German Minister of Justice Heiko Maas called an insolvency law reform of the right to set aside transactions which were made to disadvantage creditors “as the most urgent task of the federal government”.

This slightly surprising comment traces back to an initiative of various German trade associations. Economists criticise the legislation of the 9th Civil Panel of the German Federal Supreme Court which is responsible for the setting aside of insolvency proceedings and which judgments in the opinion of the economists are getting out of hand. Whilst the “review” of the right to set aside transactions had already been included in the government’s coalition contract, this clear statement by the minister regarding the priority of this project has surprised insolvency law professionals.

The subject matter of the current legal debate is that pursuant to § 133 German Insolvency Code (InsO) (provided that the debtor is at least in a state of imminent insolvency and takes note of this status on the basis of external circumstances), agreements for payments by instalments concluded up to a period of 10 years before an application for insolvency has been filed can be challenged by a future insolvency administrator. It is an additional problem that under current law, the setting aside of transactions under insolvency law becomes due on the commencement of insolvency proceedings and the transaction value is then subject to statutory default interest, regardless of when the insolvency administrator makes the claim.

On the one hand, trade associations criticise in particular that legal certainty would be at risk due to the alleged extension by the Federal Supreme Court of the right to set aside transactions in insolvency. On the other hand, many administrators employ the duty to pay interest from the commencement of insolvency proceedings as a way to exert pressure in order to keep creditors from taking action via the courts. Sometimes, claims to set aside transactions are made too late under law in order to secure for the insolvency estate the interest rate for default which is currently very favourable. In contrast, administrators point out the regulatory aspects of the provision. If a (future) insolvency debtor who is obviously insolvent is kept in the market by its previous creditors by means of deferments of payments, there would be a risk that new contractual partners who are not aware of the company’s financial situation could incur substantial losses at a later time. Private builders are often cited as an example in this regard. In addition, by tightening the right to set aside transactions in insolvency, the lawmaker had exactly the intention to reverse the ratio of insolvency proceedings which have commenced as opposed to proceedings which have not yet commenced due to a lack of estate - and it has clearly been successful in this regard: Whilst under the old Bankruptcy Act (Konkursordnung) 75% of all bankruptcy proceedings were not even commenced, under the new Insolvency Code this figure now accounts for the share of insolvency proceedings that have commenced.

It remains to be seen with how much enthusiasm and at what speed the lawmaker will actually become active. All those involved agree that currently, there are neither substantiated figures on the burden this issue constitutes for the economy, nor on the number of commenced proceedings which were only made possible due to transactions having been set aside. However, it is likely that the lawmaker will fine-tune some aspects. At least the time periods during which instalment payments can be challenged are subject to review. Time periods of 3-5 years are currently being discussed in this regard. It remains to be seen whether payments by instalment will in the future generally be outside of the scope of the setting aside of transactions made with the intention to disadvantage creditors. It is not unlikely that at least in these cases the obligation to pay interest from the commencement of proceedings will be abolished and will instead be linked to the standard requirements for default interest.

It becomes apparent from economists’ comments on this bill that many creditors unnecessarily enter into settlements with the administrator. An administrator can only challenge payments by instalment made more than three years prior to the commencement of proceedings in exceptional circumstances. In many cases, a hasty settlement is also due to the fact that the law on the setting aside of transactions in insolvency has become so complex following a number of Supreme Court judgments that only specialists are able to precisely estimate the associated risks.

Ansgar Hain