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BGH defines conditions for contestation-proof cash transactions
New decision clears up legal uncertainties in the use of Section 142 InsO
As part of the 2017 avoidance reform, the legislator also revised the wording of Section 142 InsO. This regulates the so-called cash transaction, which creates scope for creditors to continue supplying economically distressed customers without the risk of avoidance. Until now, it had not been clarified under which conditions the “unfair practices” cited there as an exception to the protection against avoidance would apply. The Federal Court of Justice (BGH) has now commented on this and other important aspects of the cash transaction in a very instructive decision dated 5 December 2024 (IX ZR 122/23).
Context of Section 142 InsO
Section 142 InsO is an exceptional provision in the context of insolvency avoidance and protects business partners of a company in crisis from subsequent reclaims, even if the conditions for avoidance are otherwise met. The provision is intended to enable a company in crisis to continue to participate in business transactions.
The basic idea behind the statutory liability privilege is that a direct exchange of equivalent performance and consideration must take place within a close time frame (case law generally sets 30 days as the upper limit). If these conditions are met, the statutory regulation does not assume a reduction in the subsequent insolvency estate to the detriment of the creditors.
Equivalence of benefits in cash transactions
However, equivalence is regularly lacking, for example, if extended retention of title is agreed for deliveries of goods to the debtor company. In this situation, the subsequent insolvency debtor does not acquire full ownership and therefore does not receive an equivalent for the purchase price payment it has made.
In the newly decided case, the insolvency administrator argued that there was a lack of equivalence even in the case of deliveries and services for a business operation that was permanently in deficit. The BGH rejects this with a brief reference to the explanatory memorandum to the 2017 amendments: “The question of equivalence should only be determined according to objective standards, without differentiating according to the customer.” In other words, the commercial qualities of the debtor must be disregarded when determining the equivalent value.
Key issue of the BGH decision
The BGH decision focuses on the restriction of Section 142 InsO, which was included as part of the reform with effect from 5 April 2017, according to which its application is excluded if the opposing party is aware of the debtor’s unfair actions.
In line with the explanatory memorandum to the law, this has so far included, for example, the squandering of assets for fleeting luxury goods with no benefit for creditors or the sale of business assets necessary for the continuation of the company with the aim of depriving creditors of their equivalent value. Until now, there has been considerable disagreement as to the cases in which unfair behaviour is to be assumed below this threshold. In some cases, it was even argued that there had been no change compared to the regulation in place before the amendment, which did not contain this restriction.
The insolvency administrator in the case in question was of the legal opinion that the mere continuation of business operations with the permanent generation of losses was sufficient for the assumption of unfair behaviour.
The position of the Federal Court of Justice
The Federal Court of Justice rejected this view and clarified that behaviour that clearly goes beyond the intention to disadvantage creditors and deliberately harms the other creditors is required in order to be able to speak of unfair behaviour. The court assumes this to be the case if the cash transaction leads to a deliberate disadvantage to other creditors or is used to deliberately favour the recipient over other creditors.
For creditors, this means a decisive improvement in legal certainty. Provided they fulfil the other requirements of the cash transaction, they are (also) exempt from the obligation to check whether the business partner is making permanent losses when continuing the business.
Conclusion
More than ever, cash transactions can therefore be seen as a safe harbour for transactions with business partners in crisis when it comes to preventing the risk of avoidance.
The experts at PASCHEN will be happy to help you find out what you need to do to benefit from this protection.
You can read here when it is justifiable to maintain the customer relationship in provisional insolvency proceedings: Continued supply during customer insolvency