The German Government proposes amendments to the German insolvency Act (‘InsO’), which will limit the insolvency administrator’s rescission rights, especially his claims under s. 133 para 1 InsO.

Current Law

The German Insolvency Act aims at an equal treatment of all creditors. Part of this aim is achieved by insolvency rescission law. Pursuant to the s. 133 para 1 InsO an insolvency administrator may contest a transaction of a debtor during the last ten years prior to the application to open insolvency proceedings or subsequent to such request, if the debtor intended to disadvantage his other creditors and the beneficiary of the action was aware of such intent. Such awareness is presumed if the party knew of the debtor’s imminent insolvency and its detrimental effects for the other creditors. Depending on the circumstances, the creditor’s knowledge can e.g. be indicated by the agreement of instalment payments.

Reasons for the Amendments

After different associations and scholars criticised the German rescission law as too broad and attested especially s. 133 InsO to cause unbearable risks for business activities, the Government decided to amend the German Insolvency Act in order to find a balance between establishing definite and recognizable rules for creditors and serving the purpose of equal treatment of the creditors.

Proposed Amendments

Concerning both incongruent and congruent transactions, the ten-year period of s. 133 InsO shall be limited to a four year-period before the insolvency application. In case of a congruent transaction, the prerequisite shall be the illiquidity of the debtor; an imminent illiquidity shall not be ample. In case of an agreement of instalment payments or other ways of facilitating payment, the presumption shall be reversed and it shall be presumed that the creditor was not aware of the debtor’s illiquidity.

Comment

The proposed amendments would have a high impact on German rescission law. The limitation of claims to actions that occurred four years before the insolvency filing may open grounds for abuse, as there would be no reason why actions earlier than four years before the application should not be challenged if the other prerequisites are fulfilled – as there is no legitimate interest to protect the beneficiary of such transaction. The reversion of the awareness presumption regarding instalment payments might serve the purpose of creating legal certainty for business acquaintances to a certain degree. However, it would also raise the bar for the insolvency administrator to effectively enforce the insolvency masses’ rights to challenge transactions, as it may be difficult to show sufficient other indications for the creditor’s awareness. In combination with the amendment that knowledge of an ‘imminent’ illiquidity shall not suffice to fulfil the criteria of s. 133 InsO, the creditors’ rights as a group are severely impaired. One should also bear in mind that these amendments might hinder the opening of insolvency proceedings on the grounds of insufficiency of assets, which would result in a detrimental effect on all creditors as well.