Insolvency creditors in Germany do not have much to fear from a harmonisation of avoidance actions in the EU. They are used to rigid statutory provisions.
Whereas the European Commission's Proposal for a Directive harmonising certain aspects of insolvency law throughout the EU (COM(2022) 702 final; the "Proposal") is still being discussed, it is safe to say that the current German rules on avoidance actions will meet the requirements of the Directive in principle.
No fundamental changes, but a few noteworthy details
Avoidance of Preferences (Art 6 Proposal), of Legal acts against no or a manifestly inadequate consideration (Art 7 Proposal) and of Legal acts intentionally detrimental to creditors (Art 8 Proposal) find their equivalents in sec 130, 131 Insolvenzordnung (InsO), in sec 134 InsO and in sec 133 InsO. These avoidance rules form a fundamental part of German insolvency law, and the German legislature will only need to amend some details.
As the Proposal allows EU member states to provide greater protection to the general body of creditors than the Directive (Art 5 Proposal), additional avoidance rules enshrined in German insolvency law will remain. This includes avoidance action on the ground of satisfaction or collateralisation of a claim to repayment of a shareholder loan (sec 135 InsO).
No room for negligence regarding knowledge of debtor's insolvency
Preferences granted within three months prior to the request for the opening of insolvency proceedings will remain a major ground for avoidance action. Pursuant to Art 6 para 2 subpara 1 lit b Proposal, a creditor whose claim was satisfied or secured in the owed manner is subject to avoidance action if he "should have known" that the debtor was unable to pay its mature debts or that a request for the opening of insolvency proceedings has been submitted.
Sec 130 para 1 InsO is less strict regarding the creditor's knowledge and generally requires his actual knowledge of the debtor's illiquidity or the filing for insolvency. Although knowledge is assumed where the creditor is aware of facts that necessarily indicate the debtor's insolvency (sec 130 para 2 InsO), sec 130 InsO will need amendment.
No room for negligence regarding knowledge of intentionally detrimental acts
Similar changes to sec 133 para 1 InsO will become necessary to fall in line with Art 8 para 1 subpara 1 (b) Proposal. Under the Proposal, the fact that the creditor should have known of the debtor's intent to cause a detriment to the general body of creditors suffices for avoidance action whereas sec 133 para 1 InsO requires the creditor's actual knowledge.
Also, the requisite knowledge will be presumed if the creditor was a party closely related to the debtor (Art 8 para 1 subpara 2 Proposal). This applies to all legal acts perfected within four years before insolvency. Since sec 133 para 4 InsO limits the presumption to contracts that provide for a consideration and that the debtor entered into within two years before insolvency, this will need amendment.
No avoidance action for fair consideration
Legal acts performed directly against fair consideration to the benefit of the insolvency estate are exempt from avoidance action (Art 6 para 3 subpara 1 lit a Proposal). Sec 142 InsO provides for the same. As a rule of thumb, the consideration needs to be paid within 30 days. Regarding wages, however, sec 142 para 2 sentence 2 InsO allows for payment up to three months. There is some doubt whether such payment qualifies as "directly" when recital 9 Proposal speaks of a "prompt" payment.
Inadequate consideration akin to no consideration
Art 7 para 1 Proposal requires that all legal acts of the debtor against no or a manifestly inadequate consideration within one year prior to insolvency are subject to avoidance action. Sec 134 para 1 InsO provides for that despite its limited wording because German jurisprudence qualifies an objectively inadequate consideration as "no consideration", but it stipulates a four-year relation-back period. The legislature may want to consider a clarification and discuss whether a relevant period of four years is appropriate when Art 7 Proposal stipulates only one year.
Voidness of the legal act is difficult to reconcile with German concept of reversal
The Proposal is quite clear in that it wants to see the detrimental acts declared void (Art 4, 6 to 11). Sec 143 para 1 InsO follows a different concept by establishing that the insolvency administrator has a restitution claim against the creditor.
Since the insolvency administrator can refuse to accept a creditor's claim arising from a voidable act (sec 146 para 2 InsO, Art 9 para 1 Proposal), the consequences of both concepts are alike in most cases. Art 9 para 2 subpara 1 Proposal suggests that full compensation of the insolvent estate is required and that its technical construction is less crucial.
If the German legislature decides to adopt the concept of voidness, however, it should be clarified whether it is the insolvency administrator or the court that can declare a legal act void and whether the act is voided for the future or voided retroactively.
Cross-border avoidance action
The applicable law for cross-border avoidance actions involving a debtor or a creditor situated in Germany will not be affected by the Directive. It is still determined by the EU Insolvency Regulation (EIR) and InsO.
Within the scope of the EIR, the law of the State of the opening of proceedings (lex fori concursus) determines the rules relating to avoidance (Art 7 para 2 sentence 2 lit m EIR). This does not apply, however, if the detrimental act is subject to the law of another member state (lex causae) and if the law of that member state does not allow any means of challenging that act in the relevant case (Art 16 EIR). With the harmonisation of avoidance actions, such exceptions will become rare.
Corresponding provisions can be found in sec 335, 339 InsO for cases outside the scope of the EIR.
For more information on avoidance actions in Germany and the harmonization proposals under discussion in the EU, contact your CMS client partner or these CMS experts.
This article is part of our Law-Now blog series "Harmonisation of Insolvency Laws in the EU", which will provide an overview of the EU Commission's draft directive, including the most important objectives and planned measures. The series itself will deal with the two exciting topics of the draft directive, "pre-pack proceedings" and "insolvency avoidance actions" and show how these topics are being discussed in the Member States and what the situation is like in individual non-Member States.
To read all the articles, please click here.