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Reform of law governing challenges to debtor’s transactions in insolvency proceedings

May 2017

The reform of insolvency law is meant to bolster the rights of creditors in the event that a business partner becomes insolvent as well as provide greater legal certainty.

Insolvency law foresees the possibility for the insolvency administrator to recover payments made by the insolvent debtor prior to becoming insolvent. This has resulted in payees being faced with legal uncertainty and sometimes disproportionate burdens. The reform of the law governing challenges to debtor’s transactions in insolvency proceedings is supposed to strengthen the position of creditors and ensure greater legal certainty.

The case law of the Bundesgerichtshof, Germany’s Federal Supreme Court, had also contributed to the uncertainty among many creditors that had received payments prior to one of their business partners becoming insolvent. In some cases, these creditors had to reckon with the insolvency administrator reclaiming the payments if, for instance, they had allowed the debtor to make payments in instalments. This was viewed as an indication that they were aware of their business partner’s imminent insolvency and nonetheless accepted money, which the insolvency administrator then reclaimed.

The reform to this aspect of insolvency law is meant to afford greater protection to creditors. The presumption that creditors were aware of the impending insolvency when granting payment relief has now been reversed, i.e. it is assumed that the creditor was not aware of this. This presumption must then be rebutted by the insolvency administrator. Thus, challenges to debtor’s transactions brought by the insolvency administrator will only be possible if the creditor knew that the debtor was definitely insolvent.

In addition, the period for filing such a challenge has been reduced. If a creditor has received security or satisfaction, the period for bringing a challenge will now no longer extend to ten years but instead only four.

Furthermore, the legislature has tightened the requirements in relation to challenges to wilfully disadvantageous cash transactions. These challenges will now only be possible if the creditor was aware that the debtor acted unfairly or dishonestly. Moreover, interest will only begin to accrue if the party opposing the challenge is in default of payment and not as early as the opening of insolvency proceedings.

The reform of insolvency law does not completely do away with legal uncertainty. Lawyers who are experienced in the field of company law can advise both debtors and creditors in the event of insolvency.

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