Under German law, there are strict legal obligations for the managing directors of an insolvent company to file for insolvency. Failure to comply exposes a managing director to civil and criminal liability. It is therefore important for managing directors to know how to test whether their company is insolvent. One of the legal reasons for insolvency is illiquidity and the second senate of the German Federal Civil Court (“BGH”) has, in a decision dated 19 December 2017 (II ZR 88/16), clarified a question regarding the illiquidity test.

A recent ruling of the German Federal Civil Court (Bundesgerichtshof (“BGH”)) is a reminder of the risks which shareholders of a German company can face in an insolvency of their German subsidiary.

Just because a liquidator asserts you have received an unfair preference, does not necessarily mean you have or that there are no potential defences available to you.

German insolvency laws are very strict. The management of an insolvent company is under strict obligations to file for insolvency, and failure to comply with such obligation may result in civil and criminal liability. Other stakeholders, like financing banks or suppliers, who are dealing with a distressed company, require documentation that their contract partner can be restructured, in order to avoid potential liability and claw back risk in case of a future insolvency.

It is common for commercial contracts to contain ipso facto clauses, which allow a party to terminate or modify the terms of the contract where the other party experiences an insolvency event. A concern addressed by the Government is that these clauses can prevent a financially distressed company from turning their situation around.

The High Court’s recent decision in Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA 28 has confirmed a bankruptcy court can exercise a discretion to go behind the judgment debt where sufficient reason is shown for questioning whether there is a debt due to the petitioning creditor.

In the recent decision of Lane (Trustee), in the matter of Lee (Bankrupt) v Deputy Commissioner of Taxation [2017] FCA 953, Cooper Grace Ward acted for the trustee in bankruptcy, who sought directions from the Court regarding the administration of a trading trust where the bankrupt was the trustee.

Facts

Section 477(2B) of the Corporations Act 2001 (Cth) provides that a liquidator must not enter into any sort of agreement that may last longer than three months without first obtaining approval of the Court, of the committee of inspection or by a resolution of the creditors.

Typically, a litigation funding agreement will be caught by this section because it will last more than three months.

The reference to ‘enter into an agreement’ could also catch a novation, and potentially a variation, to an agreement.

All Australian states have sale of goods legislation that, in certain circumstances, allows an unpaid seller to retain possession of goods in transit where the buyer becomes insolvent. The statutory right, called stoppage intransitu, is a useful remedy to obtain payment.

A registered security interest on the PPSR is not required to exercise the statutory right. Administrators and liquidators may be trumped by a notice under the stoppage in transitu provisions.

However, the sale of goods legislation is not identical in each state.

Competing claims to goods are common where there is an unpaid seller with alleged retention of title, the supplier’s customer has gone into external administration and the goods are in the possession of a transport or warehouse provider. Thrown into the mix may be an administrator or liquidator demanding possession of the goods to sell them.