A key objective of the current German coalition government is the reform of the clawback provisions in the German Insolvency Code (Insolvenzordnung – InsO). To address this, the German Federal Ministry of Justice and Consumer Protection recently published a draft bill for discussion. The German government is expected to remain in office until 2017, making it highly likely that this reform will become law, in the course of 2015-2016.
Background and objective of the reform
Minor instalment payments alone – also in the event of late payments – may not be sufficient to trigger knowledge of the debtor’s imminent illiquidity within the meaning of section 133 German Insolvency Act
Overview
Impending major reform of German insolvency clawback regime
A key objective of the current German coalition government is the reform of the clawback provisions in the German Insolvency Act (Insolvenzordnung - InsO). To address this, the German Federal Ministry of Justice and Consumer Protection recently published a draft bill for discussion.
The German government is expected to remain in office until 2017, making it highly likely that this reform will become law, in the course of 2015-2016.
Background and objective of the reform
The Federal Court of Justice (Bundesgerichtshof – BGH) on 5 March 2015 issued a decision (case no. IX ZR 133/14, available here) that is of immense relevance for all creditors and debtors that face the need of a subordination agreement (Rangrücktrittvereinbarung) under German law.
German insolvency case law on intellectual property rights has experienced rapid development in recent years, while attempts by the German legislature to regulate this subject with precision have repeatedly failed. The multitude of stakeholders involved (among them insolvency administrators, licensors, sub-licensees and creditors that have liens on IP rights) could not agree on a resolution acceptable to all.
In a situation where the survival of a German company depends on restructuring measures by third parties (mainly lenders) who fear that the shareholders may use their hold-out position in a potential subsequent exit by sale of the shares, it is an option for the lenders to demand from the shareholders that the shares are transferred to a trustee to be held in a “double-sided trust” (doppelnützige Treuhand).
The German Federal Constitutional Court (BVerfG) will soon issue a decision on the constitutionality of Sec. 56 of the German Insolvency Statute. According to Sec. 56, only independent natural persons can be appointed as insolvency administrators. Thus, accounting firms, law firms, and tax consulting firms cannot act as insolvency administrators. In 2013, a German law firm lodged a constitutional complaint asserting that this provision infringed its right of equality before law as well as its right of occupational freedom.
With a recent draft act to amend the German Insolvency Code (Insolvenzordnung – InsO), the German Federal Ministry of Justice and Consumer Protection intends to reduce uncertainty regarding insolvency claw-back, in particular regarding Sec. 133 InsO. The result may be that restructuring opinions that are now market standard when (re)financing financially troubled companies in Germany become redundant.
Current legal status
Germany’s Frankfurt District Court recently dealt with the question of whether a debtor’s lawyers’ fees arising from restructuring advice prior to insolvency could be challenged and claimed back in insolvency. The court held in the first instance (07.05.2015, Az. 2-32 O 102/13) that the lawyers of an insolvent German company in the solar industry had to repay €4.5 million after the out-of-court restructuring failed.