German Federal Ministry of Justice and Consumer Protection outline paper: New rules on contesting of wage payments in insolvency?

Insolvency proceedings serve to ensure that all creditors are satisfied equally. Contesting in insolvency (Insolvenzanfechtung) (Section 129 et seq. German Insolvency Code (Insolvenzordnung InsO)) aims to reverse and reallocate to the insolvent’s estate any asset transfers (payments etc.) deemed to be unjustified. It is also intended as an incentive not to implement any such measures prior to insolvency.

The German Federal Ministry of Justice and Consumer Protection (Bundesministerium der Justiz und des Verbraucherschutzes – BMJV) is now planning, in an outline paper drafted in September 2014, an extensive legal revision by the legislature. This aims to endorse, among other things, the current case law of the German Federal Employment Court (Bundesarbeitsgericht – BAG) which, in certain cases, restricted the scope of application of Section 129 et seq. InsO to the employee’s benefit (judgement of 6 October 2011 – 6 AZR 262/10) and also considered a further restriction on constitutional grounds (most recently, BAG judgement dated 3 July 2014 – 6 AZR 953/12). The German Federal Court of Justice (Bundesgerichtshof – BGH), for its part, heavily criticized this restriction as unconstitutional in its judgement of 10 July 2014 (IX ZR 192/13). The highest German courts are thus quarrelling out in the open. What is the German Federal Ministry of Justice and Consumer Protection planning? 

Contesting for unfair disadvantage in place of wilful contest

The outline paper sets out plans to replace the current provision on contesting for wilful disadvantage (Anfechtung wegen vorsätzlicher Benachteiligung) (Section 133 InsO) with a provision on contesting for unfair disadvantage (Anfechtung wegen unlauterer Benachteiligung) which aims to sanction any socially unreasonable and thus objectionable conduct by the debtor. The law will exhaustively list the cases of unfair disadvantage and define clear criteria on which to determine when the granting of “coverage” (i.e. security or satisfaction of a creditor in insolvency) is unfair.

“Coverage” is therefore to be deemed unfair if it is granted by a debtor – i.e. the employer – where said debtor knows that it is insolvent and where

• the coverage is not part of a serious attempt to reorganize the debtor and

• equivalent consideration to ensure the debtor’s continued entrepreneurial activities or the securing of its livelihood is not paid directly into its assets.

This new legislation is specifically not intended to affect the employee-friendly case law of the German Federal Employment Court (BAG) on the employee’s “knowledge” (Kenntnis). In fact, the grounds for the draft revision state that even employees in executive positions or in commercial or accounting posts cannot per se be expected to keep track of all liabilities payable by the employer within the coming three weeks and of the funds available during this period, as the case law of the German Federal Employment Court (BAG) requires in its definition of “knowledge”. 

Codification of the case law of the German Federal Employment Court on cash transactions for employee claims 

Cash transactions are already privileged under the current legislation because they can only be contested under Section 133 of the German Insolvency Code (InsO). In order to reinforce legal security for employees and “strengthen their confidence in actually being able to keep wages earned for recently performed work”, the legislation intends to explicitly confirm the case law of the German Federal Employment Court (BAG) under which payments made within 3 months benefit from the cash transaction privilege (Section 142 InsO). The aim is thus ultimately a return to the German Bankruptcy Act (Konkursordnung) which contained a similar employee privilege that was abolished with the German Insolvency Code (InsO).  

Correction of case law on incongruent coverage in the event of performance on the basis of (the threat of) execution 

The qualification of performances obtained via (the threat of) execution as incongruent primarily applies to employees who (threaten to) enforce execution against their employer for overdue wage claims without, as a rule, “knowing” – as in the above-mentioned sense – of their employer’s insolvency. This reasoning – which is questionable (as execution is not usually enforced by employees but by state creditors) – aims to make clear that coverage is not incongruent simply because the creditor obtains security or satisfaction via execution.

Although the latter desired reform is unconvincing, developments in the law on contesting insolvency remain something to watch with great interest. Both case law and legislation are clearly endeavouring to bring about a reform to which legal practice should definitely contribute.

Bibliographical reference: An overview of the current developments with regard to the contest of wage payments in insolvency proceedings is provided by Mückl, in: Gesellschafts- und Wirtschaftsrecht (GWR) 2014, p. 427 et seq.