem of the current evolving jurisprudence to allow for avoidance of a waiver or other accommodation for payment which has been intentionally concluded to avoid illiquidity. Finally, the reform does not take into consideration a recent decision of the Bundesgerichtshof, according to which the creditor has to examine the feasibility of an out-of-court reorganization concept (on which often installment agreements are based) in order to avoid a claw back.” These aspects have not been taken care of in the reform so that already due to these points, the reform will probably not lessen the burden for the creditors very much.

Draft-Law: BT-Drs. 18/7054 (in German)
Recommendations of the Legal Committee: BT-Drs. 18/11199 (in German)
Recommendations of the Bundesrat: BR-Drs. 139/1/17 (in German)