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One year of the Reform on the Avoidance of Transfers

By Dr Artur Bunk
Posted: 17th May 2018 08:41
In recent years, the Supreme Court (BGH) rulings on the avoidance of transfers pursuant to § 133 InsO have caused creditors more and more headaches. The granting of generous terms of payment to customers who are in a tense financial situation – often only temporarily – became an increasingly incalculable risk. Trade creditors who in good faith had granted installment payments to their debtors in order to help them through difficult times where suddenly faced with preference avoidance actions in subsequence of insolvency proceedings of the aforesaid debtors, which might have occurred years after the original event. Whereas in other jurisdictions like the US, bankruptcy trustees very often bring wholesale avoidance actions against all vendors who have received payments during the preference period, forcing creditors to incur the time and cost of defence, especially the fact that in Germany such actions could be brought forward in reference to payments received up to 10 years prior to filing made the situation extraordinarily painful. An entire industry, specialising in the preparation of such proceedings developed. Big Four companies aggressively offered (and still offer) a “product (software programming)” with which in accordance with a special algorithm all payments for a given period (sometimes the last two to three years prior to filing) are being analysed for patterns of an imminent insolvency state of the debtor. One keeps wondering why such programming was not used when the debtor obtained the auditor’s certificate.
In numerous cases simple trade creditors who, at a certain moment experienced a “hiccup” in their receivables, which after short payment demand exchanges had been rectified, were faced with claims from bankruptcy administrators to repay all payments received thereafter, in addition to interest accrued over the past three to five years. The fact that default interest (of 5% above base rate p.a.) was calculated from the opening of the insolvency proceedings, regardless whether the trade creditor had ever been faced with a payment demand (thus not knowing that a claim was being made) was a clear invitation to abuse. The bankruptcy administrators would typically wait the entire length of the proceedings (which could take years) and then, shortly prior to reaching the time limitation period, state their claim and file it immediately thereafter.
The matters have become so dramatic, that the legislator felt compelled to intervene. Thus, on 5 April 2017 a new Reform came into force with the intention to rectify the worst effects.
  • The possible rescission period for cover actions (payment for deliveries and services actually rendered) has been reduced from ten to four years prior to filing.
  • In these cases, knowledge of the recipient, to be proven by the bankruptcy administrator, is no longer linked to "imminent" insolvency of the debtor at the time of payment, but to "incurred" insolvency, if a so-called congruent cover was available. This is the case if the method and terms of payment corresponded to the original agreements. This difference, though seemingly small, is of high practical importance. It is significantly more difficult to prove actual knowledge of “incurred” insolvency, as there is much less room for circumstantial evidence.
  • So-called “cash transactions” (Bargeschäfte), where there is a short period between performance and consideration, can only be contested, if the creditor had realised that his debtor was acting with bad intent towards the remaining creditors.
  • Claims for rescission will only be subject to interest as of the occurrence of default (e.g. with the first repayment demand by the bankruptcy trustee, and not automatically as of the opening of insolvency proceedings).
  • If the creditor has granted the debtor easements on the payment terms, it is assumed that he was not aware of any insolvency of the debtor - in these cases the insolvency administrator must provide (counter) proof that the creditor was aware of this.
It must be noted that the burden of proof and the Supreme Court rulings on it were the main issues which led to this development in the first place.
Although the new rules are in principle only applicable to proceedings opened after 5 April 2017 (with the exception of the regulation on default interest) we have already now noted a swing in the actual approach of the courts to those cases. Over the last year, we have been able to obtain a number of positive rulings for our clients in cases, in which prior to the reform the outcome might have been more frustrating. That despite the fact, that the new rules were not actually applicable yet, due to the fact that the proceedings started a long way before the enforcement of the reform.
When analysing the situation, it is of course paramount to exactly assess the capacity in which the creditor is being addressed in the repayment demand. The situation of closely related parties (such as former board members, advisors, shareholders, financing institutions) has improved with the reform much less, than the situation of the simple third party trade creditor. However, even for the former significant improvements (level of knowledge, default interest etc.) were introduced.
Therefore, instead of giving way to “immoral demands” too fast, it might be well worthwhile to have a second look at the bankruptcy administrators demand letter.
Dr Artur Bunk
Managing Director
Office Frankfurt
Rüsselsheimer Str. 22
60329 Frankfurt
Tel: +49 69 348 771 660
Dr Artur Bunk specialises in advising banks, corporates, shareholders, creditors and debtors on debt restructuring, turnaround and insolvencies, mainly in proceedings in cross-border environment; Collaboration with insolvency administrators in cross-border insolvencies in the scope of Council regulation (EC) 1346/2000 and 848/2015 on insolvency proceedings.
In his career he has advised on numerous high profile debt restructurings and insolvencies, be it domestic, EU cross-border or international, including ISPAT International, Orinoco Iron, NRG Energy, Qualitech Steel, FairchildDornier, Lloyd Werft Bremerhaven, Cassens Werft SSW, Warnowquerung, VermögensGarant AG, F&P AG&Co.KG, AE group AG and Trevira GmbH, Amber Gold Sp. z o.o., SSN Sp. z o.o. a.o..

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