With a recent draft act to amend the German Insolvency Code (Insolvenzordnung – InsO), the German Federal Ministry of Justice and Consumer Protection intends to reduce uncertainty regarding insolvency claw-back, in particular regarding Sec. 133 InsO. The result may be that restructuring opinions that are now market standard when (re)financing financially troubled companies in Germany become redundant.
Current legal status
Under Sec. 133 InsO, a transaction made by the debtor during the last ten years before the petition to open insolvency proceedings may be challenged if the debtor intended to disadvantage his creditors and the other party was aware of that intention. Such awareness is presumed if the party knew of the debtor’s imminent insolvency and that the transaction prejudiced the other creditors.
The following example illustrates the changes proposed by the draft act:
A debtor, who is about to run out of money, sells a car in 2009. The parties agree that the buyer pays an adequate purchase price directly to a creditor of the seller. That creditor knows of the imminent insolvency of the seller and that the payment prejudices all other creditors. In 2015, insolvency proceedings are opened in respect of the seller.
Under current InsO, the insolvency administrator could challenge the transaction: the transaction took place less than ten years before the filing for insolvency and the buyer knew that the seller was imminently illiquid and that the transaction prejudiced the other creditors.
By contrast, according to the draft, claw-back becomes more difficult where a transaction constitutes congruent cover, i.e. is effected according to the underlying (purchase) contract, as is the case here. Such a transaction can be challenged only if it took place four years before the filing for insolvency (instead of ten). Moreover, the awareness of the debtor’s intention to prejudice his creditors would be only presumed if the creditors were unreasonably disadvantaged and if the creditor knew that the debtor was illiquid (instead of knowledge of imminent illiquidity). None of these requirements are met so that the transaction could not be challenged if the draft act was effective.
Current market practice is to advise lenders which (re)finance ailing German companies and accept collateral to obtain restructuring reviews in order to avoid the potential allegation of an insolvency administrator that the refinancing was futile from the outset and that the borrower was therefore imminently illiquid. The allegation would be that the (re)financing protracted the insolvency to the detriment of trade creditors while the secured lenders were not at risk. Restructuring reviews are often provided by accountants in the form of the market standard IDW S 6, which is costly and time-consuming.
The drafted amendment could make (re)financings less complicated because lenders could prevent claw-back under Sec. 133 InsO simply by obtaining a liquidity status from the borrower instead of a full-fledged restructuring review.