German insolvency law is often feared for its strict scrutiny of pre-insolvency transactions and the ability of insolvency administrators to claim restitutions to the insolvency estate (clawback). The most notorious provision – Section 133 of the Insolvency Code – threatens creditors with a 10-year hardening period and therefore puts a significant burden on transactions with counterparties in financial distress. Challenges extend not only to payments made, but also to security provided by the debtor.

Pursuant to the law, the risk in respect of such transactions is justified because it is restricted to exceptional circumstances. It requires that:

  • the transaction disadvantage the creditors;
  • the debtor's intention cause such disadvantage to its creditors; and
  • the relevant creditor be aware of such intent or circumstances indicate such intent.(1)

Under general principles of the rules on civil procedure, the burden of proving that these prerequisites are met rests with the insolvency administrator when asserting a clawback claim against a creditor. However, courts have lowered the burden of proof in favour of the insolvency administrator through rules on prima facie evidence. Most notably, the Federal Court of Justice has taken the view that whenever a debtor enters into an unusual transaction with a creditor outside the ordinary course of business (ie, where it deviates from the underlying contractual agreement), this strongly indicates that the debtor has acted with the intention to disadvantage its creditors and that the relevant creditor was aware of such intention. This is still controversial among practitioners, scholars and courts. Considerable uncertainty for creditors remains, since the legislature is still struggling to introduce a comprehensive reform dealing with these issues. Consequently, this topic should be handled with great care in the context of restructurings, especially of loan agreements where additional security is taken or retaken as part of a refinancing. Both security and payments can be put in jeopardy following restructuring.


In this context, the Dusseldorf Higher Regional Court (January 28 2016, 1-12 U 30/15) recently dealt with a challenge to security under a new loan provided by a bank for the purpose of repaying the bank's outstanding claims against the debtor. The claims resulted from a current account relationship under which the debtor had borrowed moneys within an expressly agreed credit limit and beyond. The bank agreed to refinance this debt by granting a new loan with a fixed term secured by assignment of the debtor's claims against an insurer.

Following the debtor's insolvency, the insolvency administrator realised such claims for the benefit of the insolvency estate through a sale. The bank brought an action against the insolvency administrator asking for the insolvency administrator to turn over the sales proceeds.(2) The insolvency administrator's defence was based on the assertion that the security assignment in favour of the bank was challengeable and the bank therefore was not entitled to a turnover of sales proceeds.


The court ruled that the security assignment could not be challenged by the insolvency administrator. As is often the case, the three-month hardening period for challenges under provisions of insolvency law with less stringent prerequisites had already elapsed. The insolvency administrator thus tried to establish the debtor's intention to disadvantage creditors and the bank's awareness of such intent to benefit from the 10-year hardening period. The court concluded that the insolvency administrator had failed to provide sufficient proof.

The first-instance court and the Dusseldorf Higher Regional Court found no direct proof of either the debtor's intention to disadvantage its creditors or the bank's awareness thereof. The Dusseldorf Higher Regional Court therefore had to ascertain whether the insolvency administrator's burden of proof was reduced due to the fact that the security assignment constituted an unusual transaction.

As per the established view of the Federal Court of Justice, the court held that the provision of security as expressly provided for in the relevant loan agreement does not constitute an unusual transaction, as opposed to security provided at a later stage and not previously specified. In looking at the new loan agreement in isolation, the court identified no room for a reduced burden of proof in favour of the insolvency administrator.

The court went on to consider whether an exception should apply due to the purpose of the new loan, which was to repay existing debt. The court's rationale was not entirely clear, but it indicates a two-pronged approach.

First, the court examined whether the purpose of the loan agreement would suffice to ignore the provisions of the new loan agreement providing for the security assignment and to consider it subsequent security for an existing debt. In this regard, it found that the parties had expressly agreed to put the debt on a new footing and that the parties' intention should be respected.

Second, the court explored whether repayment of the existing debt with moneys from the advance of the new loan was in itself an unusual transaction. It appears that the background to this test was that the court thought either that the bank should be barred from claiming sales proceeds if the insolvency administrator could clawback the repayment of the existing debt or that the associated repayment constituting an unusual transaction would also serve to establish prima facie evidence with respect to the security assignment (ie, infecting such security with respect to rules of evidence).

Irrespective of the ultimate rationale, the court found that the repayment did not constitute an unusual transaction because the existing debt was due either for repayment or for repayment on termination by the bank. To the extent necessary, the court saw such termination as an implied term of the agreement between the bank and the debtor to refinance the existing debt.

Finally, the court also dealt with the question of whether there was an actual or impending illiquidity of the debtor. However, this criterion would have been relevant only if the court had concluded that the burden of proof for the insolvency administrator had been lowered. Therefore, it must be considered obiter dictum. Nevertheless, the court clarified that even where the burden of proof is lowered, it must be established that, from the perspective of the creditor, the liquidity of the debtor was in question. The court found that this was not the case, as the bank agreed to a refinancing which alleviated existing liquidity constraints on part of the debtor.


The court's ruling is reassuring from the perspective of financiers and other creditors faced with a debtor in financial distress. The court's reasoning in denying the insolvency administrator a reduced burden of proof where additional liquidity is provided in exchange for new security appears reasonable. However, so far it is unknown whether the Federal Court of Justice has taken the same position in the context of refinancing. The uncertainty regarding the court's exact reasoning in the decision leaves room for interpretation as to whether security for a new loan would be considered security for an existing debt (and subject to easier challenges) if it does not re-open credit lines, but merely provides the funds to repay the financier's debt that was due for repayment or callable. It is questionable whether the courts will apply this rationale if an expiring term loan is replaced with a new term loan with the same or higher pricing. The court did mention the fact that interest was reduced in its decision.

Nevertheless, financiers should try to avail themselves of the additional protection that this decision may provide against clawback challenges by insolvency administrators. Mainly, this means that where debt could be called (eg, due to existing defaults), the refinancing arrangement should include language to the effect that debt is either already due or being called by virtue of the refinancing arrangement. Such language and related mechanisms should be drafted and constructed carefully so as not to create an actual insolvency of the debtor in the course of the refinancing.

Particularly in the context of providing new debt, financiers may wish to have a debtor in financial distress provide a proper restructuring concept and have such a concept tested by a public accountant in the form of a restructuring opinion. This is the gold standard to protect financiers in the German market, but it comes with additional costs. Otherwise, financiers should always make sure to utilise common precautions in the course of refinancing debt. Security should always be provided in close proximity to the disbursement of a new financing. This can allow a qualification as a privileged transaction, which is much harder for an insolvency administrator to challenge. Where existing debt is already secured, the re-qualification of the existing security purpose from existing to new debt should be timed so that the relevant security asset is securing a claim against the debtor at all times (ie, there can be no gap between repayment of the existing debt and adjustment of the purpose of the existing security). In this case, the secured asset would never have become part of the debtor's estate (economically), so there was no disadvantage to other creditors and, consequently, no basis for clawback claims.

For further information on this topic please contact Stefan Sax or Benjamin Werthmann at Clifford Chance LLP by telephone (+49 69 7199 01) or email ([email protected] or [email protected]). The Clifford Chance website can be accessed at


(1) Section 133(1), second sentence of the Insolvency Code.

(2) Sections 166(2) and 170(1) of the Insolvency Code.