Broad interpretation of voidability laws subject to much criticism
In the past the German High Court interpreted the laws of voidable transactions rather broadly and allowed the insolvency administrators extensive voidability claims. This expansion of voidable transactions led to much criticism and thus a reform of the law has been discussed since the last elections in 2013.
Particularly the broad interpretation of the voidability due to a willful disadvantage of creditors according to section 133 of the German Insolvency Code (Vorsatzanfechtung) has been criticized a lot. According to case law of the Court, it was sufficient to trigger voidability under section 133 if the debtor was illiquid or impending illiquid at the time of payment or performance and the creditor knew of the illiquidity or the pending illiquidity of the debtor. Thus, one of the main goals of the reform was to cut back on the voidability under section 133.
The reformed law now implemented has been subject to much criticism from scholars and practitioners. One main point of criticism is the ambiguous and unclear wording which causes uncertainty as to the scope of the amendments and (again) leaves it to the German High Court to define its meaning. Hence, until the High Court will have had the chance to decide upon the first cases, a number of uncertainties will remain.
More creditor and employee protection under the new law
The reform is intended to generally protect creditors and employees better from (unexpected) voidability claims. To reach that goal the reform mainly tackles section 133 regarding the scope of willful disadvantage of creditors, extends the privileges and scope of 'cash transactions' (Bargeschäft) under section 142 of the German insolvency code and limits the default interest payable on claims resulting from voidable transactions.
Considerable limitation of the scope of voidability due to willful disadvantage of creditors
- The voidability period for willful disadvantage of creditors is reduced from 10 to 4 years in cases in which the creditor received consideration or security for a claim.
- Further, if consideration or security were granted exactly in the way it had been contractually agreed (i.e. congruently) the transaction will only be voidable if the creditor knew of the debtor's illiquidity; knowledge of its pending illiquidity is no longer sufficient.
- An agreed payment plan between debtor and creditor shall no longer indicate knowledge of the debtor's illiquidity (as it has been the case under case law of the German High Court so far). Just to the contrary: an agreed payment plan shall now indicate that the creditor had no knowledge of the debtor's illiquidity.
Extension of privilege and scope of 'cash transactions'
- 'Cash transactions' will only be voidable if the debtor acted "unfair" (unlauter) when entering into the cash transaction. Please be aware that it is completely unclear what "unfair" is supposed to mean in that context.
- Also, the scope of cash transactions is expanded by referring to the business practice in assessing whether the time period between the exchange of goods/services and its payment can still be considered as a 'cash transaction'.
- In particular, wage payments shall still count as (non-voidable) cash transaction if the wage is paid within three months after services have been rendered. In addition, wage payments shall not be voidable if the payment were made by a third party but the employee was not aware of it being a third party payment.
Default interest payments no longer automatically triggered by the opening of insolvency proceedings
- Under current law, default interest was triggered automatically by the opening of the insolvency proceedings even if it took the insolvency administrator another three years to actually raise the voidability claim with the creditor. Now default interest accrues only after the insolvency administrator has raised the claim with the creditor.
- The limitation to default interest claims will apply to all insolvency proceedings even if they have been opened prior to the reform. However, for the period prior to reform the old default interest rule applies.
With the exception of the limitation to the default interest, all changes apply only to claims arisen in insolvency proceedings opened after the reform has come into force. Hence, old and new law will exist side by side for at least a couple of years. For any questions regarding the new law, don't hesitate to contact our business restructuring and insolvency team.
Authored by Dr Heiko Tschauner, Dr Maximilian Baier and Christine Borries