Dr. Ingo Reinke, Gesellschaftsrecht

Contesting in insolvency proceedings: Reform remains distant

The contesting of debtor’s transactions in insolvency proceedings in Germany has increased significantly in recent years. Insolvency administrators are demanding the return of payments, which the creditor received from the insolvent company prior to the commencement of insolvency proceedings. A reform proposal to limit the right to contest transactions was debated last year. The second and third readings in the German Bundestag were set to take place in autumn 2016, but have since been postponed. The proposal includes provisions to shorten the period for which transactions can be contested due to wilful disadvantage (section 133 para 1 of the Insolvency Code “InsO”) from ten to four years and to enable the parties to make payment agreements. At the present time, however, companies must still expect the contesting of transactions in accordance with the current laws. Certain practices can help reduce such risk:

  • Companies should have a strict system in place for payment reminders and debt collection so that large outstanding debts are avoided in the first place. Concrete measures such as collection and debt enforcement should not only be threatened but also promptly carried out. Creditors that announce debt enforcement measures multiple times, offer the option of payment by instalments or threaten to discontinue deliveries must later expect allegations that they knew about the debtor’s illiquidity early on. This increases the risk of contested transactions.
  • If a contractual partner has liquidity issues, any further business should be conducted in the form of cash transactions. Deliveries should only be made on advanced payment and counterperformance should be made and accounts settled within two weeks.
  • Depending on the subject of the business relationship, adding specific provisions to the general terms and conditions or the terms of delivery may help avoid the contesting of transactions in insolvency proceedings. Such provisions include dissolution clauses and the form of the retention of ownership.

 

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