On February 24, 2016, the legal committee (Rechtsausschuss) of the German parliament (Bundestag) held a hearing on the proposed reform to considerably limit the clawback regime (Insolvenzanfechtung) in the German insolvency code (Insolvenzordnung – InsO). The general gist of hearing was that the current German governing party coalition is still determined to enact the reform, with some modifications as to the scope and protected parties still up for discussion.

Background: The German government wants to limit clawback actions by German insolvency administrators (see our previous blog posts in this regard) by excluding, among others, employees of the insolvent debtor, as well as tax authorities, social security providers and other creditors who are holding enforcement titles. Furthermore, the general scope of the contestation for willful intent (Vorsatzanfechtung) shall be limited and the looking-back-period shortened from ten to four years prior to the insolvency filing. Other incentives of insolvency administrators to late-file clawback actions shall also be removed.

The hearing was held in order to fine-tune the proposal, by collecting the views of representative experts of German unions, German industry, legal scholars and several insolvency administrators, who all also answered further questions from the members of parliament. While there is still some considerable criticism from legal scholars leveled against the overall scope and necessity of the reform, which was reiterated during the hearing, it appears that most of the experts agreed that some real reform to considerably limit German clawback law is in order. The debate mostly circled not on the need for a reform but rather around the question how far the reform should go and which additional third-parties should be protected against clawback liability.

There was general agreement that employees of debtors should have more protection against being subject to clawback actions for wages paid by the debtor or by third parties closely related to the debtor. Even the insolvency administrators admitted that there had been excesses in prosecuting claw back claims against employees. The experts also agreed that the planned exception should not apply to managers.

Crucially, the parliamentary representatives of the governing coalition asked the experts specifically whether, in addition to employees, other stakeholders should also be protected against clawback. This would include innocent small craftspeople and manufacturers, vendors and suppliers, which usually have no way of knowing whether the company that they are serving is already insolvent or not. Currently the reform does not envisage to specifically protect these groups in addition to employees.  The issue was brought up because it would in a way be unfair to protect only employees against clawback but not others that may often be like employees essentially needed for the continuation of the debtor’s business.

During the hearing it became clear that the representatives of the governing coalition agreed that their reform draft was already, in their view, in good shape, and only needed some further tweaking but in all likelihood not a major change. All in all, it seems to be likely after this hearing that the envisaged reform of German clawback law will soon be enacted. While the final scope of the limitation to claw back law has not yet been decided, it can be expected that not only employees but other specific groups may also soon be subject only to a more restrained German clawback regime. Whether this reform will result in eviscerating German claw back to a degree that would makes it mostly ineffective, as some legal scholars fear, remains to be seen.