In a recent decision, the German Federal Court of Justice (BGH) further outlined the requirements for the avoidance of a transaction under insolvency law on the grounds of wilful disadvantage to creditors pursuant to section 133 of the German Insolvency Code (InsO).

Background

Background

Under German insolvency law, employees are generally protected from claw-back claims. The payment of wages is considered a "cash transaction" if the employer pays the salary within three months of the work being performed. A “cash transaction” can only be contested in limited circumstances. Where a third party pays the salary, the cash transaction privilege remains if it is not clear to the employee that a third party made the payment (s.142(2) and s.3 InsO).

A recent German Federal Court of Justice ruling shows that this protection has limits.

The German court has published LG München I v. 13.07.2021 - 6 O 17571/20 – the first published ruling on COVInsAG. We unpack the key takeaways from the decision below.

Background

To mitigate the economic effects of the pandemic, the German government passed the COVID-19 Insolvency Suspension Act (COVInsAG) to temporarily suspend the obligation on directors to file for insolvency where the debtor's insolvency was due to the pandemic. The COVInsAG (Section 2(1) Nos.2 and 4) also suspends large parts of the rules on insolvency avoidance.

Key points

• Where the underlying liability on which a bankruptcy order is made is subsequently set aside, the correct remedy is rescission under s.375(1) of the Insolvency Act 1986.

• Annulment under s.282(1)(a) is the appropriate remedy when, on grounds existing at the time of making the bankruptcy order, the order ought not to have been made.

The facts

Key point

• In certain circumstances the court will look to parallel statutory provisions where existing applicable statute does not accommodate the situation, as long as the latter is not offended, expanded or altered by doing so.

The facts

This application for directions was brought by the administrators of Lehman Brothers Europe Ltd (the “Company”) on:

Key Points

• Statutory powers are to be exercised in accordance with a company’s articles of association
• The Duomatic principle cannot simply be used as a bandage to cure a company’s procedural errors

The Facts

This appeal considered whether the sole director of a company, whose articles required two directors for its board meeting to be quorate, could validly appoint administrators under paragraph 22 Schedule B1 of the Insolvency Act 1986.

Key points

• The dismissal of the appellant’s previous application for an annulment of a bankruptcy order was a serious procedural irregularity
• A court may annul a bankruptcy order under s 282 IA 1986 if it is satisfied that the order ought not to have been made based on grounds existing at the time the order was made
• In relation to appeals made pursuant to s 375 IA 1986 to review or rescind the decision of a lower court, the court may consider fresh material.

The facts

Key points

• A practical approach was adopted by the court in respect of deadlines for submitting administration expense claims that were otherwise holding up the making of distributions to unsecured creditors.
• In the absence of a suitable statutory mechanism, the court allowed for a cut-off date by which expense claims must be submitted.

The administrators of 18 of the Nortel companies applied to court for directions on how to deal with potential claims for administration expenses.

Key Points 

• S 304 of the Insolvency Act 1986 is concerned with acts or omissions by a trustee in bankruptcy that have caused loss or damage to the estate

• However, the wording of that Section does not go so far as to state that in no circumstances can a trustee owe an enforceable duty in respect of loss or damage caused to the bankrupt personally.

The Facts

Key Point

In certain circumstances, a purchaser’s deposit may constitute an equitable lien upon the liquidation of the seller.

The Facts

An application under s112 IA 1986 was made by the joint liquidators of Alpha (Student) Nottingham Ltd to determine whether the purchasers of unbuilt flats had the benefit of equitable liens, and therefore ranked as secured creditors in the liquidation.