Vol 13 (2016) - Issue 3

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Reform Act on German Insolvency Avoidance Rules

On 29 September 2015 the German Federal Government presented a reform act, which aims to improve the legal certainty in connection with the existing German avoidance rules under the German Insolvency Code (the 'InsO'). On 16 December 2015 the reform act was introduced before the German Federal Parliament for further review and consultation.
A statement of the German Federal Government indicates that, the reform act is supposed to be a 'selective readjustment' of the German avoidance rules. However, this appears surprising, if one considers that Heiko Maas, the German Federal Minister for Justice and Consumer Protection, in April 2014 stated that the avoidance rules are 'the biggest construction site in [German] insolvency law'.
According to the reform act the main changes are as follows:

1. Incongruent transactions
As a general rule, transactions during the last three months prior to the filing for insolvency are challengeable under relatively limited conditions under German law. For these three months, the InsO distinguishes between ‘congruent’ (section 130 InsO) and ‘incongruent’ transactions (i.e. payments or collateral which were either not (yet) due or due, but in another form). Regarding the latter, a successful claw back (claim) does not even require the beneficiary to be aware of the debtor’s illiquidity at the time when the transaction took place (section 131 InsO).
Payments made under enforcement pressure and even satisfactions received through actual enforcement of a final judgement are currently not protected and considered as 'incongruent transactions'.
Section 131, para. 1, sentence 2 of the reform act would change this situation insofar, as the reform act states that satisfaction received through any kind of enforcement measures cannot be challenged as 'incongruent transaction' (so called 'enforcement privilege').
While an earlier draft of the reform act dated 16 March 2015 stated that this protection should apply only for enforcement measures conducted on the basis of an enforceable judgment obtained in judicial proceedings’, the present version completely foregoes this criterion. Thus, also rulings issued by the tax authorities and the social insurance agencies are covered by the 'enforcement privilege'.
The new provision creates a preferential right in favour of the treasury, since only they are able to make such awards, although it seeks to justify the special treatment on the basis that the treasury ultimately supports payments to employees. Most commentators criticise this on the basis that they should not be in any better position compared to other creditors, who may equally be as deserving as employees, for example small trade creditors being dependent on recovery of sums due to them. In this regard, the proposed reform may be considered to be contrary to the reform of the InsO in 1999 and to overall international trends, where there has been a significant retreat from increasing the number of creditors who benefit from preferential treatment in insolvencies.