Overview of the most significant new rules

• The period during which the insolvency administrator may challenge so-called covering transactions, which serve the purpose of satisfying a claim, has been shortened from ten to four years.
• Actual insolvency is decisive rather than imminent insolvency: The main requirement for a challenge according to Sec. 133 Para. 3 No. 1 InsO n.F. (Insolvency Act as amended) is no longer an “imminent” insolvency, but rather an “actual” insolvency.
• Inverted presumption: If the creditor agreed with the debtor on a payment arrangement or granted any other payment facility to the debtor prior to an insolvency, it is now presumed pursuant to Sec. 133 Para. 3 No. 2 InsO n.F. that the creditor had no knowledge of the actual insolvency. This means that the presumption that the creditor was aware of any intent of the debtor to disadvantage its (other) creditor(s), no longer applies. In contrast to the earlier presumption, it is now the insolvency administrator who has to substantiate and prove in these cases that the creditor had knowledge of any inability to pay; It is no longer the creditor that has to provide evidence in its defence.
• The privilege of cash transactions is extended such that the insolvency administrator may now challenge a cash transaction only if the creditor “recognised” that the debtor acted “unfairly” (cf. Sec. 142 Para. 1 InsO n.F.).
• Claims asserted by means of the challenge now only incur interest from the date on which the creditor enters into default, i.e. usually from the date of assertion of the claim rather than from the opening of insolvency proceedings (cf. Sec. 143 Para. 1 No. 3 InsO n.F.). The experience made in the past showed that claims had been raised usually very late; yet interest had been incurred, independently of the date of the assertion of the claim, from the date of the opening of insolvency proceedings based on the statutory provisions. This particular rule has also been modified in connection with the reform and adapted to the standard principles regarding default.
• No retroactive effect for insolvency proceedings that are already pending. The application of the new provision is limited to those insolvency proceedings that were/are opened on or after 5 April 2017. An exception exists with regard to interest payments, which also applies to proceedings that are already pending under certain conditions.

Outlook and practical consequences

Although the new provisions regarding challenges against creditors still need to be interpreted and applied by the courts, they nevertheless offer a good opportunity to make the relationship of creditors and debtors or with a future insolvency administrator more reliable and predictable.

Specific options for organising the relationship among the parties result in particular in connection with the arrangement on payment facilities, e.g. in the form of payment by instalments, and in connection with cash transactions, which in principle are not supposed to be challengeable. Furthermore, creditors obtain legal certainty more quickly thanks to the shortened period in which a challenge can be brought, which makes the process more predictable for creditors.

It will be interesting to see whether the practice of the courts in pending proceedings will change against the background of the new statutory provisions and whether this will also have an effect on existing disputes over challenges in insolvency proceedings that were opened before 5 April 2017.
Please do not hesitate to contact us if you have any further questions or require assistance with the specific implementation of the new provisions in connection with the (contractual) arrangements reached (or to be reached) with your company’s debtors and/or creditors.

Client Alert 2017-109