German Court Finds that the Presumption of Knowledge in Contestation Claims Extends to Indirect Shareholders

According to the German Federal Court of Justice (the Court), a "related party” (nahestehende Person) within the meaning of German insolvency law includes in the case of a legal entity, an indirect shareholder, provided that it holds more than 25% of the shares. Here, the Court will assume that the legal entity has advance knowledge of the financial situation of its subsidiary.

Background

An insolvency administrator sued a registered association (Verein) - the sole shareholder of M. GmbH - for EUR 300,000 based on an insolvency contestation claim. M. GmbH was in turn the sole shareholder of the insolvent debtor and had transferred funds from its business account on several occasions. 

The contestation claim was based upon the presumption that Verein had advance knowledge of the insolvency since it was a "related party". Related parties ordinarily refer to friends and family and are offered less protection against contestation due to their presumed knowledge of a debtor’s financial situation. 

The court at first instance held that this presumption of knowledge under section 138 of the German Insolvency Code (InsO) was not applicable to indirect shareholdings.

Decision 

The Court took a different view and decided that if a debtor is a legal entity, persons who hold more than 25% of the debtor's capital are to be regarded as related parties pursuant to section 138(2) no.1 InsO and that this presumption also covers indirect shareholdings.

Key takeaways

This important decision provides clarification that in contestation claims indirect shareholders are not protected against the presumption in section 138 InsO merely via an additional layer of corporate structure.

Find out more

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

(Federal Court of Justice, decision from 22. February 2024 - IX ZR 106/21).