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Avoidance of transactions in insolvency proceedings – New BGH Ruling

The ruling of the IXth Civil Senate, which is responsible for insolvency law at the Federal Supreme Court (BGH), on the so-called transaction avoidance with intent, pursuant to § 133 of the German Insolvency Code (InsO), has been a major source of concern for creditors in recent years.

The granting of generous payment terms to customers who are in a tight financial situation, which is often only temporary, was becoming more and more of an incalculable risk. After Prof. Kayser became chairman of the senate, in an effort to make it easier for insolvency administrators to prove illegitimate cooperation between the insolvency debtor and individual creditors later, a “presumption jurisprudence” emerged, which was often no longer compatible with a sense of justice, and which, furthermore, lacked clear structures and reliable rules, to which the affected parties could adapt. Under its successor Dietmar Grupp, the IXth Civil Senate expressly declared its departure from central pillars of its previous jurisprudence in a much-examined decision (IX ZR 72/20) of 6 May 2021.

The comprehensive guidelines of the decision are as follows:

  1. The assumption of the subjective requirements for transaction avoidance with intent cannot be solely based on the fact that the debtor is recognised as unable to pay at the time of the contested legal transaction.
  2. In the case of recognised insolvency, the intention of the debtor to put creditors at a disadvantage also presupposes that the debtor knew at the relevant point in time or at least reasonably accepted that he would be unable to pay his other creditors in the future; this is determined by the objective circumstances of which he was aware.
  3. For full proof that the debtor was aware of the intention to put the creditors at a disadvantage, the party opposing the avoidance must, in the event of the recognised inability to pay of the debtor, must also have known, at the relevant time, that the debtor would be unable to pay his other creditors in the future either; this is based on the objective circumstances of which he is aware.
  4. As a rule, the debtor’s intention to put creditors at a disadvantage cannot be based on a mere threat of inability to pay at the time of the contested legal transaction.
  5. One particularly significant basis for determining the discontinuance of payments is the debtor’s declaration that he is unable to pay, due to a lack of liquid funds; if no such declaration is made, the other circumstances that point towards a discontinuance of payments must be of similar significance to that of the declaration.
  6. The level and duration of the presumption of persistence of the confirmed discontinuance of payments depend on the extent to which the inability to pay has become apparent; this applies particularly to the sphere of knowledge of the party opposing the avoidance.

As these guidelines already suggest, the IXth Civil Senate has finally addressed the justified objections of the affected creditors to the way it handles contestation of intent.

In the justification, the senate rightly claims: “The jurisprudence, according to which it is concluded, solely from the inability to pay recognised by the opposing party, that the latter is usually also aware of the debtor’s intention to disadvantage the creditors (Ruling IX ZR 188/15), requires reorientation. The same applies to the determination of the intention to disadvantage the creditor in itself.”

In this context, they state further: “The conclusion from the recognised inability to pay to the subjective prerequisites of the transaction avoidance with intent leads in the case of the granting of congruent hedging to a far-reaching concurrence with the prerequisites of avoiding powers under section 130 InsO and thus de facto to an extension of the avoidance period relevant under this provision from three months to ten years under the old law and to four years under the new law. This does not only meet with concerns regarding the legal system. The corresponding intention of the legislator also seems doubtful.”

In this ruling, the Federal Supreme Court is responding to the frequently voiced criticism of its jurisprudence, and eliminating the largely indiscriminate handling of the requirements of § 130 and § 133 InsO, in the case of avoiding powers.

In its ruling, the Federal Supreme Court first seeks a way out by reorienting its definition of intent to put creditors at a disadvantage. In this context, it is (no longer) sufficient that the debtor is aware that he cannot honour his payments to creditors at the time of the legislation to be changed at a later date. The decisive factor (now) is that he knows or agrees that he will not be able to do so in the future.

Furthermore, the ruling expressly breaks with the “automatic” derivation of the subjective requirements of § 133 (1) InsO, relating to the debtor’s recognised inability to pay, which was in practice until then. In particular, it should be emphasised that attempts to provide hedging at the stage of imminent inability to pay should only be contestable in the future if other circumstances arise.

The fact that it is possible to draw conclusions from the recognised cessation of payments regarding the recognition of inability to pay is upheld, but with the reservation that higher standards are applied with regard to the judicial findings in this respect. If the debtor does not (explicitly) declare (that he is unable to pay), the circumstances that speak for a discontinuation of payments must be of similar significance to this declaration. Even if they occur repeatedly, delays in payment alone are insufficient.

Furthermore, although the decision upholds the principle that the continuation of a cessation of payments once it has occurred is to be presumed, it also correctly states that the presumption had been applied too indiscriminately in the past.

Finally, the decision also calls into question the previous handling of reasoning in connection with the fact that the debtor must have known or must have accepted that he would not be able to fully satisfy his other creditors, by giving preference here to a differentiation according to the extent of the hedging gap as well as its temporal perspective.

Overall, critical analysis of the Federal Supreme Court ‘s own jurisdiction on the challenge of intent should be applauded. It was long overdue, and it is a step in the right direction. However, not only are there unanswered questions, but there is also a lack of practical guidelines for creditors to follow in the future.

Where the previous practice of easing the burden of proof by presumptions has been broken, the Senate has not established concrete alternative standards. Instead, it regularly merely roughly outlines what the judge should consider in each individual case. The answer to the question of when the debtor could legitimately assume that he would still be able to honour the payments to all his creditors, despite having recognised his inability to pay, has still not been clearly defined. The ruling lacks a definition that is manageable in practice for the lower courts, as to when the “crisis has not yet progressed so far, or there is still justified hope of improvement for other reasons.” This is where the legal uncertainty persists.

In particular, it remains questionable if the ruling finally comes to the conclusion that: “If the court of appeal does not consider that the full proof of knowledge of the intention to put creditors at a disadvantage has been established, it will have to take the statutory presumption of § 133 (1) InsO into consideration.”

Additional findings in this respect leave “everything as it was.” In the end, it should be sufficient proof from the administrator, that the party contesting avoidance was aware of the relevant circumstances indicating (imminent) inability to pay. The fact that the creditor was aware that he would be putting other creditors at a disadvantage should also be presumed in the future, at least if the debtor is active as an entrepreneur.

The Senate concludes by saying that it sees no reason for further indications at present. They could not have expressed more clearly that they would like to keep everything open for the future.

Notwithstanding all sympathy for the decision, it is still too early to grant the affected creditors the all-clear. However, they are still well advised to exercise the greatest caution in dealing with financially distressed customers. It is even more important than before to be in a position to deal professionally with privileged treatment of payments with the available instruments, such as cash transactions or the rescission reform (accompanied by PASCHEN). The latter is likely to become even more important in the future due to the changes in jurisprudence postulated by the decision while at the same time adhering to the effects of the statutory presumption of section 133 (1) InsO.

You will find more information on the subject of avoidance of transactions in insolvency proceedings here. All information on the privileged treatment of payments during a crisis, according to the COVInsAG (COVID-19 Insolvency Suspension Act), is available in our Top Topic.