I am pleased to share a great article on the recent reform of German insolvency law regarding avoiding pre-insolvency transactions by my good friend and colleague Annerose Tashiro, a leading cross-border insolvency specialist in Germany. This is important in the event a contract counter-party becomes insolvent in Germany. Also, German avoidance laws are likely applicable should an insolvent German company also file a Chapter 15 proceeding in the U.S.
“The reform is intended to increase legal certainty and aims to reduce the risk of businesses being subject to avoidance in respect of transactions that have been carried out with a person who subsequently becomes insolvent. The main new features are as follows:
- The deadline for avoiding transactions carried out by the debtor with the intent (known to the other party) to cause detriment to creditors (known as ‘Vorsatzanfechtung’ – avoidance of transactions on the grounds of intentional prejudice) under Section 133 of the German Insolvency Code (InsO) is reduced from 10 to 4 years;
- ‘Vorsatzanfechtung’ is now not possible when the debtor has, in exchange for the performance made by the debtor and within the same period of time (in principle, within 30 days), received a consideration of equal value, unless the insolvency administrator proves that the debtor has acted in bad faith, for example by squandering the assets by acquiring luxury goods that are of no use to the insolvency creditors;
- Transactions may now not be avoided under Section 133 InsO in cases where the creditor had an entitlement to the performance by the debtor, unless, at the time of receiving the performance, the creditor was definitely aware of the debtor’s illiquidity (prior to the reform, for the purposes of avoiding a transaction it was sufficient for the creditor to be aware of the mere risk of potential illiquidity);
- Again in relation to ‘Vorsatzanfechtung’, the reform stipulates that agreeing to deferred payment does not automatically lead to the presumption that the creditor was aware of the illiquidity (thus ultimately privileging payment in instalments);
- If the avoidance of a transaction is determined, interest owed is now reduced solely to default interest: prior to the reform, interest was due from the date of insolvency proceedings being commenced, but now interest starts to accrue only from the time the insolvency administrator serves a warning notice.
In order to see whether the reform will achieve its aims, we will have to await the courts’ decisions in the years ahead. The new legislation contains a series of terms which require interpretation by the courts and, ultimately, by the German Federal Court of Justice.”
Dr. Annerose Tashiro, Attorney at law in Germany, Registered European Lawyer (London).