Cancellation of commercial agreements under German insolvency law

Commercial agreements usually provide for extraordinary termination rights or even automatic cancellation in the case of insolvency of one of the parties. Such a cancellation right may, however, contradict the general principles of German insolvency law.

The Federal Court of Justice (BGH) continued with its extensive interpretation of the rules for contesting transactions under insolvency law in a judgment dated 21 February 2013 (BGH IX ZR 32/12). In the case before the court, direct shareholder A in company T sold a claim under a loan to B at below par value. Following assignment, T repaid the loan to B at the nominal amount plus interest. Insolvency proceedings were opened around two months later in relation to T’s assets. The BGH’s decision covers three aspects:

A. Bill of the “Law on shielding credit institutions and financial groups against risks and planning their restructuring and winding-up”

In a recent case decided by the Federal Court of Justice (judgment of 15 November 2012 – IX ZR 169 / 11), an energy supplier had entered into a contract with a customer “which should also terminate without notice if the customer makes an application for insolvency or where preliminary insolvency proceedings are initiated or opened based on an application by a creditor”. When the customer was forced to declare insolvency, the energy supplier and the customer’s insolvency administrator entered into a new energy-supply contract at higher rates, subject to a review of the legal position.

Under the new liability standard set out in section 64 sentence 3 of the GmbHG, which was introduced by the Act to Modernise the Law Governing Private Limited Companies and to Combat Abuses (MoMiG), the managing director of a company is liable for payments to shareholders which necessarily cause the insolvency of the company. The requirement for causality of the payment for insolvency and actual determination of insolvency were matters of dispute. The Federal Court of Justice (BGH) has now established clarity on both points (judgment of 9 October 2012 II ZR 298 / 11).

In einer vor wenigen Tagen veröffentlichten Entscheidung vom 14. November 2012 (2 Sa 837/10) hat das LAG Nürnberg sich mit den Anforderungen an die Insolvenzfestigkeit eines Contractual Trust Arrangements (CTA) beschäftigt. Im Ergebnis hat es dem streitgegenständlichen CTA die Insolvenzfestigkeit abgesprochen.

Hintergrund

The acquirer attempted to contractually transfer employees to a so-called "transitional company" (Transfergesellschaft) for a few hours only. The employees involved had previously signed five different employment offers presented by the acquirer, some of them limited, some unlimited in time. The acquirer subsequently accepted one of the offers, which was a fixed term contract.

In insolvency proceedings, claims for repayment of shareholder loans – particularly if granted to a company limited by shares or a limited commercial partnership – are generally subordinate. In its judgment of 15 November 2011 (II ZR 6/11), the Federal Court of Justice (Bundesgerichtshof, BGH) addressed whether and for what period this also applied to corresponding claims by former shareholders.

The Federal Court of Justice (Bundesgerichtshof, BGH) pronounced on double securities in its eagerly anticipated judgment of 1 December 2011 (IX ZR 11/11). The practice was controversial even before the Act for the Modernisation of Limited Liability Company Law and for the Prevention of Abuse (Gesetz zur Modernisierung des GmbH-Rechts und zur Bekämpfung von Missbräuchen, MoMiG) came into force. “Double security” arises where security is provided over a creditor‘s claim both by the company itself and by its shareholders.

On 27 October 2011, the German parliament adopted the Law for Further Facilitation of the Restructuring of Businesses (Gesetz zur Erleichterung der Sanierung von Unternehmen, ESUG), which entered into force on 1 March 2012. In particular, legislators have increased the importance of debtequity swaps as part of this reform. Significant practical obstacles that previously often caused debt-equity transactions to fail have now been removed.

Previous legal framework