German CourtOn 5 April 2017, an amendment to the German Insolvency Code (Insolvenzordnung – “InsO”) has come into force which provides for various changes to the avoidance rules and clawback laws in German insolvency proceedings.

The major change affects the right of an insolvency administrator to challenge transactions for willful disadvantage (§ 133 InsO).

Until the change in law, a transaction made by the debtor during the last ten years prior to the request to open insolvency proceedings, or subsequent to such request, with the intention to disadvantage his creditors could be challenged if the other party was aware of the debtor’s intention on the date of such transaction. Such awareness was presumed if the other party knew of the debtor’s imminent illiquidity (drohende Zahlungsunfähigkeit) and that the transaction constituted a disadvantage for the creditors.

The changes to this rule are that the claw back period for such transactions, where the other party received satisfaction or security, is reduced from ten years to four years. Furthermore, if such satisfaction or security was due to the other party, the awareness of the intention to disadvantage creditors shall only be presumed if the other party knew about an actual illiquidity (Zahlungsunfähigkeit) – knowledge about imminent illiquidity is no longer sufficient. Also, it is now explicitly stated that if the other party has agreed to a payment plan/payment in instalments, it shall be presumed that such other party has not been aware of an illiquidity of the debtor at such time.

Also, cash transactions which the debtor has entered into with a third party shall only be challengeable for willful disadvantage if the third party is aware that the debtor has acted dishonestly (unlauter).

Further changes are the following:

  • If a creditor files for the insolvency of its debtor, such filing will not become inadmissible (unzulässig) only because a specific invoice is paid by the debtor.
  • As long as a salary payment by the debtor has been made within three months of the employee’s work, the payment qualifies as a cash transaction which is generally not challengeable.
  • A creditor who owes repayment to the insolvency estate as a result of a successful challenge by the insolvency administrator is obliged to pay interest on these amounts only upon defaulting with the payment and not from the opening of proceedings.

The new rules apply to insolvency proceedings which have been opened on or after 5 April 2017 and the new interest calculation rules will, from 5 April 2017 onwards, also apply to insolvency proceedings which have been opened prior to that date.

Restructuring professionals have different views whether the new law will substantially change the practice of insolvency proceedings in Germany. The interpretation of the avoidance laws by the German Federal Court has been regarded by many market participants as excessive, and there is some concern that the new rules allow for interpretation in many provisions which may still allow the insolvency administrator to challenge transactions. It will certainly take some time for the first cases in which the new law applies to be brought before the German courts, and until then there will be uncertainty. Creditors which are concerned about a possible avoidance of transactions they plan to enter into with a distressed German counterparty are therefore well advised to seek legal advice to minimize their potential exposure.