German Federal Court of Justice: Performance within reciprocal contracts as circumstantial evidence against intention to disadvantage creditors during insolvency

In its decision given on 18 July 2019 (IX ZR 258/18), the German Federal Court of Justice (BGH) continues its case law on indications providing evidence of a debtor’s intention to disadvantage its creditors during an insolvency. According to the decision, if the debtor has made a contested payment in order to receive consideration from the other party in the form of cash in return, this can constitute circumstantial evidence against an intention to disadvantage creditors, even though the conditions for a “situation similar to a cash transaction” are not met. In an insolvency situation, payments essential to keep the business running and (depending on the circumstances) payments made by a debtor in return for equivalent cash consideration are not automatically linked to an intention to disadvantage its creditors, and therefore not regarded as being unlawful transactions. The decision relates to the version of section 133(1) German Insolvency Statute applicable until 5 April 2017 (the outdated version, which is still applicable for all insolvency proceedings commenced before 5 April 2017).

A. Facts of the Case

The insolvency debtor was obligated by collective agreement to make monthly payments to the defendant (a holiday pay fund). If these payments were remitted to the contributions account as agreed, the debtor would be entitled to claim a reimbursement of holiday pay which it had granted to its employees. From 2010 onwards, the debtor had repeatedly defaulted on its payments for months. Only by attachment of the debtor’s business account could the defendant enforce the claims due to it. From 2010 to 2013, the defendant had received a total of 28,366.85 EUR, and in return the defendant reimbursed a total of 19,457.30 EUR in holiday pay to the debtor between 2011 and 2013.

B. Decision of the Court

The Federal Court set aside the contested judgment of the court of appeal and referred the case back to it.

In the Federal Court’s opinion, the presumption of an intention to disadvantage creditors was legally flawed. The Court stated that although it considered the initial findings of the court of appeal to be correct (i.e. that the many arrears and enforced attachments provided strong circumstantial evidence of an intention to disadvantage), it failed to take into account essential circumstances of the case in question.

The Federal Court reasoned that because no performance necessary for the continuation of business operations was involved, the intention to disadvantage was not excluded because of the existence of a “situation similar to a cash transaction”. However, it held that the court of appeal failed to consider that the indications did not provide substantial evidence and that the intention to disadvantage could be rebutted by other reasons. In the specific case, the debtor possibly could have acted without this intent, as it might have reasonably assumed that its performance would imply entitlement to payments in return. As the Federal Court argued, the debtor potentially acted “to fulfil imperative legal requirements for being entitled to reimbursement claims against the defendant.” Hence, it maintained that the debtor may have acted without the intention to disadvantage the creditors to the value of the capital inflows it expected to receive in return. Likewise, the defendant could have been unaware of a disadvantage and any intention of the debtor to cause such disadvantage.

C. Conclusion

The decision follows the Federal Court’s jurisdiction on “contra-indicators” under section 133(1) of the German Insolvency Statute, especially regarding a “situation similar to a cash transaction”. In so doing, it broadens the range of categories in which an intention to disadvantage might be absent despite the existence of typical indications. It remains to be seen whether the Federal Court will extend this rationale to other situations involving performance within reciprocal contracts. Claims assigned by way of security which the debtor made enforceable by providing the consideration, for example. In these situations, it should also be considered whether or not the performance by the debtor was only made in order to obtain payment of its own claim from the other party in return. This could also mean that the debtor likewise does not deliberately intend to harm its creditors. The decision is another example of the Federal Court’s established position on the assessment of a debtor’s intention to disadvantage, which it believes must be conducted on an individual basis and not based on a fixed formula.