The German Parliament passed an act to reduce the risk of clawback actions and provide more legal certainty in this regard under German law, the so called "Act for the Improvement of Legal Certainty concerning Clawback pursuant to the German Insolvency Code and the Creditor's Avoidance of Transfers Act" (Gesetz zur Verbesserung der Rechtssicherheit bei Anfechtungen nach der Insolvenzordnung und dem Anfechtungsgesetz) on Thursday, 16 February 2017.
The reform will not take effect until it is officially published , which is expected in June/July 2017. The new rules will in principle apply to all insolvency proceedings which are opened after the act takes effect.
Objective and background
- The act is aimed at limiting the burden on commercial trade and employees, respectively legal uncertainty, resulting from the current clawback practice, in particular contesting debtor transactions for wilful disadvantage to other creditors (Vorsatzanfechtung) (section 133 of the Insolvency Code (Insolvenzordnung - InsO). Rulings in recent years broadened the conditions of clawback for wilful disadvantage to include, among other things, the possibility of proving a creditor's knowledge of (impending) insolvency necessary for clawback because of indications that would give rise to presumption. Presumption will now be more precisely defined in certain cases.
- Moreover, the act clarifies the conditions under which a cash transaction (a “Bargeschäft”, i.e. an immediate exchange) are now also exempt from clawback from wilful disadvantage.
- Interest on clawback claims will be limited as well, as a means of eliminating the incentive to assert claims as late as possible.
Clawback for wilful disadvantage (Vorsatzanfechtung)
- The period for the clawback of transactions due to wilful disadvantage will be reduced from ten to four years for those cases in which satisfaction was received or security granted. For all remaining cases of clawback for wilful disadvantage the period will remain ten years. The shortened deadline applies to all typical clawback cases, that of payment of an existing debt.
- The awareness of illiquidity (Zahlungsunfähigkeit) of the creditor may still be established by a presumption. However, if performance has been rendered in line with what the creditor is entitled to demand, it is no longer sufficient to prove the awareness of the debtor's wilful intent by the creditor's awareness of impending insolvency of the debtor, rather the insolvency administrator must prove the awareness of the actual insolvency instead.
- If the creditor concluded a payment agreement with, or granted some other form of deferred payment terms to the debtor, the creditor's awareness of the debtor's illiquidity is not presumed; on the contrary, the presumption in this case is that the creditor was in fact not aware of the debtor's illiquidity. This is opposite from the current case law in which such agreements were seen as a presumption for the awareness of the creditor that the debtor is illiquid.
- The cash transaction privilege can be applied against clawback for wilful disadvantage unless the creditor recognised that the debtor acted dishonestly.
Cash transaction privilege
- The conditions for the cash transaction privilege are specified in section 142 (2) InsO (revised version). The immediate exchange of services at arm's length is privileged. In accordance with the revised legislation, an exchange is immediate if it is undertaken within a short period of time, taking into account the type of services exchanged and the customs of the business practice.
- The payment of wages will be deemed a transaction undertaken within a short period of time if the wages are paid within three months following the work rendered.
- Clawback claims will only accrue interest in future if the creditor is in default, i.e. if the creditor is, at its own fault, late in paying the claim asserted by the insolvency administrator.
- The new provisions on the accrual of interest will apply upon the reform taking effect even if the respective insolvency proceedinghas been opened beforehand.
The amendments also apply mutatis mutandis to individual clawback actions outside insolvency proceedings pursuant to the Creditor's Avoidance of Transfers Act (Anfechtungsgesetz - AnfG).
- The reform will generally reduce transaction risks due to long clawback deadlines. However, due to the introduction of new undefined legal terms such as “dishonest” or “transaction conventions”, significant relief for businesses cannot be expected initially. The courts will first need to define these terms.
- Excessive clawback claims (due to barely merited threatened lawsuits) can thus be expected until rulings further clarify the matter. This means that clawback claims should be contested comprehensively to be able defend against the claims or, at least, to a achieve an appropriate settlement.
- In order to avoid clawback, transactions should be structured in such a way that they are eligible for the cash transaction privilege and comply with its new definitions. In order for a cash transaction privilege against clawback for wilful disadvantage, it should be ensured that the creditor is not aware of any “dishonesty” of the debtor.
- Goods and services should be charged, provided and paid for as agreed to ensure that such transactions do not fall under the further-reaching presumptions for clawback for wilful disadvantage triggered by the awareness of impending illiquidity.
- To agree on (instalment) payment agreements is still to be approached with caution. In certain cases such agreements constitute the presumption that the creditor is not aware of the illiquidity of the debtor, i.e. against clawback for wilful disadvantage. Firstly, however this is only valid in cases of congruent coverage (kongruente Deckung). Secondly, further circumstances and facts underlying such agreements could nonetheless prove awareness of illiquidity.