German: New Ruling Reduces Risk of Clawback Claims in a German Restructuring

In a ruling issued on 3 March 2022 (IX ZR 78/20) the German Federal Court (BGH) has again raised the requirements for proving that a debtor, when making a payment, intended to disadvantage their creditors.

Background

Under the German Insolvency Act, an insolvency administrator can rescind payments made before the beginning of insolvency proceedings by debtors with an intent to disadvantage creditors. This represents a significant risk for the contractual partners of an insolvent company or a company in a crisis.

New decision by the federal court

The BGH has confirmed as already stated in the ruling of 6 May 2021, that a debtor’s recognition of their illiquidity or threatened illiquidity does not automatically show a debtor's intention to disadvantage creditors with subsequent payments. This means that a judge must consider whether the debtor could still believe that they would be able to satisfy their creditors at a later date.

If the debtor attempts to restructure, the insolvency administrator has to show that this decision was unsuitable and that the debtor was aware of this. The debtor may generally rely on the advice of an unbiased, professionally qualified expert when deciding to undergo a restructuring.

What is the implication of this ruling?

This case has made it more difficult to prove a debtor's intent and even more difficult for insolvency administrators to successfully enforce insolvency clawback claims in the future, especially where the debtor performed a restructuring process supported by restructuring experts.

Find out more

To discuss the issues raised in this article in more detail, please contact a member of our Restructuring & Insolvency team.