New Developments in Insolvency Avoidance Action

In two recent decisions (judgment dated 12 February 2015 – IX ZR 180/12 and ruling dated 16 April 2015 – IX ZR 6/14), the German Federal Court of Justice (Bundesgerichtshof – “BGH”) has further defined its judgement concerning intentional insolvency avoidance (Vorsatzanfechtung). On the one hand, the decision refers to so-called cash transactions (Bargeschäfte), which are broadly excluded from insolvency avoidance actions. On the other hand, the BGH distanced itself from the position that knowledge of insolvency should be invariably presumed in the case of business partners whom subsequent debtors had requested to enter into an agreement for instalment payments.

Background

In the first case, the defendant supplied ingredients to the insolvent company, a producer of bakery products. The defendant’s underlying terms and conditions for delivery and payment provided for retention of title (Eigentumsvorbehalt). The bakery products were not to become the insolvent company’s property until all receivables of the defendant were paid (so-called current account retention (Kontokorrentvorbehalt)). Upon insolvency, the bankrupt company regularly paid for the ongoing deliveries from its sale proceeds (Veräußerungserlöse).

In the second case, the defendant had disputed a payment order of approximately €20,000.00 against the company which subsequently went bankrupt, and had allowed the company’s request to pay this amount in four instalments.

Both insolvency administrators filed suit in their relevant proceedings. Based on intentional insolvency avoidance as contemplated in section 133 of the German Insolvency Code (Insolvenzordnung - “InsO”), the insolvency administrator demanded the repayment of payments already made by the bankrupt company to the defendant prior to initiating insolvency proceedings. As usual in such cases, it depended on whether the payments by the bankrupt company had been made with the intention to defraud creditors (Gläubigerbenachteiligungsabsicht) and whether the defendant receiving payments had any knowledge thereof.

The Judgment of the BGH dated 12 February 2015, Docket no. IX ZR 180/12 (Cash Transactions)

Initially, the BGH affirmed that its new judgement, according to which an intention to defraud creditors—which is usually assumed whenever performance is rendered with knowledge of one’s own insolvency—is not applicable if payment is made as part of a so-called cash transaction, namely in direct exchange for consideration of equal value. The BGH has specified this in two points. First, the exchange of performance by way of a cash transaction could take place without the intention to defraud creditors only with respect to the immediate disadvantaging of the creditors by the performance itself. The intention to defraud with respect to any indirect disadvantage due to continuing business operations on a cash-transaction basis which does not cover costs but which instead leads to additional losses could also exist in the case of cash transactions. On the other hand, the BGH noted that due to the expanded current account retention, the prerequisites for a direct exchange of performance were not satisfied, because the payment for the delivery did not result in the acquisition of ownership, if additional purchase-price payments from earlier deliveries were still outstanding.

The Ruling of the BGH dated 16 April 2015 (Knowledge of Insolvency in the Case of an Instalment Payment Agreement)

In contrast to prior decisions, the BGH held that the request for an instalment payment agreement with a supplier is not indicative of a company’s insolvency or the supplier’s knowledge thereof. Same is merely the case, if the debtor also states that it can otherwise no longer fulfil its payment obligations. According to the court, such requests are not unusual in the course of business and could have various reasons not connected to payment difficulties (e.g., the attempt to obtain advantageous interest rates).

Comment

Both decisions accentuate a recently initiated change of direction in the judgement of the IX Civil Senate of the BGH concerning intentional insolvency avoidance in favour of the suppliers of subsequently insolvent debtors. These suppliers can now assume that payments for goods delivered immediately and therefore satisfying the prerequisites of cash transactions are usually not subject to challenges. However, in the case of knowledge of payment difficulties (whereby the mere request of instalment payment agreements may no longer suffice as an indication), the goods in consideration of payment must become the property of the subsequent debtor. On an individual basis, it can therefore be more reasonable not to incorporate one’s own terms and conditions of delivery in part or fully in view of an expanded retention of title.

In the draft bill of the German Ministry of Justice (Justizministerium) dated 16 March 2015 to amend the law governing insolvency avoidance action, it can be seen that the jurisprudence—for purposes of knowledge of an intention to defraud—tends to except an exchange of performance resembling a cash transaction from intentional insolvency avoidance and at the same time to restrict the indicative effect of circumstances such as entering into an instalment payment agreement. Both restrictions to the appeal authorization (Anfechtungsbefugnis) derived from the decisions are expressly intended as legal exceptions. This legislative initiative began after the number of court proceedings appealing insolvency proceedings had more than doubled since 2007. Industry groups and credit insurers perceive considerable risks particularly in the complexity of the jurisprudence governing the right to appeal against a bankruptcy. Same may result in the risk that suppliers of companies in financial difficulties will no longer make deliveries, from fear of subsequent appeals, or will do so only in consideration of advance payment, and that, as a result, it will become even more difficult to avoid insolvency. If the reform is passed in the present version, it will certainly constitute a restriction of the authorization of the supplier to appeal. But it will most likely do little to make the right to appeal against a bankruptcy any simpler or more predictable.